Retrenchment compensation on business closure is not deductible business expenditure under income-tax principles.

Retrenchment compensation payable when a business is closed is not expenditure laid out wholly and exclusively for carrying on that business. The liability arises because the undertaking is brought to an end, not because it is being operated in the ordinary course. Applying the settled income-tax principle that only business expenditure incurred for carrying on the business is deductible, the deduction was disallowed and the issue was decided against the assessee.

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Issues: Whether retrenchment compensation payable on closure of the business was allowable as a deduction under the Income-tax Act.

Analysis: The assessee's liability arose because the firm had closed its business and the employees' services came to an end on that account. Expenditure is allowable only if it is laid out wholly and exclusively for the purpose of carrying on the business. Retrenchment compensation triggered by closure is not incurred in carrying on the business but in bringing it to an end. The settled position, applied from the Supreme Court and High Court decisions relied upon, is that such liability is not a deductible business expenditure.

Conclusion: The deduction was not allowable and the question was answered against the assessee.

Ratio Decidendi: Retrenchment compensation arising on closure of a business is not expenditure laid out wholly and exclusively for the purpose of carrying on that business and is therefore not deductible.

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