1. The Income-tax Appellate Tribunal, Madras Bench, under Section 256(1) of the Act has referred the following questions of law for the opinion of this court in the two referred cases, respectively :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the two sums of Rs. 13,312 and Rs. 1,310 claimed as a deduction in the computation of the business income of the assessee for the assessment year 1967-68 are not admissible under Section 37(1) or Section 28(i) of the Income-tax Act, 1961 ?'(T.C. No. 421 of 1971).
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that the two sums of Rs. 16,560 and Rs. 3,884 claimed as a deduction in the computation of the business income of the assessee for the assessment year 1967-68 are not admissible under Section 37(1) or Section 28(i) of the Income-tax Act, 1961 ?'(T.C. No. 422 of 1971).
2. Though there are two references and two questions have been referred to this court, the point involved is the same. The assessee in T.C. No. 422 of 1971 is a partnership firm consisting of three partners, namely, P. G. Bala-subramaniam, R. Natarajan and M. N. Nair, and the assessee in T.C. No. 421 of 1971 is a partnership consisting of P.G. Balasubramaniam and R. Natarajan only. The year of assessment for both the firms is 1967-68 and the year of account ended on April 13, 1967. Some time prior to the end of the year, the partners of both the firms decided to dissolve the firms and as a result to close down the factory. Their intention originally was to close the factory with effect from April 10, 1967. The labour officer was aware of this and there were meetings between the representatives of the factory, labour and the assessees. As a result, an agreement was entered into on April 7, 1967, between the management of the assessee-firms on the one hand and the workers on the other hand, under which the amount of compensation and notice pay payable to the workers under Section 25-FFF of the Industrial Disputes Act, 1947, on the basis that the factory would be closed on April 10, 1967, was determined. As a matter of fact, the factory was not closed on April 10, 1967, and it was agreed before the Tribunal that the factory was actually closed on July 15, 1967, and the payments to the workers were made thereafter. The assessees in each of the cases claimed the amounts paid to the workers pursuant to this agreement on the closure of the respective factories as a deductible item for the assessment year 1967-68, the account year ending April 13, 1967, as pointed out already. The Income-tax Officer, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal have rejected this claim and hence the present reference to this court in the two tax cases at the instance of the assessees.
3. We are of the opinion that the conclusion of the authorities as well as the Tribunal is correct in law. The scheme of the relevant Section of the Industrial Disputes Act will make it clear that the amount was payableonly on the closure of the business. Section 25F deals with the conditions precedent to retrenchment of workmen on the basis that the business continues. Section 25-FF deals with compensation to the workmen in the case of transfer of undertaking. Though the particular context or event that attracts liability to pay compensation is different, still Section 25-FF itself provides that the workers shall be entitled to notice and compensation in accordance with the provisions of Section 25-F as if the workmen have been retrenched. Similarly, Section 25-FFF deals with a case of compensation payable to the workmen in case of closure of an undertaking. Here also the section says:
'Where an undertaking is closed down for any reason whatsoever, every workman who has been in continuous service for not less than one year in that undertaking immediately before such closure shall, subject to the provisions of Sub-section (2), be entitled to notice and compensation in accordance with the provisions of Section 25-F, as if the workman had been retrenched...'
4. Mr. K. Srinivasan, the learned counsel for the assessee, contends that the liability of the assessees in the two cases was ascertained as on April 7, 1967, i e., during the account year relevant to the assessment year in question and in view of this liability having become ascertained, the assessees are entitled to have this amount allowed as a deduction in the computation of the profits and gains of the business of the assessees. We are of the opinion that this argument is misconceived. It is not the question of the ascertainment of the liability, but it is only the question of accrual or arising of the liability. The point for consideration is when actually the liability to pay the compensation to the workman arose or accrued in this case. It is true that originally the assessees wanted to close the business on April 10, 1967. But they actually closed the business on July 15, 1967, only. From what we have pointed out with reference to Section 25FFF, the liability is one arising on the closure of the business. If we may say so, the closure of the business and the accrual or arising of the liability to pay the compensation are concurrent and, therefore, from the point of view of time, one cannot be separated from the other. If so, the compensation payable under Section 25FFF cannot be said to be an expenditure incurred by the assessees for carrying on the business or an expenditure laid out wholly and exclusively for the purpose of the business. As a matter of fact, this is an expenditure which the assessees incurred not for carrying on the business, but for the closing of the business. Therefore, this amount cannot be said to be an expenditure laid out wholly or exclusively for the purpose of the business or an expenditure incurred for the purpose of carrying on the business.
5. We reach this conclusion simply as a matter of interpretation of the relevant provisions of the Industrial Disputes Act as well as the Income-tax Act, 1961. But we derive support for this conclusion from the decision of the Supreme Court in Commissioner of Income-tax v. Gemini Cashew Sales Corporation : 65ITR643(SC) which dealt with the compensation payable under Section 25FF of the Industrial Disputes Act. In dealing with a similar claim in respect of the amount of compensation, the Supreme Court observed (pages 647, 650):
'Liability to pay retrenchment compensation arises under Section 25FF when there is a transfer of the ownership or management of an undertaking : it arises on the transfer of the undertaking and not before. Transfer of ownership or management of an undertaking in law operates, except in the conditions set out in the proviso, as retrenchment of the workmen. But until there is a transfer of the undertaking resulting in determination of employment, the workmen do not become entitled to retrenchment compensation. So long as the ownership of the business continues with the employer, the right of the workmen to claim compensation remains contingent. A workman may, before the transfer of ownership of the business, himself terminate the employment: he may die or he may become superannuated: in none of these cases the owner of the business is under any obligation to pay retrenchment compensation to the workman. The obligation to pay compensation becomes definite only when there is retrenchment by the employer, or when the ownership or management of the undertaking is, except in the cases contemplated by the proviso, transferred to a new employer, and not till then. The right, therefore, arises from determination of employment, or from transfer of the undertaking : it has no existence before these events take place...Normally the liability which occurs after the last date, unless its source is in a preexisting 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, in our judgment, a properly debitable item in its profit and loss account as a revenue outgoing. The claim of the firm to treat it as an item in the determination of the profits of the firm under Section 10(1) of the Income-tax Act cannot, therefore, be sustained.
Under Section 10(2Xxv) of the Indian Income-tax Act, 1922, in the computation of taxable profits (omitting parts of the clause not material) 'any expenditure laid out or expended wholly and exclusively for the purpose of such business, profession or vocation', i.e., business, profession or vocationcarried on by the assessee, is a permissible allowance. But to be a permissible allowance the expenditure must be for the purpose of carrying on the business. When accounts are maintained on the mercantile system, if liability to make the payment has arisen during the time the business is carried on, it may appropriately be regarded as expenditure. But where the liability is, during the whole of the period that the business is carried on, wholly contingent and does not raise any definite obligation during the time that the business is carried on, it cannot fall within the expression ' expenditure laid out or expended wholly and exclusively' for the purpose of the business.'
6. In the sentence in the judgment of the Supreme Court underlined by us, if the word 'closure' is substituted for the word 'transfer', namely, '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 closure of the business, it is not, in our judgment, a properly debitable item in its profit and loss account as a revenue outgoing ', the above judgment will directly cover the present case also. Section 37 of the Income-tax Act, 1961, corresponds to Section 10(2)(xv) of the Indian Income-tax Act, 1922, and the Supreme Court with reference to that provision also has rejected the claim of the assessee in that case. This will apply a fortiori to a case of closure of business and, therefore, the above decision of the Supreme Court will cover the case on hand.
7. Under these circumstances, we are of the opinion that the conclusion of the Tribunal is correct and we answer the questions referred to us in the affirmative and against the assessees.
8. There will be no order as to costs.