Contingent retrenchment compensation on transfer of undertaking is not deductible as a business outgoing.

Liability to pay retrenchment compensation under section 25FF of the Industrial Disputes Act, 1947, arising only on transfer of an undertaking, is not an allowable deduction in computing business profits if it is still contingent when the accounts are made up. The obligation is not a present debt incurred in the course of carrying on the business; it becomes enforceable only on the transfer event. A contingent provision is not a proper business outgoing under mercantile accounting, and expenditure that springs from the transfer of the business itself is outside allowable deduction provisions.

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Issues: Whether the liability to pay retrenchment compensation under section 25FF of the Industrial Disputes Act, 1947, arising on transfer of the undertaking, was an allowable deduction in computing the assessee-firm's profits for income-tax purposes.

Analysis: The liability to retrenchment compensation arose only on transfer of the undertaking and not during the carrying on of the business. Until that transfer occurred, the obligation remained contingent and there was no present debt or enforceable liability in praesenti. A provision for a contingent liability is not a proper outgoing for computing business profits, even where the accounts are kept on the mercantile system. The expenditure was not incurred for the purpose of carrying on the business, but sprang from the transfer of the business itself, and therefore did not fall within the allowable expenditure provisions governing business deductions.

Conclusion: The claim for deduction was not allowable and the answer to the reference was against the assessee.

Final Conclusion: A liability that arises only upon transfer of the undertaking and remains contingent until that event cannot be treated as a deductible business outgoing in computing taxable profits.

Ratio Decidendi: Only an existing and definite liability incurred in the course of carrying on the business, and not a contingent obligation arising on transfer of the undertaking, is deductible in computing business profits.

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