Retrenchment compensation during ongoing business is deductible when liability accrues and is not merely contingent.

Retrenchment compensation paid to workmen during the continuance of business was treated as allowable business expenditure under section 37(1) of the Income-tax Act, 1961, because the liability arose when retrenchment occurred in the course of ongoing business and under a subsisting contract. Compensation payable under section 25F of the Industrial Disputes Act, 1947, was held to be deductible when the obligation had accrued in praesenti and was not a mere contingent provision. As the assessee followed the mercantile system, the deduction was allowable in the year of accrual, and not as a closure-related expense.

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Issues: Whether retrenchment compensation paid to workmen during continuance of business, and not on closure, was allowable as revenue expenditure under section 37(1) of the Income-tax Act, 1961.

Analysis: The liability arose when retrenchment took place during the subsisting contract and while the assessee's business activities were continuing. Compensation paid under section 25F of the Industrial Disputes Act, 1947, is an allowable business deduction when the liability is incurred in praesenti and is not a mere contingent provision. The case was one of retrenchment in the course of carrying on business, not expenditure incurred for closure of business. The assessee followed the mercantile system of accounting, so the liability was deductible in the year in which it accrued.

Conclusion: The retrenchment compensation was deductible under section 37(1) of the Income-tax Act, 1961, and the answer to the referred question was in the affirmative, in favour of the assessee.

Final Conclusion: The reference was disposed of by holding that the expenditure was an allowable business deduction, leaving the Revenue unsuccessful on the substantive tax issue.

Ratio Decidendi: Retrenchment compensation payable for termination of workmen during the continuance of business, where the liability has accrued and is not merely contingent, constitutes allowable business expenditure under section 37(1) of the Income-tax Act, 1961.

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