1984 (7) TMI 56 - HC - Income Tax

High Court denies deduction under Income-tax Act for non-business payments

The High Court ruled against the assessee, denying the deduction of Rs. 4,18,107 claimed under section 37 of the Income-tax Act for the assessment year ... Business Expenditure, Reference, Single Business Or Different Businesses Issues Involved:1. Entitlement to deduction of Rs. 4,18,107 under section 37 of the Income-tax Act.2. Determination of whether the assessee's ten processing units constituted a single business.3. Applicability of section 25-FF of the Industrial Disputes Act.4. The Tribunal's misdirection in law regarding findings of fact.5. Jurisdiction of the High Court to revise findings of fact by the Tribunal.Issue-wise Detailed Analysis:1. Entitlement to Deduction of Rs. 4,18,107 Under Section 37 of the Income-tax Act:The primary question referred to the High Court was whether the assessee is entitled to claim a deduction of Rs. 4,18,107 under section 37 of the Income-tax Act. The Income Tax Officer (ITO) initially rejected the claim, stating that the payments were not made to employees of the assessee during the relevant period, the expenditure was not incurred wholly or exclusively for the purpose of the business, and the payment was not covered by section 36(1)(v) of the Act. The Appellate Assistant Commissioner (AAC) allowed the deduction of Rs. 2,71,421 but refused the entire amount of Rs. 4,18,107. The Tribunal, however, found that the payment was made by way of commercial expediency for the industrial health of the business as a whole.2. Determination of Whether the Assessee's Ten Processing Units Constituted a Single Business:The Revenue argued that the assessee must prove that the ten units constituted a single business to charge the outgoings against the income from other units. The Supreme Court's decision in L. M. Chhabda and Sons v. CIT was cited, which states that different ventures must be interlaced and dovetailed into each other to be considered a single business. The Tribunal's finding of 'unity of management and control' based on accounts produced by the assessee was questioned by the Revenue. The High Court found that the Tribunal had misdirected itself in law by not considering crucial documents like annexure A, B, and C, which indicated no unity of management or control.3. Applicability of Section 25-FF of the Industrial Disputes Act:The Revenue contended that the liability for retrenchment compensation arose on account of the transfer of the business, not during the carrying on of the business, thus falling under section 25-FF of the Industrial Disputes Act. The Supreme Court's decision in CIT v. Gemini Cashew Sales Corpn. supported this view, stating that the liability to pay retrenchment compensation arose after the closure of the business and not before, making it a non-revenue nature liability. The High Court agreed with this interpretation, concluding that the retrenchment compensation paid by the assessee did not arise in the course of business but due to the transfer of the business.4. The Tribunal's Misdirection in Law Regarding Findings of Fact:The High Court found that the Tribunal had misdirected itself in law by wrongly casting the burden of proof on the Department to establish that the four units in Kerala were separate businesses. The Tribunal also overlooked crucial documents (annexure A, B, and C) while considering the interconnection of the units. The High Court held that these findings were erroneous and not binding, thus liable to be eschewed while considering the main question.5. Jurisdiction of the High Court to Revise Findings of Fact by the Tribunal:The High Court asserted its jurisdiction to revise the Tribunal's findings if they were based on a misdirection in law. Citing the Supreme Court's decisions in Parimisetti Seetharamamma v. CIT and Mahesh Anantrai Pattani v. CIT, the High Court concluded that it could consider the correctness of the Tribunal's findings as they were another aspect of the main question referred. The High Court found that the Tribunal had misdirected itself by not considering crucial documents and wrongly casting the burden of proof.Conclusion:The High Court concluded that the assessee is not entitled to the deduction of Rs. 4,18,107 claimed in the return for the assessment year 1972-73. The question was answered in the negative and against the assessee. No order as to costs was made. The judgment emphasized that the Tribunal's findings were not binding due to misdirection in law and that the liability for retrenchment compensation arose from the transfer of the business, not during its operation.