Retrenchment compensation provision disallowed where no liability accrued to the transferor on undertaking transfer

On transfer of an undertaking, section 25FF of the Industrial Disputes Act does not create retrenchment-compensation liability in the transferor where employees continue in service without interruption, retain no less favourable conditions, and the transferee assumes the compensation obligation on retrenchment based on continuous service. In that situation, the liability does not accrue to the transferor on the transfer date, and a book provision for such compensation is not an ascertained liability deductible in the relevant accounting year. The provision is therefore not allowable merely because it is recorded in the accounts.

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Issues: Whether the assessee was entitled to deduct the provision made for retrenchment compensation under section 25FF of the Industrial Disputes Act, 1947, as an ascertained liability in the relevant accounting year.

Analysis: Section 25FF applies only where, on transfer of an undertaking, the workmen's service is interrupted or the transferee is not under the statutory obligation contemplated by the proviso. On the facts, the agreement provided that the employees' services would continue uninterrupted, their service conditions would not become less favourable, and the transferee-company would be liable to pay compensation in the event of retrenchment on the basis of continuous service. The liability, therefore, did not accrue to the assessee on the transfer date. The assessee's claimed provision was not a liability payable by it and could not be treated as an allowable deduction merely because it had been entered in the books.

Conclusion: The deduction was not allowable and the question was answered in favour of the Revenue and against the assessee.

Ratio Decidendi: Where the proviso to section 25FF is satisfied on transfer of an undertaking, no retrenchment-compensation liability accrues to the transferor, and a book provision made for such compensation is not a deductible ascertained liability.

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