Closure-related retrenchment compensation is not deductible as business expenditure under the Income-tax Act.

Notice pay and retrenchment compensation paid on closure of a printing business were not allowable as business expenditure under the Income-tax Act, 1961. The payments arose because the business was being wound up, so they were not laid out wholly and exclusively for carrying on the business. Although the liability under section 25FFF of the Industrial Disputes Act, 1947 was statutory and absolute on closure, it remained a closure-related cost rather than an operating business expense. The Calcutta HC therefore held that compensation paid on closure is not deductible under sections 28 or 37, and the deduction claim failed.

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Issues: Whether the notice pay and retrenchment compensation paid to employees on closure of the printing business were allowable as business expenditure under the Income-tax Act, 1961.

Analysis: The payment was made in consequence of the closure of the business and not for carrying on the business. The liability under section 25FFF of the Industrial Disputes Act, 1947, though statutory and absolute on closure, was incurred for winding up the business operations. Expenditure incurred at the point of closure does not answer the statutory test of being laid out wholly and exclusively for the purpose of carrying on the business. The principle applied was that compensation paid on closure is not deductible as business expenditure under sections 28 or 37 of the Income-tax Act, 1961.

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

Ratio Decidendi: Compensation and notice pay paid on closure of a business are not expenditure incurred for carrying on the business and are therefore not deductible as business expenditure.

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