1976 (7) TMI 82 - AT - Income Tax

Appeal Partly Allowed: Clarifications on Retrenchment Compensation, Earned Leave, Staff Gratuity

THE BEAWAR ELEC. SYPPLY CO. LTD. Versus THE INCOME TAX OFFICER.

The appeal was partly allowed. The retrenchment compensation was not considered revenue expenditure, while earned leave wages were allowed. The staff ... - Issues Involved:1. Whether the appellant was conducting any business during the period under consideration.2. Whether the sum of Rs. 1,00,602 paid to the laborers as gratuity, leave salary, wages, compensation, etc., is revenue expenditure.3. The applicability of Section 41(2) regarding the computation of profit.Issue-wise Detailed Analysis:1. Whether the appellant was conducting any business during the period under consideration:The appellant company was generating and supplying electricity to Beawar under a state-issued license. The accounting year ended on 31st March 1963. The Rajasthan Government informed the company about the revocation of its license effective from 15th March 1964, leading to the company's decision to go into liquidation. Liquidators were appointed on 11th March 1964, but the Registrar did not accept the ordinary resolution for liquidation, requiring a special resolution passed on 29th September 1964. The State Government took over the company's electricity generation and supply on 15th March 1964. The company continued its business of electricity generation and distribution until 15th March 1964. The income and expenditure for the period from 11th March 1964 to 15th March 1964 were transferred to the accounts closing on 10th March 1964. The AAC noted that the company did not carry on the business of electricity generation and supply during the accounting period except for four days, and the profit and loss account submitted related to the period from 15th March 1964 onwards when no business was carried on.2. Whether the sum of Rs. 1,00,602 paid to the laborers as gratuity, leave salary, wages, compensation, etc., is revenue expenditure:The appellant claimed various payments to staff on retrenchment due to the business takeover by the Rajasthan Government. The ITO disallowed the claim, stating that the expenses were not incurred for earning the income credited in the profit and loss account. The AAC also rejected the claim, stating that the expenses were not for carrying on the business but after its closure. The AAC relied on the decision in CIT vs. Gemini Cashew Sales Corpn. 65 ITR 643, which held that liability for retrenchment compensation arises only after the closure of the business and not during its operation. The Tribunal agreed that the retrenchment compensation of Rs. 23,143 was not allowable as it arose after the business closure. However, the staff earned leave wages of Rs. 19,202 were considered allowable as they were due during employment. The staff gratuity payment of Rs. 50,927 required further examination to determine if it was related to carrying on the business or its closure. Other expenses like salary, postage, stationery, etc., were allowed as they were incidental to the business carried on for five days.3. The applicability of Section 41(2) regarding the computation of profit:The Tribunal examined whether any part of the sale proceeds of stores could be subjected to profit under Section 41(2). It concluded that items sold, which were in stock, could not be taxed under Section 41(2) unless depreciation was allowed on them. For items where depreciation was allowed and the written-down value was nil, the profit under Section 41(2) was justified. The contention that the sale was made by the liquidator and not the company was dismissed, as the liquidator represents the company, and the income from the company's assets is assessable in its hands.Conclusion:The appeal was partly allowed. The retrenchment compensation was not considered revenue expenditure, while earned leave wages were allowed. The staff gratuity payment required further examination. Other business-related expenses were allowed. The profit under Section 41(2) was justified for items with allowed depreciation.