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M. Seshadri Iyengar and Sons Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 318 of 1978
Judge
Reported in(1985)46CTR(Mad)337; [1985]152ITR734(Mad)
ActsIncome Tax Act - Sections 37
AppellantM. Seshadri Iyengar and Sons
RespondentCommissioner of Income-tax
Appellant AdvocateS.V. Subramaniam, Adv.
Respondent AdvocateJ. Jayaraman, Adv.
Cases ReferredAmarendra Lal Khan v. Commr. of Agrl. I.T.
Excerpt:
.....- deduction - section 37 of income tax act, 1961 - assessee firm closed down its business - paid gratuity, retrenchment allowance and notice to pay of certain amount - claimed aforesaid amount as deduction - tribunal held that retrenchment allowance and notice to pay cannot be claimed as deduction as it was not business expenditure - appeal - assessee failed to disclose facts that business closed down for relevant assessment year - held, assessee cannot claim amount as deduction. - - as a matter of fact, if a portion of the business had been closed in the accounting year, the assessee would not have failed to mention such a vital fact and place the said materials before the authorities below. it is well established that the tribunal cannot support its order with reference to new..........learned counsel for the assessee then points out that during the assessment year in question, the assessee closed down only a part of the business and not the whole of the business and that the whole business was closed only in the next year and that the retrenchment compensation claimed by the assessee related to that part of the business which has bene closed in the year of account. according to the learned counsel for the assessee, if a part of the business had been closed in the year of account and the rest of the business was carried on, the retrenchment compensation in relation to that part of the business which has been closed can be claimed as a charge against the profits earned from that part of the business which has been carried on during the assessment year. the learned.....
Judgment:

Ramanujam, J.

1. At the instance of the assess, the following question has been referred to this court by the Income-tax Appellate Tribunal :

'Whether the Tribunal was justified in confirming the disallowance of the retrenchment compensation of Rs. 22,993 and notice pay of Rs. 3,204 ?'

2. The assessee was a firm carrying on business as dealers in timber and also exporters with headquarters of Madras and a retail depot in Madras itself and two branches at Cuddalore and Kallai. The firm decided to close down its business and entered into an agreement with its employees agreeing to pay them gratuity in a sum of Rs. 21,179, retrenchment compensation of Rs. 22,993 and notice pay of Rs. 3,204, totalling in all Rs. 43,376. The said amount was credited to the various employees' accounts and there was a corresponding debit entry in the profit and loss account for the assessment year 1973-74. The firm claimed the said amount of Rs. 43,376 as a deduction in the computation of its business income. The ITO disallowed the said sum on the ground that it was not deductible under s. 36(1)(v) of the I.T. Act. The assessee took the matter in appeal to the AAC who had held that the provisions of s. 36(1)(v) had not been complied with, in that the contributions have not been made towards an approved gratuity fund created by the assessee for the exclusive benefit of the employees under an irrevocable trust. The AAC has held that though the assessee had entered into an agreement with the employees to pay them some amount towards gratuity, retrenchment compensation and notice pay, the amounts had actually been paid only in April, 1973, when the closure of the business took place and, therefore, the assessee cannot claim the benefit of deduction towards retrenchment compensation and notice pay in the accounting year when the closure of the business did not take place. In that view, the AAC rejected the assessee's claim for deduction of the amounts paid towards gratuity, retrenchment compensation and notice pay in the accounting year when the closure of the business did not take place. In that view, the AAC rejected the assessee's claim for deduction of the amounts paid towards gratuity, retrenchment compensation and notice pay. The assessee went before the Tribunal. The Tribunal held that the amounts paid towards the gratuity liability is deductible though the amounts paid towards retrenchment compensation and notice pay are not deductible. Since the decision of the Tribunal was in favour of the assessee so far as it related to the payment made towards gratuity, this court is not concerned with that question in this reference. As regards the retrenchment compensation and notice pay, the Tribunal relied on the decision of the Supreme Court in CIT v. Gemini Cashew Sales Corporation : [1967]65ITR643(SC) and held that the amount paid towards the retrenchment compensation and notice pay on the closure of the business of the assessee cannot be held to be a business expenditure and, therefore, they are not deductible. In this reference, the assessee is challenging the decision of the Tribunal holding that the retrenchment compensation and notice pay are not allowable expenditure.

3. As already stated, during the assessment year 1973-74, the closure of the business did not take place, but the closure of the business took place only in the next year. But what the assessee has done is that it took a decision to close down the business and entered into an arrangement with the workmen for payment of retrenchment compensation and notice pay and it credited the amounts due to the workmen under both accounts in their accounts and debited the same in the profit and loss account. The assessee, based on such entries made in the accounts, claimed deduction towards those amounts as against the profits returned for that year. It is not in dispute that the actual payment of retrenchment compensation and notice any was made only in the subsequent year when the business was actually closed.

4. The question is whether of the basis of the entries made by the assessee during the assessment year in question, the claim for deduction could be allowed. Even if the assessee had followed the mercantile system of accounting and the credit entries in favour of the workmen and the debit entries against the assessee-firm could be taken note of as contended by the learned counsel for the assessee, the assessee is not entitled to the relief because the liability to pay the retrenchment compensation and notice pay arose only in the next year when the business was actually closed. Merely on the basis of the entries, the amounts covered by those entries cannot be claimed as a business expenditure since the actual liability arose only in the subsequent year when the business was closed. During the assessment year, the liability to pay the retrenchment compensation and notice pay remained only as a contingent liability and the actual liability arose only in the subsequent year. Apart from this question, the Supreme Court in CIT v. Gemini Cashew Sales Corporation : [1967]65ITR643(SC) has categorically ruled that the liability to pay the retrenchment compensation arises only after the closure of the business and not when the firm is actually carrying on the business and as such the same cannot be allowed as a business expenditure. The Supreme Court has pointed out that the obligation to pay compensation becomes definite only when there is retrenchment by the employer and, therefore, the right to receuve the retrenchmebt compensation by the workmen arise from determination of employment and that, therefore, the said amount cannot be taken to be an outgoing of the business and as such debitable in the profit and loss account. The Supreme Court observed as follows (p. 650) :

'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.'

5. Thus, to be a permissible allowance, the expenditure must be for the purpose of carrying on the business, and where the business is closed and as a result of the closure of the business, the liability to pay retrenchment compensation has arisen, the liability to pay the retrenchment compensation cannot be said to be a liability which arose at the time when the business was carried on, and such a liability was wholly contingent when the business was being run and, therefore, the amounts paid or agreed to be paid towards retrenchment compensation cannot be termed as expenditure wholly or exclusively for the purpose of the business. Thus, even if the entries made in the accounts can be taken as the basis for the assessee's claim for exemption, that claim has to be rejected on two grounds, namely, (1) that the liability to pay the retrenchment compensation arose only in the next year when the business was closed and the credit or the debit entries, as the case may be, can only be in respect of a contingent liability during the assessment year and such a contingent liability cannot be taken as business expenditure to be charged against the profit, and (2) even assuming that the closure of the business took place in the year of account, still on the basis of the decision of the Supreme Court, the claim cannot be allowed as the said expenditure cannot be said to be a business expenditure, for the liability to pay the retrenchment compensation arose after the closure of the business and not while running the business. In any view of the matter, the Tribunal has come to the right conclusion in this case in disallowing the claim for deduction of the amounts of the retrenchment compensation and the notice pay.

6. Learned counsel for the assessee then points out that during the assessment year in question, the assessee closed down only a part of the business and not the whole of the business and that the whole business was closed only in the next year and that the retrenchment compensation claimed by the assessee related to that part of the business which has bene closed in the year of account. According to the learned counsel for the assessee, if a part of the business had been closed in the year of account and the rest of the business was carried on, the retrenchment compensation in relation to that part of the business which has been closed can be claimed as a charge against the profits earned from that part of the business which has been carried on during the assessment year. The learned counsel for the assessee refers to paragraph 2 of the statement of the case, wherein a statement has been made that the assessee closed down a part of the business in the accounting year relevant to the assessment year 1974-75. However, we find that except for a casual reference to the closure of the business in the statement of the case, none of the authorities below has referred to that fact. All the authorities below have proceeded on the basis that the assessee's business as a whole was closed in the next year. That the assessee closed down a portion of the business even in the year of account does not find a place anywhere in the record. As a matter of fact, if a portion of the business had been closed in the accounting year, the assessee would not have failed to mention such a vital fact and place the said materials before the authorities below. Since all the authorities below proceed on the basis that the assessee's business as a whole was closed in the next accounting year, we are not in a position to proceed on the basis that the assessee closed down a part of the business in the assessment year 1973-74 and the rest of the business was closed in the next assessment year 1974-75. According to the learned counsel for the assessee, the statement of the case filed before this court by the Tribunal has normally to be looked into for the purpose of finding out facts, and in this case when the statement of the case says that the assessee's-firm closed down a part of the business in the accounting year relevant to the assessment year 1973-74, that fact cannot be overlooked merely because the Tribunal has not referred to that fact in its order. It is no doubt true that in the statement of the case, the Tribunal refers to the fact that the assessee had closed down a part of the business during the year of account. But that fact is not supported by the materials which were available before the Tribunal at the time of the hearing of the appeal. hence, it is not possible for us to rely on the statement made by the Tribunal for the first time in the statement of the case. It is well established that the Tribunal cannot support its order with reference to new materials which were not before it when it heard the appeal. If the Tribunal refers to such new materials or evidence, it would be the duty of this court to ignore the same. This has been so held by the Supreme court in Keshav Mills Co. Ltd. v. CIT : [1965]56ITR365(SC) . It has also been held in Amarendra Lal Khan v. Commr. of Agrl. I.T. : [1959]36ITR288(Cal) that the Tribunal should not attempt to find facts at the stage of reference or incorporate additional findings of fact in the statement of the case and that all the necessary facts should be found by the Tribunal at the appellate stage. In this case, the whole order proceeds on the basis that the assessee closed down the business in the subsequent accounting year and it is for the first time in the statement of the case, the Tribunal has stated that the assessee-firm closed down a part of the business in the accounting year in question. For the reasons stated above, we are not in a position to place any significance on the statement referred to by the Tribunal in the statement of the case that the assessee-firm closed a portion of the business in the accounting year relevant to the assessment year 1973-74.

7. In this view of the matter, the question referred to us is answered in the affirmative and against the assessee. The assessee will pay the costs of the Revenue. Counsels' fee Rs. 500.


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