1967 (4) TMI 4 - SC - Income Tax

Supreme Court: Gratuity not deductible for income. Retrenchment compensation not a deductible outgoing.

Commissioner Of Income-Tax, Kerala Versus Gemini Cashew Sales Corporation

The Supreme Court concluded that the firm was not entitled to deduct the amount claimed as gratuity payable to workers in the computation of income. It ... Transfer of the undertaking - Whether the workmen of the undertaking became entitled to retrenchment compensation - Held, no - amount claimed as a permissible allowance by the assessee in its profit and loss account cannot, be regarded as properly admissible either u/s. 10(1) or s. 10(2)(xv) - appeal of revenue is allowed and the order passed by the High Court is set aside. Issues Involved:1. Permissibility of gratuity payable to workers as a deductible expenditure.2. Application of Section 25FF of the Industrial Disputes Act, 1947.3. Determination of liability to pay retrenchment compensation.4. Admissibility of contingent liabilities as deductions in tax computation.Detailed Analysis:1. Permissibility of Gratuity Payable to Workers as a Deductible Expenditure:The firm claimed an amount of Rs. 1,41,506 under the head 'Gratuity payable to workers of the business' as a permissible outgoing. The Income-tax Officer rejected the claim, and the Appellate Assistant Commissioner confirmed the order. The Income-tax Appellate Tribunal, however, held that the firm was entitled to deduct the sum in the computation of income for the assessment year 1958-59. The High Court of Kerala observed that since the firm maintained accounts on a mercantile system, it could claim the amount for which liability was incurred, even though no actual payment was made to the workmen. The Supreme Court, however, concluded that the liability to pay retrenchment compensation arose after the closure of the business and not before, and thus, it was not a proper outgoing or allowance in computing the profits of the assessee.2. Application of Section 25FF of the Industrial Disputes Act, 1947:Section 25FF provides that when the ownership or management of an undertaking is transferred, the workmen are entitled to notice and compensation as if they were retrenched. However, the proviso to this section states that no such right accrues if:(a) The service of the workman has not been interrupted by such transfer;(b) The terms and conditions of service are not less favorable after the transfer;(c) The new employer is legally liable to pay retrenchment compensation in the event of retrenchment.The Supreme Court noted that the first and second conditions were satisfied, but did not express an opinion on the third condition, as the allowance claimed was not deemed a proper outgoing.3. Determination of Liability to Pay Retrenchment Compensation:The Tribunal had held that the workmen became entitled to retrenchment compensation on the dissolution of the partnership and transfer of the undertaking to Walter. However, the Supreme Court emphasized that the liability to pay retrenchment compensation arises only upon the transfer of ownership or management of an undertaking, and not before. The right to claim compensation remains contingent until there is a transfer of the undertaking resulting in the determination of employment.4. Admissibility of Contingent Liabilities as Deductions in Tax Computation:The Supreme Court discussed various precedents and principles regarding the admissibility of contingent liabilities. It concluded that the liability to pay retrenchment compensation, which arose after the closure of the business, was not of a revenue nature and could not be regarded as a proper outgoing in the profit and loss account. The court distinguished between definite obligations and contingent liabilities, stating that only the former could be considered permissible deductions. The court also referenced the Madras High Court and the House of Lords' decisions, reinforcing that contingent liabilities do not qualify as deductible expenditures.Conclusion:The Supreme Court held that the amount of Rs. 1,41,506 claimed by the assessee was not admissible as a deduction under either Section 10(1) or Section 10(2)(xv) of the Income-tax Act. The appeal was allowed, and the High Court's order was set aside, with costs awarded to the Commissioner.