1990 (7) TMI 9 - HC - Income Tax

Retrenchment compensation not deductible under Income-tax Act

PN. Ganesan Private Limited (In Liquidation) Versus Commissioner Of Income-Tax

PN. Ganesan Private Limited (In Liquidation) Versus Commissioner Of Income-Tax - [1992] 196 ITR 455, 85 CTR 166, 52 TAXMANN 461 Issues Involved:1. Admissibility of retrenchment compensation as a deduction under section 37(1) of the Income-tax Act, 1961.2. Interpretation of the term 'for the purpose of business' under section 37(1).3. Applicability of precedents from Supreme Court and other High Courts.Issue-wise Detailed Analysis:1. Admissibility of Retrenchment Compensation as a Deduction:The central issue was whether the retrenchment compensation of Rs. 1,06,044 paid by the assessee-company during the previous year was an allowable deduction under section 37(1) of the Income-tax Act, 1961. The company had passed a resolution for voluntary winding up on September 15, 1973, and paid the compensation to its employees. The Income-tax Officer initially allowed this deduction, but the Commissioner of Income-tax found it inadmissible, arguing that the payment was made due to the closure of the business and not for carrying on the business. The Tribunal upheld the Commissioner's view, stating that the compensation was paid to facilitate the winding up, not to earn profits or keep the trade going.2. Interpretation of the Term 'For the Purpose of Business':Under section 37(1) of the Act, any expenditure laid out or expended wholly and exclusively for purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession.' The court examined whether the retrenchment compensation met this criterion. The court noted that the decision to wind up the company was driven by financial strain and dwindling business, and the retrenchment was a consequence of this decision. Therefore, the payment of retrenchment compensation was not for the purpose of carrying on the business but was a result of the decision to close down the business. The court concluded that the expenditure was not incurred for the purpose of business as defined by the Supreme Court in CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140.3. Applicability of Precedents:The court reviewed several precedents to support its decision.- Sassoon J. David and Co. P. Ltd. v. CIT [1979] 118 ITR 261 (SC): The court found that this case did not support the assessee's position because, in that case, the company was neither dissolved nor its business sold. The court emphasized that the factual background of the Sassoon case was different from the present case.- CIT v. Gemini Cashew Sales Corporation [1967] 65 ITR 643 (SC): This case involved a firm that dissolved and paid retrenchment compensation. The Supreme Court held that the liability to pay retrenchment compensation, which arose from the decision to close down the business, was not an expenditure incurred for the purpose of carrying on the business. The court found this precedent applicable, as the retrenchment compensation in the present case also arose from the decision to close down the business.- Venkatesa Colour Works v. CIT [1977] 108 ITR 309 (Mad): In this case, the assessee-firm decided to close down its factory and paid compensation to workers. The court held that the compensation payable under section 25FFF of the Industrial Disputes Act was not an expenditure incurred for carrying on the business but for closing it down. The court found this decision directly applicable to the present case.Conclusion:The court concluded that the retrenchment compensation paid by the assessee was not an allowable deduction under section 37(1) of the Income-tax Act, 1961. The expenditure was incurred due to the decision to close down the business and not for the purpose of carrying on the business. The court answered the question referred to it in the affirmative and against the assessee, entitling the Revenue to costs of Rs. 500.