Business closure compensation was held non-deductible because it was not wholly and exclusively for the purpose of trade.

Compensation paid to employees on closure of the banking business was not an allowable deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922, because it was incurred after the business had closed and was not shown to have been laid out for carrying on the trade. No legal obligation to pay such compensation on closure was established, so the payment was treated as a voluntary gesture rather than a business necessity. Expenditure incurred for winding up or closing the business does not satisfy the statutory requirement of being wholly and exclusively for the purpose of the business. The absence of proof that the amount was expended during the accounting year also militated against allowance.

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Issues: Whether compensation paid to employees on closure of the banking business was an allowable deduction as expenditure laid out wholly and exclusively for the purpose of the business under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis: The payment was made after the business had been closed and was not shown to have been incurred for keeping the trade going. No legal obligation under any provision then in force was established to pay such compensation on closure, and the payment was treated as a voluntary gesture rather than a business necessity. The wording of section 10(2)(xv) requires that the expenditure be laid out wholly and exclusively for the purpose of the business, which does not extend to expenditure incurred at the time of winding up or for the purpose of closing the business. The absence of proof that the amount had been expended during the accounting year also told against allowance.

Conclusion: The expenditure was not deductible under section 10(2)(xv) and the answer to the reference was in the negative, in favour of the Revenue.

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