1986 (2) TMI 120 - AT - Income Tax

Appeal Dismissed: Gratuity Payment Not Deductible After Business Closure

The tribunal dismissed the appeal, upholding the decision to disallow a gratuity payment of Rs. 24,000 to employees upon business closure. The tribunal ... Business Expenditure, Allowability of Issues: Disallowance of gratuity payment to employees upon business closure.In this case, the primary issue revolves around the disallowance of a payment of Rs. 24,000 made to eight employees upon the termination of their services due to the closure of the business. The appellant, engaged in the business of plying buses, claimed that the amount was paid as gratuity to the employees and thus should be allowed as a deduction. However, the Income Tax Officer (ITO) and the Appellate Authority Commissioner (AAC) disallowed the claim, stating that the liability did not arise in the course of business or for the purpose of carrying on the business, but only upon the closure of the business. The appellant challenged this decision by filing an appeal.The main contention put forth by the appellant's counsel was that the gratuity amount was paid during the accounting year and should be considered an allowable deduction as a business expenditure. On the other hand, the departmental representative argued that the payment was made only after the closure of the business and was not incurred in the course of the business or for the purpose of the business. Reference was made to the decision of the Supreme Court in CIT v. Gemini Cashew Sales Corpn. [1967] 65 ITR 643 to support this argument.Upon considering the submissions from both sides, the tribunal observed that the business was closed after the sale of three buses, following which the employees' services were terminated, and the payment of Rs. 24,000 was made as compensation. It was noted that there was no existing gratuity scheme, and the payment was categorized as retrenchment compensation for the terminated employees after the closure of the business. The tribunal emphasized that the liability for the payment of Rs. 24,000 was incurred after the closure of the business and was not allowable as a business expenditure, as it did not arise in the course of the business or for the purpose of the business.The tribunal referred to various judicial precedents, including Venkatesa Colour Works v. CIT [1977] 108 ITR 309, Stanes Motors (South India) Ltd. v. CIT [1975] 100 ITR 341, and others, which supported the position that payments made after the closure of the business, such as retrenchment compensation, are not deductible as business expenditures. The tribunal concluded that the liability for the payment of Rs. 24,000 was not incurred in the course of the business and, therefore, upheld the decision to disallow the claim. The tribunal distinguished the case cited by the appellant's counsel, Ambala Cantt. Electric Supply Corpn. Ltd. v. CIT [1982] 133 ITR 343, stating that it was not applicable to the current scenario.Consequently, the tribunal dismissed the appeal, affirming the lower authorities' decision to disallow the gratuity payment as a deduction, based on the premise that the liability did not arise in the course of the business or for the purpose of the business, but only after the closure of the business.