1. This appeal by the department relates to the assessment year 1980-81 for which the previous year ended on 31-3-1980.
2. The only ground taken in the appeal is that the AAC erred in holding that a sum of Rs. 15,300 paid by the assessee to his employees on the closing down of the business is an admissible deduction.
3. In the profit and loss account, the assessee had debited a sum of Rs. 30,610 under the head 'Gratuity and closure compensation'. The claim for deduction of this amount was disallowed by the ITO on the ground that this is compensation paid to employees when the assessee closed down a school of commerce and a tailoring institute which he was running. The AAC held that half of the amount constituted gratuity, that only the remaining half constituted retirement compensation and that, as the gratuity liability was a statutory one, the same is an allowable deduction. He, therefore, restricted the disallowance to Rs. 15,300. The department questions the correctness of the same.
4. It was contended by the learned departmental representative that even assuming that the gratuity liability paid by the assessee was a statutory liability, it is not an admissible deduction in view of the fact that the payment was made because of the closing down of the business. In support of the position, the learned departmental representative relied upon the decision of the Supreme Court in the case of CIT v. Gemini Cashew Sales Corporation  65 ITR 643. On the other hand, the learned representative for the assessee relied upon the order of the AAC, who held that the decision of the Supreme Court referred to above will apply only to retrenchment compensation and that it will not apply to gratuity payable to retrenched employees which is a statutory liability.
5. The nature of the payment had been made clear by the assessee in a letter written by the chartered accountant to the ITO on 26-4-1982. It was stated in the letter that each employee was paid 15 days remuneration for each year of service as gratuity and another 15 days remuneration for each year of service as retrenchment compensation. It is claimed by the assessee that the two payments were in discharge of legal obligations and are, therefore, allowable deductions. At the time of the hearing of the appeal, it was confirmed by the learned representative for the assessee that the payment of 15 days, retrenchment compensation was under Section 25FFF of the Industrial Disputes Act, 1947 and the payment of gratuity was under Section 4 of the Payment of Gratuity Act, 1972. The amounts payable under both enactments are identical. The reason mentioned by the AAC for making a distinction between the two amounts is that the payment of gratuity was a statutory liability cast on the assessee which he was obliged to discharge'. He had, therefore, held that 'the same is not hit by the decision of the Supreme Court'. This distinction is not sustainable.
The payment of retrenchment compensation under the Industrial Disputes Act is as much a statutory liability as the gratuity payable under the Payment of Gratuity Act. No distinction can, therefore, be drawn between the two on the ground that one is a statutory liability and the other is not. The test laid down by the Supreme Court in the case of Gemini Cashew Sales Corpn. (supra) is whether the expenditure was for the purpose of carrying on the business. The relevant portion of the head note reads thus : ...Normally the liability which occurs after the last date, unless its source is in a pre-existing definite obligation, cannot be regarded as a part of the outgoing of the business debitable in the profit and loss account. A deduction which is proper and necessary for ascertaining the balance of profits and gains of the business is undoubtedly properly allowable, but where a liability to make a payment arises not in the course of the business, not for the purpose of carrying on the business, but springs from the transfer of the business, it is not a properly debitable item in its profit and loss account as a revenue outgoing.(p. 644) The question for consideration here is whether the payment was made during the course of the business or whether it was paid on account of the closure of the business. It is clear that, in the present case, both the retrenchment compensation and the gratuity amount were paid as a result of the closing down of the business. The termination of the service of an employee otherwise than on superannuation falls within the definition of the term 'retirement' in the Payment of Gratuity Act.
The gratuity paid is, therefore, due to the termination of the services. This payment stands on the same footing as a payment under the Industrial Disputes Act, as both are statutory liabilities. It may be that a deduction of a proper provision for gratuity can be claimed as a business expenditure. But this deduction should be claimed as a provision as a normal item of expenditure. This has not been done. In the present case, the claim has been based solely on the basis of a payment made on account of the closing down of the business.
6. We consider it proper to refer to some more rulings on the subject though they have not been referred to by either side at the time of the hearing. In Stanes Motors (South India) Ltd. v. CIT  100 ITR 341 (Mad.), the business of the assessee-company was taken over by a new company and the employees were also taken over without break in service. The gratuity reserve attributable to the employees transferred to the new company was made over to the new company. There was no payment to any employee. Applying the decision of the Supreme Court in the case of Gemini Cashew Sales Corpn. (supra), it was held that the expenditure was not for the purpose of carrying on the business and could not, therefore, be allowed. In CIT v. Pathinen Grama Arya Vysya Bank Ltd.  109 ITR 788 (Mad.), the business of the assessee-bank was taken over by another bank and the employees were also taken over.
The provision made by the assessee-bank for payment of gratuity on retirement was transferred to the new bank. Following the decisions of the Supreme Court in Gemini Cashew Sales Corpn.'s case (supra) and the Madras High Court Stanes Motors (South India) Ltd.'s case (supra), it was held that the expenditure was not allowable. This was in spite of the fact that the transferee bank actually paid the amount to the employees and they in turn deposited the amount with the new bank. It was held by the Madras High Court thus : ...The obligation of the assessee-bank to pay gratuity to its employees was at the time of the retirement of the employees concerned. We are assuming for the purpose of the present case that when the assessee-bank transferred a part of its business and thereby it compelled the employees to retire from its business, the gratuity was payable to them. Still the obligation to pay the gratuity arises only by virtue of transfer of the business and, as a matter of fact, the transfer of the business and the obligation to pay the gratuity are contemporaneous or simultaneous. Therefore, the payment of gratuity cannot be said to be an item of expenditure incurred in the course of carrying on the business or for the purpose of carrying on the business....(pp. 797-98) CIT v. Salem Bank Ltd.  120 ITR 224 (Mad.) was another case where the business of a bank was taken over by another bank. It was held that once the assessee is found to have not carried on business of banking subsequent to the transfer of its business to the new bank, it is not entitled to claim the amount as an allowance under Section 37(1) of the Income-tax Act, 1961 ('the Act'). All these decisions are against the claim of the present assessee.
7. We may now refer to two decisions where payment of gratuity was allowed. CIT v. Sri Venkateswara Bank Ltd.  120 ITR 207 (Mad.), was also a case where the assessee-bank was taken over by another bank.
At the time of the transfer, the assessee actually paid gratuity to its employees and this was claimed as a deduction. The claim was allowed by the High Court only because of a rinding that in the particular case the assessee-bank carried on business in spite of the transfer and that it was 'a payment made in the course of carrying on its business as gratuity cannot be equated to a terminal payment on the closure of the business so as to be disallowed. There was no closure on the facts'. It was, therefore, held that the decision of the Supreme Court in the case of Gemini Cashew Sales Corpn. (supra) was not attracted to the case.
CIT v. Srinivasa Perumal Bank Ltd.  131 ITR 692 (Mad.), was also a case where the assessee-bank was taken over by another bank. The assessee-bank actually paid the gratuity to its employees. Referring to the Supreme Court decision in the case of Gemini Cashew Sales Corpn.
(supra), it was observed by the Madras High Court that when the observations of the Supreme Court at pages 649 and 650 clearly indicated that the case of a pre-existing definite obligation would stand out and form a separate category. Distinguishing the earlier decisions of the Madras High Court in the cases of Stanes Motors (South India) Ltd. (supra) and Pathinen Grama Arya Vysya Bank Ltd. (supra) on the ground that in those cases there were no payments by the assessee-banks it was held that the payment in the particular case was in pursuance of a resolution passed prior to the transfer of the business and was, therefore, in pursuance of a pre-existing obligation.
It was for this reason that the claim for deduction was allowed.
8. The ratio of the above decisions seems to be that if the gratuity is paid solely because of the closure of the business, then it would be hit by the ratio of the decision of the Supreme Court in the case of Gemini Cashew Sales Corpn. (supra). In the present case, the payment appears to be solely on account of the closure of the business and the claim is not, therefore, allowable.