1. On an application made by the assessee under Section 256(2) of the I.T. Act, 1961, hereinafter referred to as 'the Act', this court had directed the Tribunal to state the case and refer the following question of law to this court for its opinion :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the expenditure amounting to Rs. 26,271 incurred by the assessee on account of retrenchment compensation was not of a revenue nature and did not constitute an allowable expenditure in computing the income of the assessee for the assessment year 1972-73 ?'
2. The Tribunal has now forwarded the statement of the case and referred the aforesaid question of law to this court for its opinion.
3. The material facts, giving rise to this reference briefly, are as follows :
The assessee is a registered firm, which was carrying on the business of exhibition of films during the assessment year 1972-73, for which the account period ended on 31st December, 1,971. The business of exhibition of films was carried on by the assessee at Indore in two theatres, namely, Shrikrishna Cinema and Raj Talkies, which were taken on lease by the assessee. In October, 1971, the lease of Raj Talkies expired and the assessee surrendered the leasehold premises on the expiry of the lease and this discontinued the business of exhibition of films at Raj Talkies, Indore, though it continued to carry on the business at Shrikrishna Cinema, Indore. The assessee claimed a sum of Rs. 26,271 paid by it by way of retrenchment compensation to its employees employed at the Raj Talkies. This claim was rejected by the ITO. On appeal, the AAC affirmed the finding of the ITO. On further appeal to the Tribunal, the Tribunal held that the decision of the Supreme Court in CIT v. Gemini Cashew Sales Corporation : 65ITR643(SC) , was attracted and that the expenditure in question could not be held to be laid out wholly or exclusively for the purposes of the business. The Tribunal also rejected the contention advanced on behalf of the assessee that there was no closure of the business as the assessee continued to carry on the business of exhibition of films at its other theatre. The Tribunal held that as two separate sets of accounts were maintained for the two theatres and as the profit and loss account of each theatre was worked out separately, the expenses in connection with one theatre could not be allowed while computing the income of the other theatre. In this view of the matter, the Tribunal dismissed the appeal preferred by the assessee. An application for making a reference submitted by the assessee was also rejected. Hence, the assessee filed an application in this court under Section 256(2) of the Act. That application was allowed and the Tribunal was directed to state the case and refer the aforesaid question of law to this court for its opinion.
4. Before we proceed to answer the question, it is necessary to refer to the relevant provisions of the Act. Section 37(1) of the Act reads as under:
'37. General.--(1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and section SOW and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ' Profits and gains of business or profession' .'
5. It is now well settled that expenditure incurred by the management in paying retrenchment compensation, as provided by the Industrial Disputes Act, is business expenditure (see Sassoon f. David and Co. Ltd. v. CIT : 118ITR261(SC) ).
6. The Tribunal has, however, disallowed that expenditure in the instant case because the Tribunal has held that the liability of the assessee to pay retrenchment compensation arose on account of the closure of its business carried on at one of its two theatres. The question for consideration is whether the Tribunal was right in holding that if business was discontinued at one place but the same business was carried onby the assessee at another place, still it would amount to a closure of its business by the assessee.
7. In CIT v. C. Parakh & Co. (India) Ltd. : 29ITR661(SC) , the Supreme Court has held that where an assessee carried on one and the same business at a number of places, for the purpose of Section 28 of the Act, there is only one business and the net profits of the business have to be ascertained by pooling together the profits earned in all the branches and deducting therefrom all the expenses. The Tribunal was, therefore, not justified in holding that the business of exhibition of films carried on by the assessee at Raj Talkies was distinct from the business of exhibition of films carried on by the assessee at Shrikrishna Cinema, because accounts of each theatre were maintained separately by the assessee. It was the same business that was carried on by the assessee at two places and hence a discontinuance of business at one place by the assessee would not amount to a closure of that business.
8. Now, if there is no closure of the business of exhibition of films by the assessee during the relevant assessment year, the liability of the assessee to pay retrenchment compensation on account of discontinuance, of its business at one theatre, cannot be held to be a liability arising on account of closure of its business. The decision in CIT v. Gemini Cashew Sales Corporation : 65ITR643(SC) , relied upon by the Tribunal and that in Venkatesa Colour Works v. CIT : 108ITR309(Mad) , relied upon by the learned counsel for the Department are, therefore, distinguishable on facts. In these cases, the liability to pay retrenchment compensation had arisen on account of transfer or closure of the business carried on by the assessee and it was, therefore, held that the liability arose not in the carrying on of the business of the assessee, but after the closure of the business. As already observed, in the instant, case, the discontinuance of its business by the assessee at one of its theatres did not result in a closure of that business by the assessee. Once this conclusion is reached, it must be held that the Tribunal wrongly disallowed the deduction claimed by the assessee on account of retrenchment compensation paid by it to its employees, employed at one of its theatres.
8. For all these reasons, our answer to the question referred to this court is in the negative and against the Department. Parties shall bear their own costs of this reference.