1990 (7) TMI 29 - HC - Income Tax

High Court rules against deduction claim for retrenchment compensation & gratuity as non-revenue expenditure

The High Court denied the assessee's claim for deduction of Rs. 70,000 as retrenchment compensation and gratuity, ruling that the payments were related to ... Business Expenditure Issues:1. Whether the assessee is entitled to deduction of a sum of Rs. 70,000 representing retrenchment compensation and gratuity paid in the assessment year 1969-70Rs.2. Whether the payment made by the assessee was in the course of carrying on the business and not on the closure of the businessRs.Analysis:1. The case involved a tax reference under section 256(2) of the Income-tax Act, 1961, where the Revenue questioned the deduction claimed by the assessee for a sum of Rs. 70,000 paid as retrenchment compensation and gratuity in the assessment year 1969-70. The Income-tax Officer initially allowed the deduction, but later disallowed it, claiming the payments were made due to the closure of the business. The Appellate Assistant Commissioner upheld the disallowance, but the Tribunal ruled in favor of the assessee, leading to the reference to the High Court.2. The Tribunal's decision was based on the view that the liability for the payments arose before the actual closure of the business and was for the purpose of the business. However, the High Court disagreed, emphasizing that the closure of the business occurred on March 3, 1969, as per the deed of dissolution. The Tribunal's argument that the closure happened on March 15, 1969, when the accounts were closed was deemed incorrect. The High Court noted that the payments were directly linked to the closure of the business on March 3, 1969, and any activities between March 4 and March 15 were merely to facilitate winding up, not continuation of business.3. Referring to the decision in Venkatesa Colour Works v. CIT, the High Court emphasized that expenses incurred for closing down a business do not qualify as revenue expenditure under section 37(1) of the Act. The court found that the Tribunal's conclusion that the payments were made during the course of business and not on closure was unfounded. It highlighted that the transactions post-March 3, 1969, were not typical business activities but were aimed at finalizing pending matters before complete closure. Therefore, the High Court ruled against the assessee on both questions, denying the deduction claimed.4. In conclusion, the High Court rejected the assessee's claim for deduction of retrenchment compensation and gratuity, emphasizing that the payments were related to the closure of the business, not regular business activities. The court held that expenses incurred for winding up operations do not fall under section 37(1) of the Income-tax Act, supporting its decision with legal precedents and a detailed analysis of the factual circumstances.