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Commissioner of Income-tax Vs. Assam Oil Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 532 of 1979
Judge
Reported in(1985)47CTR(Cal)371,[1985]154ITR647(Cal)
ActsCompanies Act, 1956; ;Income Tax Act, 1961 - Sections 37(1) and 256(1); ;Income Tax Act, 1922 - Section 10(1) and 10(2); ;Industrial Disputes Act, 1947 - Section 25FF
AppellantCommissioner of Income-tax
RespondentAssam Oil Co. Ltd.
Cases ReferredCommissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd.
Excerpt:
- .....the contentions of the assessee were accepted and the said amount was directed to be allowed as business expenditure of the assessee.13. the revenue preferred a further appeal to the income-tax appellate tribunal. the tribunal remanded the matter directing that the revenue should be given an opportunity to cross-examine the administrative manager of the assessee on the facts stated in his affidavit filed before the aac. the aac was further directed to ascertain the amount of expenses reimbursed by oil india ltd. to the assessee for the use of the employees of the latter up to january 31, 1961, and other details regarding the number of employees of the assessee working in various areas and the agreements recording the transfer of the areas and business to oil india ltd.14. further.....
Judgment:

Dipak Kumar Sen, J.

1. The facts found and/or admitted as on record are, inter alia, that Assam Oil Co. Ltd., the assessee, is a non-resident sterling company which had been carrying on business in prospecting and extracting petroleum from various fields in the north-eastern region of India. The assessee was also running a refinery at Digboi in Assam. The assessee was granted prospecting licences by the Government of India for prospecting in areas other than those initially allotted to it including Naharkatia, Hugrijan and Moran in Assam on condition that, ultimately, the entire new area would be transferred to a resident rupee company to be incorporated for prospecting and extraction of petroleum. Between 1954 and 1958, the assessee continued with field work in prospecting in the extended areas.

2. The rupee company known as Oil India Ltd. was incorporated under the Companies Act, 1956, on February 18, 1959. It was arranged that the expenses incurred by the assessee prior to the registration of the rupee company were to be met by the latter and that the assets and properties of the assessee utilised in prospecting and field work would also be taken over by Oil India Ltd. at an agreed consideration to be settled between the parties.

3. From its incorporation in 1959 till the end of December, 1961, Oil India Ltd. had no employees of its own and the operations in different areas allotted to it were carried out by the employees of the assessee.

4. On December 31, 1961, the services of the employees of the assessee who were working in the extended areas were transferred to Oil India Ltd. The conditions of service of the persons so transferred were protected and the liability for payment to the said employees for the services rendered by them up to December 31, 1961, was taken over by Oil India Ltd. No retrenchment compensation was paid to the employees by the assessee whose services were so transferred.

5. After the transfer of the new areas to Oil India Ltd., the assessee's business stood restricted to the operations in the Digboi fields and the refinery located there. The assessee found that the Digboi fields were getting exhausted gradually and that there was no prospect of further allotment of fresh areas to the assessee for prospecting and extracting. The refinery of the assessee crime to depend more and more on the crude petroleum extracted by Oil India Ltd.

6. By reason of the aforesaid, the man-power requirement of the assessee was substantially reduced and it was felt that the number of personnel of the assessee had to be rationalised in keeping with its reduced requirements.

7. An operation and management team appointed by the assessee went into the problem to make suitable recommendation for reducing expenditure and improving efficiency. A report was submitted by the team in May, 1953.

8. It was found by the team that all departments of the assessee were over-staffed and for effecting economy and efficiency, the strength of the staff was required to be reduced. A voluntary severance scheme was suggested under which the assessee was to ascertain the personnel in each department who were actually surplus and to decide, thereafter, as to services of which personnel could be profitably dispensed with for reducing the surplus. As a general retrenchment might lead to an industrial unrest and litigation, it was suggested that a financial incentive should be given to the persons who were found to be surplus to accept voluntary severance of their services. The surplus personnel had the option to participate in the scheme by resigning from the service of the assessee in consideration of which the assessee undertook to pay in addition to the normal gratuity, other retirement benefits and retrenchment compensation of an amount to be calculated on a formula. The formula was that each of the personnel who would join the scheme and resign from his service would receive a fixed sum of Rs. 3,000 plus two months' salary for each year of his service subject to a ceiling.

9. In the assessment year 1967-68, the corresponding previous year being the calendar year 1966, 312 employees of the assessee joined the scheme and resigned from their service against payment of the stipulated compensation. The total amount paid aggregated to Rs. 30,96,805.

10. The assessee claimed deduction of the said amount from its gross income for the said assessment year contending that the said amount represented expenses incurred for commercial expediency. The ITO rejected such claim on the ground, inter alia, that the said scheme was not a general scheme applicable to all the employees of the assessee but had a limitedpurpose of retrenching only selected employees declared by the assessee to be surplus. The scheme gave the company an absolute and unfettered discretion and did not confer upon the employees in general a right to receive such compensation in the event of their voluntary retirement. He held that the scheme did not have the effect of creating any impetus or incentive, that the payments were made not under any contractual or other liability and that the amount represented gratuitous payment to selected employees. The ITO found that the necessity to pay this amount arose for the first time after the assessee transferred its business of drilling and other operations to Oil India Ltd. on account of such transfer.

11. The ITO also held that the discharge of selected employees resulted in an enduring benefit to the assessee and, therefore, the expenditure was capital in nature.

12. On appeal, the AAC after considering the records held that the payment of retrenchment compensation by the assessee was not related to the business transferred to Oil India Ltd. He found that transfer of a part of the business of the assessee in favour of Oil India Limited had taken place four years earlier and that the services of the employees of the assessee had been transferred to the Indian company along with the business. It was later that the assessee came to the conclusion that it was necessary to retrench the remaining staff on the ground of economy and efficiency. The Appellate Assistant Commissioner found further that the scheme applied to a large number of employees of the assessee and that payments made thereunder could not be held to be gratuitous. The contentions of the assessee were accepted and the said amount was directed to be allowed as business expenditure of the assessee.

13. The Revenue preferred a further appeal to the Income-tax Appellate Tribunal. The Tribunal remanded the matter directing that the Revenue should be given an opportunity to cross-examine the administrative manager of the assessee on the facts stated in his affidavit filed before the AAC. The AAC was further directed to ascertain the amount of expenses reimbursed by Oil India Ltd. to the assessee for the use of the employees of the latter up to January 31, 1961, and other details regarding the number of employees of the assessee working in various areas and the agreements recording the transfer of the areas and business to Oil India Ltd.

14. Further proceedings were held on remand and a report was submitted by the ITO. It was found that the facts stated by the administrative manager of the assessee were basically correct. After consideration of the said report, the AAC passed a fresh order accepting the contentions of the assessee. It was found that the compensation paid by the assessee underthe voluntary severance scheme did relate to the employees whose services had been transferred to Oil India Ltd. earlier and that such payments were not related to the business of the assessee transferred to Oil India Ltd. It was found that the scheme was necessarily applicable only to the employees who had been found surplus and who agreed to leave the services of the assessee. The payments under the scheme were payments under contracts between the assessee and the employees concerned and that such payments did not confer on the assessee any enduring benefit. The payments were a normal business expenditure and deductible. The appeal was allowed.

15. There was a further appeal before the Income-tax Appellate Tribunal by the Revenue. In the appeal, it was contended on behalf of the Revenue, inter alia, that the question of retrenchment and compensation arose as a result of closure of a part of the business of the assessee which was transferred to Oil India Ltd. Such compensation when paid was not deductible as business expenditure.

16. It was contended that the scheme was not voluntary but selective and depended entirely on the decision of the management of the assessee. The scheme did not bring about any contract as the employees were not a party to the scheme and the payments thereunder were not under any contractual obligation.

17. It was contended further that the scheme was undertaken for restructuring the business of the assessee after closure of a substantial part thereof. The expenditure incurred under the scheme related to the restructuring of the capital and the basic organisation of the business and was not a revenue expenditure. By incurring the expenditure, the assessee got rid of a large number of its employees thereby reducing its further expenditure and obtaining an enduring benefit.

18. It was contended on behalf of the assessee that it was found as a fact that the scheme and the compensation paid therein had no relation to the part of the business transferred to Oil India Ltd. The scheme was promulgated long after such transfer.

19. The scheme provided for compensation by way of incentive to the employees to leave their service and there was no compulsion. The volume of the business of the assessee had been reduced after the transfer but had not ceased and there was no closure of any part of the assessee's business during the relevant year. Payments under the scheme resulted in benefit to the assessee in the shape of a more rationalised and efficient business but the same were not enduring benefits.

20. The scheme was not general but was applicable to a large number of employees and payments thereunder were contractual and were beingmade to the employees who had accepted the offer of the assessee to resign in consideration of the compensation. The Tribunal held, inter alia, that-

(a) There was no closure of business as such by the assessee and although the volume was reduced, the business itself was continued ;

(b) After the business was reduced, it was realised that employment of all the existing employees could not be continued as a business proposition ;

(c) The scheme had no direct relationship with the transfer of a part of the assessee's business to Oil India Ltd. ;

(d) The scheme was of a general nature for a class of employees of the assessee who were considered to be surplus, and its object was to bring about rationalisation and economy ;

(e) The capital structure of the assessee was not modified or changed by the scheme ;

(f) Payments of compensation under the scheme were business expenditure ;

(g) By the said payments, no enduring benefit resulted to the assessee in the manner that a fixed capital endures ; the Tribunal rejected the appeal.

21. On an application by the Revenue under Section 256(1) of the I.T. Act, 1961, the Tribunal has referred the following question, stated to be a question of law arising out of its order, for the opinion of this court :

'Whether, on the facts and in the circumstances of the case, the payment of Rs. 30,96,805 as retrenchment compensation to the employees of the company could be allowed as a deduction by holding it to be a revenue expenditure ?'

22. At the hearing, learned advocate for the Revenue reiterated all the contentions made on behalf of the Revenue before the Tribunal.

23. He submitted further that the expenditure incurred was against a partly contingent liability. If any particular employee had been retrenched, the assessee would have had to face a claim for compensation. The expenditure incurred was, therefore, de hors the business carried on by the assessee in the relevant year. It was submitted that the matter should be remanded to the Tribunal for an enquiry whether the expenditure was incurred for effecting economy or for restructuring of the fixed capital of the company.

24. Learned advocate for the assessee contended to the contrary and submitted that on the facts found, which remain unchallenged, the question referred has to be answered in favour of the assessee.

25. In support of the respective contentions of the parties, a number of decisions were cited at the Bar. The same are considered hereafter.

(a) Assam Bengal Cement Co. Ltd. v. CIT : [1955]27ITR34(SC) . In this case, the assessee had acquired from the Government of Assam lease of certain limestone quarries for a number of years against payment of half yearly rent, royalty and further payments by way of protection fees. The question arose whether such protection fees which were paid could be deducted under Section 10(2)(xv) of the Indian I.T. Act. 1922, as revenue expenditure. The Supreme Court laid down that an outlay would be deemed to be capital when it was made for initiation of a business or for extension of a business, or for a substantial replacement of equipment. Expenditure would be treated as attributable to capital when it was made not only once and for all, but with a view to bring into existence an asset or an advantage for the enduring benefit of a trade. It was also observed that if for the purpose of the expenditure concerned, any capital was withdrawn, it would be a relevant consideration.

In the facts, it was held that the assessee had obtained an enduring benefit in its business by way of continuation of the lease by making recurring payments by way of protection fees. The asset which the company acquired in consideration of such payments was the right to carry on business unfettered by any competition from any outsider within the area. This was a protection acquired by the company in its business as a whole.

(b) CIT v. Gemini Cashew Sales Corporation : [1967]65ITR643(SC) . Here, a firm constituted by two partners was dissolved on the death of one. The business was taken over and continued by the surviving partner on his own account without any interruption in the services of the employees or alteration in the terms of their employment. An amount had been set apart in the accounts of the firm as retrenchment compensation payable to the employees under Section 25FF of the Industrial Disputes Act, 1947. The question was whether the said sum constituted an allowable expenditure in computing the income of the firm.

In the facts, it was held by the Supreme Court that the liability which arose on the transfer of the business was not of a revenue nature and could not be deducted under Section 10(1) of the Indian I.T. Act, 1922. It was held further that the liability under the Industrial Disputes Act was wholly contingent and did not raise any definite obligation during the relevant year and, therefore, the said amount was not an expenditure laid out or expended wholly and exclusively for the purpose of the business.

(c) Indian Cable Co. Ltd. v. Their Workmen : (1972)IILLJ121SC . In this case, the Supreme Court court considered a voluntary retirement scheme and observed as follows (p. 538 of 41 FJR) :

'The voluntary retirement scheme enabled the younger workmen to continue in service while it offered a temptation for the older employees to retire from service. The voluntary retirement scheme has not been challenged as mala fide by the unions. We are in agreement with the view of the Tribunal that the payment of compensation to induce the workmen to retire prematurely was an item of expenditure incurred by the company on the ground of commercial expediency in order to facilitate the carrying on of the business and it was an expenditure allowable under Section 37(1) of the Income-tax Act. It was not an expenditure of a capital nature. The Tribunal was justified in declining to add back this item of expenditure to the gross profits.' (d) Empire Jute Co. Ltd. v. CIT : [1980]124ITR1(SC) . In this case, the Supreme Court held that expenditure incurred in the purchase of loom hours by a jute mill was in implementation of part of a scheme which enabled the mill to remove a restriction in the number of its working hours, that no new asset was created and that there was no addition to or expansion of the profit-making apparatus of the mill. The acquisition of additional loom hours did not add to the fixed capital of the business, the permanent structure of which remained the same. The expenditure incurred was essentially related to the operation or working of the looms and was an expenditure incurred as part of the process of profit-making. It was held that such expenditure was a revenue expenditure and was deductible as such under Section 10(2)(xv) of the Indian I.T. Act, 1922.

26. Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1965] 58 ITR 241 and CIT v. Navsari Cotton and Silk Mills Ltd. : [1982]135ITR546(Guj) were also cited. These decisions do not lay down any new principles relevant to the question before us and need not be considered further.

27. In the facts and circumstances, it appears to us that the controversy raised by the question referred is more or less concluded by the observations of the Supreme Court in Indian Cable Co. : (1972)IILLJ121SC . Even otherwise, the principles laid down by the Supreme Court in Empire Jute Co. Ltd. : [1980]124ITR1(SC) , appear to be applicable to the facts in this reference.

28. The findings of fact against the Revenue are conclusive and have not been challenged. It is conclusively established that the assessee's business in which the disputed payments were made did not come to a closure and that the assessee made such payments in order to effect economy and rationalisation of its personnel. No asset of enduring nature came into existence by reason of the payments though benefits accrued to the assesseethereunder which would continue not only for one year but in future years. But this benefit cannot be related to any asset as such.

29. For the above reasons, the question referred to us is answered in the affirmative and in favour of the assessee.

30. In the facts and circumstances of the case, there will be no order as to costs.

Ajit K. Sengupta, J.

31. I agree.


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