Retrenchment compensation as revenue expenditure raised a referable question of law under the Income-tax Act.

The dispute concerned whether retrenchment compensation paid to employees could be treated as revenue expenditure and therefore as an allowable deduction in computing the firm's income for the assessment year 1972-73. The High Court held that the proposed reference raised a question of law, namely the proper tax character of the expenditure, and that the Tribunal should have referred it. The application under section 256(2) was allowed, and the Tribunal was directed to state the case and refer the question of law.

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Issues: Whether the application under section 256(2) of the Income-tax Act, 1961 deserved to be allowed on the ground that the proposed question regarding the allowability of retrenchment compensation as revenue expenditure gave rise to a question of law.

Analysis: The assessee sought a reference on the character of the expenditure of Rs. 26,271 paid as retrenchment compensation to employees of Raj Theatre. The Tribunal had declined to make a reference, but the Court found that the controversy involved a legal question as to whether the amount was an allowable deduction in computing the firm's income for the assessment year 1972-73.

Conclusion: The application under section 256(2) was allowed and the Tribunal was directed to state the case and refer the question of law to the Court.

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