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Issues: Whether gratuity and closure-related compensation paid to employees on the closing down of the business were admissible deductions in computing business income.
Analysis: The payment of gratuity and retrenchment compensation arose because the business was closed and the employees' services were terminated. The mere fact that both payments were statutory liabilities did not make them deductible, because the governing test was whether the expenditure was incurred for the purpose of carrying on the business. A liability springing from closure of the business, rather than from an expenditure incurred in the course of its conduct, is not a proper business outgoing. The distinction between gratuity and retrenchment compensation was rejected, as both were statutory obligations arising contemporaneously with the closure. The authorities allowing deduction were distinguished on their facts, where either the business continued or the payment was made pursuant to a pre-existing obligation.
Conclusion: The deduction was not allowable and the claim failed.
Ratio Decidendi: An expenditure arising solely because of the closure of the business, even if paid in discharge of a statutory obligation, is not deductible unless it can be shown to have been incurred for the purpose of carrying on the business.
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