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Issues: (i) Whether gratuity paid to the workers pursuant to the labour settlement was allowable as a deduction in computing business income. (ii) Whether retrenchment compensation paid on transfer and reorganisation of the manufacturing unit was an allowable business expenditure where the assessee's manufacturing and trading activities constituted a single business.
Issue (i): Whether gratuity paid to the workers pursuant to the labour settlement was allowable as a deduction in computing business income.
Analysis: The gratuity liability was treated as arising on termination of employment and not as a liability that came into existence only on closure of the business. The Supreme Court decision relied upon by the Court recognised that gratuity is distinct from retrenchment compensation and constitutes a present liability.
Conclusion: The gratuity payment was allowable as a deduction and was in favour of the assessee.
Issue (ii): Whether retrenchment compensation paid on transfer and reorganisation of the manufacturing unit was an allowable business expenditure where the assessee's manufacturing and trading activities constituted a single business.
Analysis: The Tribunal's finding that the manufacturing and trading activities formed one business, supported by unity of control and unity of management, was accepted. On that basis, the liability to pay retrenchment compensation was incurred in the course of carrying on and reorganising the same business, not as a mere consequence of closure of one independent unit. Such payment was therefore of revenue character and deductible as business expenditure.
Conclusion: The retrenchment compensation was allowable as a deduction and was in favour of the assessee.
Final Conclusion: The assessee was entitled to deduction of both the gratuity liability and the retrenchment compensation in computing business income, and the reference was answered wholly against the Revenue.
Ratio Decidendi: Where related business activities constitute a single and indivisible business, gratuity payable on termination of employment is a present deductible liability, and retrenchment compensation paid during reorganisation of that business is allowable as revenue expenditure.
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