The appellant hag filed appeal against the order passed by the Commissioner (Appeals) vide order No. 197/Asr/1996-97, dated 15-10-1997, and taken following grounds in appeal: "1 That the learned Commissioner (Appeals) erred both in law as well as in respect of the facts of the case while upholding the below noted disallowances vide his order dated 15-10-1997 2. That the learned Commissioner (Appeals) failed to appreciate the submissions of the appellant judiciously, while upholding the above noted disallowances.
The ground No. 1 taken by the appellant deals with retrenchment compensation claimed by the appellant at Rs. 19,720. The assessing officer observed in his order that the appellant debited to P&L a/c a sum of Rs. 19,720 under the head "retrenchment compensation'. The assessing officer asked the appellant to explain the reason for making claim during the year under consideration. The appellant filed reply vide letter dated 9-12-1996. The appellant took plea that due to change in the constitution of the firm, the liability towards employees on account of retrenchment compensation due to workmen upto 31-5-1994, was calculated and paid. The appellant also filed complete details of working of the retrenchment compensation which included date of appointment, salary drawn, period of service, etc. The appellant also pleaded that in accordance with section 25FF of the Industrial Disputes Act, 1947, the employees are entitled for retrenchment compensation when ownership of the management of an undertaking is transferred whether by agreement or by operation of law, from the employer in relation to or 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 and compensation in accordance with the provisions of section 25F, as if the workman had been retrenched. The assessing officer observed that except Sh.. Deepak Bhandari, other three employees remained in service with the firm and, therefore, it cannot be treated for any intent and purpose as retrenchment. The assessing officer relied on the decision of Intesco Raw Silk Co. v. CIT (1979) 117 ITR 315 (All) whereby the Hon'ble Allahabad High Court has observed that retrenchment comes into operation when the business is closed. The assessing officer also relied on the decision of Hon'ble Madras High Court in the case of Chandamama Publications v. CIT (1989) 176 ITR 321 (Mad). The assessing officer has observed that there is no change in the management because constitution of the firm remains the same and the only change is that Sh. Om Parkash Behl, the other three partners took over the firm. The matter was agitated by the appellant before the learned Commissioner (Appeals). The learned Commissioner (Appeals) confirmed the order of the assessing officer primarily by giving his finding that there is no change in the management or ownership of the firm. The second point taken by the learned Commissioner (Appeals) was that since there is no interruption in service there can be no claim for retrenchment compensation. The learned Commissioner (Appeals) has relied on the decision of Hon'ble Supreme Court in the case of CIT v.Gemini Cashew Sales Corporation (1967) 65 ITR 643 (SC). The learned Commissioner (Appeals) is of the opinion that facts of M/s Ambala Cantt.. Electilc Supply Corporation Ltd. v. CIT (1982) 133 ITR 343 (P&H) are distinguishable.
The learned counsel of the appellant has pleaded that retrenchment compensation was paid in accordance with section 25FF of the Industrial Disputes Act, 1947, and copy of the order and agreement was sent to the Labour Inspector, Amritsar. The learned counsel pleaded receipts of all the employees were full and final, settlement regarding payment of retrenchment compensation was filed before the authorities below. The learned counsel pleaded that due to family settlement, the appellant-firm came under control and management of Vishwa Nath Behl, HUF, who is now having 85 per cent share in the changed management and is managing partner of the firm whereas earlier the firm was under the management of Sh. Sham Sunder Behl who was having 45 per cent of share, reduced their share to fifteen per cent. The learned counsel pleaded that the issue has been decided by the judgment of Hon'ble Punjab & Haryana High Court in the case of Ambala Cantt. Electric Supply Corporation Ltd. v. CIT (supra).
The learned Departmental Representative relied on the order passed by the authorities below.
The first issue to be decided is to give proper meaning for transfer of ownership of management for the purpose of section 25FF of the Industrial Disputes Act, 1947. Section 25FF reads as follows : "Section 25FF. Compensation to workmen in case of transfer of undertakings.Where the ownership of management of an undertaking is transferred whether by agreement or by operation of law, from the employer in relation to or 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 and compensation in accordance with the provisions of section 25F, as if the workman had been retrenched." In the case of the appellant what has happened was that due to family settlement between the brothers, management of erstwhile firm passed on to Shri Vishwa Nath Behl, Karta of Vishwa Nath Behl, HUF. In the constitution of erstwhile firm, Sh. Vishwa. Nath Behl (Karta) was having 25 per cent of share whereas major shareholders of the firm were Sh. Sham Sunder Behl with 20 per cent, Sh. Om Parkash Behl with 25 per cent share. 'In the new set up Sh. Vishwa Nath Behl got 85 per cent share and nominal share of 5 per cent each was retained by other three brothers. Thus, it is clear that the management and the ownership was passed on to Sh. Vishwa Nath Behl. The authorities below have not given correct interpretation to section 25FF which is reproduced above holding that the management of ownership is not transferred by agreement. They are strictly going by income-tax law regarding change in constitution and continuation of firm. For the purpose of income-tax one can give finding that the firm is in continuation but so far as section 25FF is concerned, there is change in ownership of the management. To decide the issue of retrenchment compensation, we are to define change in the management keeping in view section 25FF of the Industrial Disputes Act, 1947. This issue came before the Jurisdictional High Court in the case of Ambala Cantt. Electric Supply Corporation Ltd. v. CIT (supra). The Hon'ble High Court was defining the application and implication of section 25FF of the Industrial Disputes Act, 1947. The Hon'ble High Court has given following finding : "Although the reference to the history and object of the introduction of sections 25F and 25FF in the Industrial Disputes Act need not be gone into, a brief reference to it seems unavoidable at this stage. The rights created by section 25F are based on humane public policy as a safety against involuntary unemployment, which may cause dislocation to trade and industry and economic insecurity. The object of section 25F of the Industrial Disputes Act was that an employer could relieve himself of the economic dead weight of surplus labour and at the same time the employee should not be thrown on the road for no fault of his.
While giving option in given cases to the employer to shake off such economic dead weight it assured the employee and his family of some partial protection to tide over the hard period of unemployment.
Section 25FF was introduced to safeguard the rights of workmen who because of the transfer of an undertaking could not be employed by the transferee.
Section 25F of the Industrial Disputes Act prescribes that in all cases of transfer by agreement or by the operation of law which do not fall under the proviso, on a transfer of the ownership or management of an industrial undertaking, a workman, who has been in continuous service of not less than one year in that undertaking immediately before the transfer, shall be entitled to notice and, compensation in accordance with the provisions of section 25F. This is because the section equates such a termination of service with retrenchment as defined in section 2(oo) of this Act. It matters little who initiates the proceedings towards the termination. If the employer, who has a prior notice of the date and time of the transfer of the industrial undertaking, which is definitely fixed, takes steps to issue retrenchment notice in accordance with law governing the industrial relations resulting in the creating of a liability regarding which deductions can be claimed under the Income Tax Act, then it can reap the benefit of that. The transferor of the undertaking, when the control of management still vests in it, can create that liability, which, though based on legal fiction, is real and effective and can take steps to minimise the losses by issuing retrenchment notices as provided by section 25FF of the Industrial Disputes Act. The language of the principal clause of section 25FF makes it clear that if the right of the retrenchment compensation accrues to the workman, then it must be a right to receive compensation from the employer, who was its (undertaking's) owner uptil the date and time of transfer. The only thing to be guarded against is that the retrenchment should not be by way of punishment, but in anticipation of a transfer.
In view of this matter, we are of the opinion that section 25FF of the Industrial Disputes Act, which governs the industry gives a right to the transferor to take a pre-emptive action to minimise his expenses by giving an advance retrenchment notice to the workmen synchronising with the time of the transfer." The Hon'ble Punjab & Haryana High Court has also distinguished the ratio decided by the Hon'ble Supreme Court in case of CIT v. Gemini Cashew Sales Corporation (supra). The Hon'ble Supreme Court has made following observation on the issue : "After considering the facts and the observations of the Supreme Court in Gemini's case (1967) 65 ITR 643 (SC), in detail, we feel that the facts on which the judgment came to be delivered were different. The liability arose suddenly because of the unforeseen event, that is, the death of Ramasubramony and the liability had arisen after the transfer of the undertaking in favour of Walter. In that case, no right had arisen to the workmen to receive retrenchment compensation while in the case in hand, on the basis of the facts in the earlier part of the judgment, the termination of the workmen no longer had remained contingent, but became definite and the assessee had invoked the provisions of the Industrial Disputes Act, which had been enacted through amendments as beneficial provisions after noticing the impact of certain judgments of the Supreme Court. Mr. Asasthy, in our view, cannot draw any support from this case and the majority of the members of the Tribunal, in our view, were not correct to interpret this judgment in the way in which they have done." The learned Hon'ble High Court has further observed that to settle the liability which is legally due by taking advantage under section 25FF which is to the mutual advantage of employee and employer cannot be denied under section 37(1) of the Income Tax Act. The Hon'ble High Court has given following observations : The provisions of sections 25F and 25FF of the Industrial Disputes Act, which are for the mutual benefit of the employer and the workmen, are to be liberally construed. These provisions give a right to the employer to take steps to avert the loss even if the steps result in the maximising of the expenses. If such a step under section 25FF of the Industrial Disputes Act is taken, as in this case, during the continuation of the business but before the actual transfer, when the assessee is still the owner of the industrial undertaking, under the operation of law, then the amount expended by way of retrenchment compensation will be covered by section 37 of the Act.
It cannot be disputed that the assessee has a right to minimise the incidence of the tax by legitimate means. The steps taken by the assessee in this case in anticipation of the transfer, the date of which was definite, can at the most be said to achieve these objects.
The Industrial Disputes Act gives him this right in the wake of the transfer of his undertaking by operation of law. In determining the services of the workmen by issuing termination notices under the provisions of the Industrial Disputes Act, the assessee created a liability, which, in a legitimate way, is recognised by law. He can claim its exclusion from his taxable income as an outgoing and is covered by 37 of the Act. This question is accordingly answered in favour of the assessee." The retrenchment compensation and its entitlement is not denied by the authorities below. In accordance with the arbitration between the partners of the firm, the liabilities are divided and borne by the firm, either before the new partner takes over the firm or these liabilities are passed on to new partners. The settlement of liabilities is between the management and the employee which is overseen by the Labour Commissioner of the area. The legal jurisdiction is of three independent authorities and persons to oversee whether or not section 25FF is applicable. The first authority is the employer, the second authority is the employee and the statutory third authority is the Labour Commissioner of the area. If an agreement is reached which is endorsed by the Labour Commissioner and payment of retrenchment compensation is made by the employer and agreed upon by an employee, under those circumstances the IT authority should not look into the applicability or non-applicability of various provisions of Industrial Disputes Act, 1947.
We are, therefore, of the opinion that there is no logic in making disallowance of the retrenchment compensation. The matter has also been discussed by the Hon'ble Supreme Court in the case of W.T. Suren & Co.
Ltd. v. CIT (1998) 230 ITR 643 (SC). The Hon'ble Supreme Court has distinguished the ratio of CIT v. Gemini Cashew Sales Corporation (supra). It is important to mention the facts of this case : "The assessee- company, a private limited company, was a wholly-owned subsidiary of Rallis India Ltd.; one of the activities was the distribution of products of Taddington Chemical Factory (P) Ltd. which was also another wholly-owned subsidiary of Rallis India. With effect from 1-5-1959, the assessee closed its unit for distribution of the products of Taddington Chemical Factory (P) Ltd. which business was taken over by Rallis India Ltd. On 22-4-1959, the assessee wrote letters to employees working in the unit dealing with the distribution stating that arrangements had been made for the business conducted by the assessee to be taken over by Rallis India Ltd. and that the transfer would take effect from l-5-1959. By this letter, the employees were further informed that arrangements had also been made whereby all the employees of the assessee of the distribution unit would be offered similar employment with Rallis India Ltd. on and from 1-5-1959. The employees were, therefore, informed that their employment was to cease on and from 30-4-1959.
These facts are, therefore, at par with the facts of the present case.
The Hon'ble Supreme Court has given following finding : "In our view, the Kerala High Court in CIT v. Standard Furniture Co.
Ltd. (1979) 116 ITR 751 (Ker)(FB), the Madras High Court in Sarada Binding Works case (1985) 152 ITR 520 (Mad) and the Bombay High Court in CIT v. Salem Magnesite (P) Ltd. (1991) 189 ITR 154 (Bom) have rightly distinguished the judgment of this court in Gemini Cashew Sales Corporation's case (supra). Retrenchment compensation is not the same thing as gratuity. In Gemini Cashew Sales Corporation's case (supra), this court considered the question of payment of retrenchment compensation under the provisions of Industrial Disputes Act. That Act contains the provisions . under what circumstances a workman is entitled to retrenchment compensation. While section 25F of that Act prescribed conditions precedent to the retrenchment of workmen, section 25FF provides for compensation to workmen in the case of transfer of undertakings. The right to claim retrenchment compensation remains contingent and there may be varying circumstances under which employment may cease. Yet there may not be any right to such compensation, like death, retirement, resignation, etc. Under the law the right to retrenchment compensation arises when the employer terminates the employment or the undertaking of the employer is transferred and in the latter case that, too if the case does not fall under the proviso to section 25FF of the Industrial Disputes Act. Those provisions cannot certainly be applied in the case of payment of gratuity. The scheme of gratuity as applicable to the members of the staff of the assessee provided as to how much gratuity would become due and payable to an employee for each year of service except to one who is dismissed for misconduct, etc. Gratuity is, thus, payable on the termination of employment of the employee on any account except dismissal and.calculated on the basis of the number of years of service and at the rate prescribed in the scheme. In the present case, the amount of gratuity which was paid to Rallis India Ltd. on behalf of the employees was not on account of transfer of the distribution unit of the assessee but on account of stopping of that business and the employees working in that unit becoming surplus resulting in termination of their services. Other business of the assessee, as held by the Tribunal, continued. Payment of the gratuity amount to Rallis India Ltd. was not made by the assessee of its own but at the instance and on behalf of the employees whose services though terminated in the assessee- company were taken over by Rallis India Ltd.' with the promise of continuity of service in Rallis India Ltd. As far as the assessee is concerned, it was bound to make payment of gratuity to the employees whose services were terminated and, in fact, as noticed above, the employees who did not join Rallis India Ltd. were directly.paid gratuity. The assessee was obliged t6 pay gratuity to those employees who had joined Rallis India Ltd. Instead of those employees getting the gratuity amount directly, they got that amount paid to Rallis India Ltd. who put that amount in trust in a separate account for the exclusive use of the transferred employees and payable to them after their services in Rallis India Ltd. terminated including the gratuity due on account of service rendered in Rallis India Ltd. as per the scheme relating to gratuity of that company. Payment of the amount of gratuity to Rallis India Ltd. was made as per the scheme of the assessee and it was not an ex gratia or some isolated payment. It was never disputed and, in fact, no question was raised, if the services of the employees of the assessee were not terminated and that being the position, the obligation of the assessee to make payment of gratuity to its employees was an obligation in praesenti, Payment of the gratuity amount to Rallis India Ltd. was with the consent of the employees transferred there. We are, thus, of the view that payment of gratuity awarded by the assessee to Rallis India Ltd. in the circumstances of the case was an expenditure wholly laid out or expended for the purpose of the business of the assessee and was allowable deduction. It cannot certainly be said, that it was an expenditure incurred much ahead of time as the services of the employees with the assessee were terminated. The Tribunal also found that the assessee was a going concern and only one of its departments was closed. The assessee had not wound up all of its affairs. Only a part of its business was closed and transferred to Rallis India Ltd. In these circumstances, in our view, the Tribunal was right in holding that the payment of gratuity amount was not on account of closing the business of the assessee but for the purpose of the business of the assessee and, thus, entitled to deduction under clause (xv) of sub-section (2) of section 10 of the 1922 Act corresponding to section 37(1) of the 1961 Act. We, therefore, hold that the assessee, the appellant herein, is entitled to the payment of gratuity amount of Rs. 4,08,622 made to Rallis India Ltd. as an allowable deduction.
We allow the appeal, set aside the judgment of the High Court and answer the question in affirmative, in favour of the assessee and against the revenue." Keeping in view the above discussion, we are of the opinion that the appellant is entitled for the deduction of the claim. The addition made by assessing officer and confirmed by the learned Commissioner (Appeals) is deleted.
Ground No.. 1 (b, c and d) relates to disallowance of expenses out of telephone, 1/5th disallowance of car maintenance and 1/5th disallowance of depreciation on car.
The learned counsel of the appellant pleaded that similar disallowance was made by the assessing officer in the assessment year 1983-84. The matter was adjudicated upon by the Appellate Assistant Commissioner where, it was held that expenses related to car and telephone are not be disallowed. The department did not file any appeal and continuously and consistently were allowing full expenditure upto the assessment year under consideration. The learned counsel pleaded that total telephone expenditure claimed are upto Rs. 21,832 which relate to telephone Nos. 44340 and 43588 and both these telephones are installed at the business premises of the appellant. The learned counsel has also pleaded that the total turnover of the appellant is about Rs. 73 lakhs and amount of Rs. 21,832 is quite reasonable. Keeping in view that the customers are spread over throughout India, we do not find any reason and logic in making disallowance. There is no history of making such disallowance in the case of the appellant. Moreso, the expenses are related to the telephones installed at the business premises of the appellant. Therefore, the disallowance made by the assessing officer and sustained by the learned Commissioner (Appeals) is deleted.
The last two grounds relate to the disallowance of car maintenance and depreciation on car. The learned counsel of the appellant pleaded that the assessing officer has wrongly mentioned that such disallowance was made in the past whereas no such disallowance has ever been made. The learned counsel pleaded that the appellant is not using car for personal use.
Keeping in view that there is no history that car is being used for personal use and in the past department has accepted finding of the appellate authority regarding such disallowance being made by the assessing officer, we find no justification for making this disallowance.