Retrenchment compensation on business closure is not deductible as revenue expenditure under section 37.

Retrenchment compensation paid on closure of a business was treated as a contingent liability arising only on cessation of operations, not as an expenditure incurred wholly and exclusively for the purposes of the business. Applying the governing Supreme Court principle that closure is materially indistinguishable from transfer for this purpose, the Allahabad HC held that such liability does not arise in the ordinary course of carrying on the business and is therefore not a revenue deduction under section 37 of the Income-tax Act, 1961. The issue was decided against the assessee and in favour of the Revenue.

---

---

Issues: Whether retrenchment compensation paid on closure of a business is an admissible deduction under section 37 of the Income-tax Act, 1961.

Analysis: The deduction was claimed in respect of retrenchment compensation paid on closure of the business. The controlling principle was that such liability does not arise in the carrying on of the business but on its closure, and therefore it is not a revenue liability incurred wholly and exclusively for business purposes. The Court followed the governing Supreme Court authority treating closure as materially indistinguishable from transfer for this purpose and held that the liability was contingent during the period of business operation and did not qualify for deduction.

Conclusion: The issue was decided against the assessee and in favour of the Revenue; retrenchment compensation paid on closure of the business was not admissible as a deduction under section 37.

Ratio Decidendi: Retrenchment compensation that arises only on closure of the business is a contingent, non-revenue liability and is not deductible as expenditure laid out wholly and exclusively for the purpose of the business.

---