Business closure expenses are not deductible revenue expenditure when liability arises from shutting down operations, not carrying them on.

Expenditure incurred because of the closure of a business, including retrenchment compensation and gratuity paid after the decision to shut down, is not expenditure laid out wholly and exclusively for carrying on the business under section 37(1) of the Income-tax Act, 1961. Where the contemporaneous documents show a decision to close the undertaking, later winding-up steps such as notices to workmen, completion of pending orders, billing, collection, and accounting adjustments do not change the character of the liability. Such payments remain attributable to closure, not to the conduct of the business, and are therefore not deductible revenue expenditure.

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Issues: (i) Whether retrenchment compensation and gratuity paid after the decision to close down the business were deductible as expenditure incurred wholly and exclusively for the purposes of the business; (ii) whether the finding that the payments were made in the course of carrying on the business and not on its closure was sustainable.

Issue (i): Whether retrenchment compensation and gratuity paid after the decision to close down the business were deductible as expenditure incurred wholly and exclusively for the purposes of the business.

Analysis: The liability to pay the amounts arose from the decision to close the business with effect from an identified date, and the subsequent steps such as winding up operations, issuing notices to workmen, completing pending orders, billing, and collection did not amount to continuation of the normal business. Expenditure linked to closure of the business is not expenditure laid out for carrying on the business within section 37(1) of the Income-tax Act, 1961.

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

Issue (ii): Whether the finding that the payments were made in the course of carrying on the business and not on its closure was sustainable.

Analysis: The contemporaneous documents showed that the business had been decided to be closed, and the later accounting adjustments did not alter the legal character of the payments. The Tribunal's inference that the business continued until the books were closed was inconsistent with the dissolution terms and the surrounding facts, and lacked supporting material.

Conclusion: The finding was unsustainable and the issue was answered against the assessee.

Final Conclusion: The payments were held to be attributable to the closure of the business and not to its conduct, so they could not be treated as deductible revenue expenditure under section 37(1).

Ratio Decidendi: Expenditure incurred because of the closure of a business, even if paid or accounted for during winding up steps, is not expenditure laid out wholly and exclusively for the purposes of carrying on that business under section 37(1) of the Income-tax Act, 1961.

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