Closure-related compensation and notice pay are not deductible as business expenditure when liability arises only on business closure.

Compensation and notice pay paid to workmen on closure of the business were held not deductible under section 37(1) or section 28(i) of the Income-tax Act, 1961. Liability under section 25-FFF of the Industrial Disputes Act, 1947 arises only on closure of the undertaking, so the payment was treated as an outgoing occasioned by shutting down the business rather than an expenditure incurred in carrying it on. Quantification of the amount by agreement before actual closure did not make it an accrued business liability for the accounting year. The deduction was therefore inadmissible.

---

---

Issues: Whether compensation and notice pay paid to workmen on closure of the business was deductible in computing business income under section 37(1) or section 28(i) of the Income-tax Act, 1961.

Analysis: Liability to pay compensation under section 25-FFF of the Industrial Disputes Act, 1947 arises on the closure of the undertaking, and not earlier. The assessee's obligation was therefore not an expenditure incurred in carrying on the business, but an outgoing occasioned by the closing of the business. The fact that the amount was quantified by agreement before actual closure did not make the liability one that had accrued for business purposes during the accounting year. A payment springing from closure is not allowable as revenue expenditure under the charging and deduction provisions relied on.

Conclusion: The deduction was not admissible and the answer was against the assessee.

---