Business closure payments and gratuity are not deductible where expenditure is incurred after the business has ceased.

Gratuity and compensation paid to workers on closure of a business were held not deductible under section 37(1) because the expenditure was incurred after the business had ceased, not in the course of carrying on an ongoing business. The legal test applied was whether the payment was for the purpose of business; a payment made on cessation of business does not satisfy that requirement. Authorities allowing gratuity deductions were distinguished on the basis that they involved a continuing business and commercial expediency, which was not the factual position accepted on the reference.

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Issues: Whether gratuity and compensation paid to workers on closure of the business were allowable as a deduction in computing business income under section 37(1) of the Income-tax Act, 1961.

Analysis: The reference was decided on the facts stated by the Tribunal, namely that the assessee's business had come to an end on the relevant date. On that footing, the payment was made on closure of the business and not in the course of carrying on an ongoing business. An expenditure is allowable under section 37(1) only if it is incurred for the purpose of business, and a payment made on cessation of business does not satisfy that requirement. The authorities relied upon for gratuity as a deductible item turned on a continuing business and commercial expediency, which was not the factual position accepted here.

Conclusion: The payment of gratuity and compensation was not an allowable deduction under section 37(1), and the question was answered in the negative, against the assessee.

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