Closure compensation on shutting down a business unit is capital in nature and not deductible as revenue expenditure.

Compensation paid to workmen on closure of a manufacturing unit under section 25FFF of the Industrial Disputes Act was held to be capital in nature because the liability arose only on shutting down the business unit and was directly connected with bringing the business to an end. It was therefore not expenditure laid out wholly and exclusively for carrying on the business. The payment was not deductible as revenue expenditure.

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Issues: Whether compensation paid to workmen on closure of the manufacturing unit under section 25FFF of the Industrial Disputes Act, 1947, was allowable as revenue expenditure.

Analysis: The liability to pay closure compensation arose only on the closure of the business unit, and the payment was integrally connected with the closing down of the business rather than with its ordinary conduct. Compensation of this nature was therefore treated as expenditure incurred for bringing the business to an end and not as expenditure laid out wholly and exclusively for carrying on the business.

Conclusion: The compensation was not allowable as revenue expenditure and was of capital nature.

Ratio Decidendi: Compensation paid to workers on closure of a business unit under section 25FFF of the Industrial Disputes Act, 1947 is expenditure incurred for closing down the business and is not deductible as revenue expenditure.

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