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Commissioner of Income-tax (Central) Vs. Ellora Silk Mills - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtPunjab and Haryana High Court
Decided On
Case NumberIncome-tax Reference No. 89 of 1976
Judge
Reported in[1983]144ITR68(P& H)
ActsIncome Tax Act, 1961 - Sections 37; Industrial Disputes Act, 1947 - Sections 25FF
AppellantCommissioner of Income-tax (Central)
RespondentEllora Silk Mills
Appellant Advocate Ashok Bhan and; Ajay Mittal, Advs.
Respondent AdvocateNone
Cases Referred(Metal Box Company of India Ltd. v. Their Workmen
Excerpt:
.....the company shall be liable to pay to such employees in the event of retrenchment of any of them compensation payable in accordance with the law on the basis that his services had been continuous and not been interrupted by such transfer ;that all the three conditions referred to in section 25ff stand satisfied, with the result that there was no liability of the assessee to pay the retrenchment compensation nor did such a liability arise during the assessment year 1966-67. the tribunal has completely ignored the clauses of the proviso to section 25ff. in the wake of this provision, we fail to understand as to how it was necessary to make a provision of an amount payable by way of retrenchment compensation on 31st march, 1965. no liability to pay retrenchment compensation to its workers..........to its workers arose by virtue of section 25ff of the industrial disputes act as soon as the assessee transferred the business to the limited company. the assessee made a proper provision of the said liability as on march 30, 1965, and the assets and liabilities as per balance-sheet prepared on march 31, 1965, which also included the said liability of rs. 22,569, was transferred to the limited company in terms of the agreement dated april 1, 1965. following the authorities mentioned above and also considering all the facts and circumstances of the case, we are of the opinion that the retrenchment compensation for which a provision was made by the assessee on march 30, 1965, was an ascertained liability and hence it was rightly claimed as a deduction by the assessee in its profit.....
Judgment:

Prem Chand Jain, J.

1. The Income-tax Appellate Tribunal, Amritsar Bench, has referred the following question for our opinion :

' Whether, on the facts and in the circumstances of the case, and, in law, the Income-tax Appellate Tribunal was justified in allowing deduction for Rs. 22,569 representing provision made by the assessee in its accounts for the year ended 31st May, 1965, towards the liability to pay retrenchment compensation as per Section 25FF of the Industrial Disputes Act, 1947 ?'

2. In order to decide the aforesaid question, certain salient features of the case may be noticed :

3. M/s. Ellora Silk Mills, Bombay, the assessee-firm was running a manufacturing unit and carrying on business in the manufacture and sale of art silk, linen and nylon fabrics and was also dealing in all types of yarn in Bombay. By virtue of an agreement dated 1st April, 1965, the running business carried on by the assessee in the name of M/s. Ellora Silk Mills with all its assets and liabilities was sold to a private limited company in the name of M/s. Ellora Silk Mills (P.) Ltd. as on 31st March, 1965. The assessee claimed a sum of Rs. 22,569 by way of retrenchment compensation payable to its workers in accordance with the provisions of the Industrial Disputes Act, 1947. According to the assessee, a provision for the above amount was made in the books of account of the assessee on 20th March, 1965, and this amount appeared in the balance-sheet prepared by the assessee as on 31st March, 1965. It was pointed out that since the assets and liabilities of the assessee-firm as per balance-sheet as on 31st March were transferred to M/s. Ellora Silk Mills Pvt. Ltd. and thesaid company took over the above liability, this amount should have been allowed as a deduction in the hands of the assessee. The ITO disallowed the assessee's claim with the following observations :

'Compensation payable has been debited at Rs. 22,569 but this liability has been taken over by the company. Clause 3(c) provides that all the assets and liabilities have been taken over. Clause 8(c) of the sale deed provides that the company shall be liable to pay to such employees in the event of retrenchment of any of them compensation payable in accordance with the law on the basis that his services had been continuous and not been interrupted by such transfer. Since the services of the employees were continuous and the company undertook to pay compensation there was no occasion to create this liability. Moreover, it is the liability of the company. The amount of Rs. 22,569 debited is, therefore, disallowed.'

4. On appeal, the AAC upheld the disallowance made by the ITO.

5. Aggrieved by the order of the AAC, the assessee preferred an appeal before the Tribunal. The Tribunal, after going into the matter, held that the retrenchment compensation for which a provision was made by the assessee in its books of account on 30th March, 1965, was an ascerfained liability and, hence, it was rightly claimed as a deduction by the assessee in its profit and loss account for the accounting period relevant to the assessment year 1966-67. The relevant observations of the Tribunal are as follows :

' 7. We have heard the learned representatives of the parties and gone through the records and, in our opinion, the assessee deserves to succeed. The liability to pay retrenchment compensation to the workers arose by virtue of the provisions of Section 25FF of the Industrial Disputes Act, 1947, the relevant portion of which has been already quofed by the Appellate Assistant Commissioner in his order. From a reading of the above provision, it is apparent that the compensation to the workers in the case of transfer of the undertaking becomes payable immediately before such transfer takes place. In the present case, the transfer of the business by the assessee to the limited company took place on March 31, 1965, and hence a provision for the retrenchment compensation payable to the workers in terms of Section 25FF of the Industrial Disputes Act, 1947, was made by the assessee in its books of account as on March 30, 1965. This amount, also appears in the balance-sheet of the assessee which was prepared on 31st March, 1965, and it was on the basis of this balance-sheet that the entire business was transferred to the limited company on the difference of the assets and liabilities as per the above balance-sheet. Thus, as on March 31, 1965, the provision of Rs. 22,569by way of retrenchment compensation was an ascertained liability of the assessee. Since the assessee followed the mercantile system of accounting, the above provision for a statutory liability was properly made and was an allowable deduction as an expense of business of the assessee for the relevant accounting period. We may, in this connection, refer to the decision of the Supreme Court in, : (1969)ILLJ785SC (Metal Box Company of India Ltd. v. Their Workmen], wherein their Lordships held that even contingent liabilities discounted and valued as necessary can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into consideration. In the above case, their Lordships were considering the question of estimated liability under a scheme of gratuity and it was held that the estimated liability for the year on account of a scheme of gratuity should be allowed to be deducted from the gross profits.

8. Similar view has been taken by the Allahabad High Court in, [1973] 92 ITR 503 (Madho Mahesh Sugar Mills (P.) Ltd. v. CIT). In the above case their Lordships hetd that (headnote):

' In the case of an assessee maintaining his accounts on the mercantile system a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. The estimated liability of an assessee for payment of gratuity to its workers based on actuarial valuation is a permissible deduction. Such a liability is an ascertainable liability in praesenti though payable in future.'

9. Similarly, the Delhi High Court in, : [1974]95ITR151(Delhi) (Delhi Flour Mills Co. Ltd. v. CIT), while dealing with the question of gratuity payable under a settlement of dispute with the employees made the following observations (head note):

'Held, that the provision made by the asssessee for payment of gratuity under the agreement dated February 14, 1956, was in the nature of revenue expenditure and the sums of Rs. 52,633 and Rs. 11,578 were allowable as business expenditure Under Section 10(2)(xv) of the Indian Income-tax Act, 1922, for the assessment years 1957-58 and 1958-59, respectively. The gratuity payable to an employee represented a part of the emoluments payable to him for rendering service during each year. The right to receive gratuity accrued to the employee as soon as he completed a year of service, and, as a corollary, the liability to pay the gratuity to the employee arose to the assessee at the end of each year. The amount of liability was also ascertainable and there was no question in this caseof the discounted present value of the liability not being ascertainable. No doubt the actual payment of the gratuity was deferred to a later date on the happening of a certain event, viz., death or voluntary retirement of the employee, but these were not uncertain events. For the reason that gratuity might not be payable to an employee if he were dismissed from service or even in cases of retirement, it could not be said that the liability of the assessee for payment of gratuity to its employees under the agreement did not accrue during the relevant years.'

Now, in the present case, the liability to pay retrenchment compensation to its workers arose by virtue of Section 25FF of the Industrial Disputes Act as soon as the assessee transferred the business to the limited company. The assessee made a proper provision of the said liability as on March 30, 1965, and the assets and liabilities as per balance-sheet prepared on March 31, 1965, which also included the said liability of Rs. 22,569, was transferred to the limited company in terms of the agreement dated April 1, 1965. Following the authorities mentioned above and also considering all the facts and circumstances of the case, we are of the opinion that the retrenchment compensation for which a provision was made by the assessee on March 30, 1965, was an ascertained liability and hence it was rightly claimed as a deduction by the assessee in its profit and loss account for the relevant accounting period. We may mention here that the retrenchment compensation was actually paid by the limited company some time in 1966 and while determining the sale value of the running business, the liability to the extent of Rs. 22,569 was taken into consideration and the assessee received the purchase price of its business after the deduction of the above liability of Rs. 22,569. We, therefore, hold that the assessee should be allowed the deduction of Rs. 22,569 on account of retrenchment compensation payable to the workers.'

6. Dissatisfied by the order of the Tribunal, the Revenue preferred an application under Section 256(1) of the I.T. Act, 1961 (hereinafter referred to as ' the Act '), on which the question reproduced above has been referred for our decision.

7. In spite of service, no one appears for the assessee.

8. After hearing the learned counsel for the petitioner we find that the answer to the question has to be in favour of the Revenue. Section 25FF of the Industrial Disputes Act reads as under :

' Where the ownership or management of an undertaking is transferred, whether by agreement or by operation of law, from the employer in relation to that undertaking to a new employer, every workman who has been in continuous service for not less than one year in that undertaking immediately before such transfer shall be entitled to notice andcompensation in accordance with the provisions of Section 25F, as if the workman had been retrenched :

Provided that nothing in this section shall apply to a workman in any case where there has been a change of employers by reason of the transfer, if-

(a) the service of the workman has not been interrupted by such transfer ;

(b) the terms and conditions of service applicable to the workman after such transfer are not in any way less favourable to the workman than those applicable to him immediately before the transfer ; and

(c) the new employer is, under the terms of such transferor otherwise, legally liable to pay to the workman, in the event of his retrenchment, compensation on the basis that his service has been continuous and has not been interrupted by the transfer. '

9. A bare perusal of the aforesaid section shows that where there has been a change of employer by reason of the transfer and conditions (a), (b) and (c) are satisfied, the section shall not apply to a workman. In this case, it is evident from Clause 8 of the agreement, which reads as under :

10. The company shall take over the employees of the sellers as on 31st March, 1965, and

(a) the services of all the, employees shall not be interrupted by such transfer ;

(b) the terms and conditions of services applicable to such employees after such transfer shall not in any way be less favourable to them than those applicable to them immediately before the transfer; and

(c) the company shall be liable to pay to such employees in the event of retrenchment of any of them compensation payable in accordance with the law on the basis that his services had been continuous and not been interrupted by such transfer ;

that all the three conditions referred to in Section 25FF stand satisfied, with the result that there was no liability of the assessee to pay the retrenchment compensation nor did such a liability arise during the assessment year 1966-67. The Tribunal has completely ignored the clauses of the proviso to Section 25FF. The transferor-firm and the transferee-firm ensured that the services of all the employees were not to be interrupted by such a transfer, that the terms and conditions of service applicable to such employees after such transfer were not in any way less favourable to them than those applicable to them immediately before the transfer and that the transferee-company was liable to pay to such employees in the event of retrenchment of any of them compensationpayable in accordance with law on the basis that his services had been continuous and not being interrupted by such transfer. In the wake of this provision, we fail to understand as to how it was necessary to make a provision of an amount payable by way of retrenchment compensation on 31st March, 1965. No liability to pay retrenchment compensation to its workers by the assessee arose at the time of the transfer of the business to the limited company. In this view of the matter, no deduction could have been allowed to the assessee and the Tribunal was not justified in allowing such a deduction.

11. For the reasons recorded above, the question referred for our opinion is decided in favour of the Revenue and against the assessee. As there is no representation on behalf of the assessee, we make no order as to costs.


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