Employee liability payments during continuing business operations qualify as revenue expenditure and are deductible under section 37.

Gratuity and retrenchment compensation paid to workers were treated as revenue expenditure deductible under section 37 of the Income-tax Act, 1961. The liability had accrued while the business was still being carried on, and the payments were made in settlement of employee claims during the continuance of business activity, not as a post-closure or capital outlay. On those facts, the expenditure was incurred for business purposes and was therefore admissible as a deduction; the disallowance was unsustainable.

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Issues: Whether gratuity and retrenchment compensation paid to workers were allowable as deduction as revenue expenditure under section 37.

Analysis: The liability to pay the amounts arose when the business was still being carried on and before the actual closure of the undertaking. The payments were made in the course of settling claims of employees during the continuance of business activity, and not as a post-closure or capital outlay. On the facts, the expenditure was incurred for the purposes of the business and had the character of revenue expenditure.

Conclusion: The payments were admissible under section 37 and their disallowance was unsustainable.

Final Conclusion: The assessment was required to be modified by restoring the allowance of gratuity and retrenchment compensation in the assessee's favour.

Ratio Decidendi: An expenditure incurred on employee liabilities that accrues before the actual closure of business and is paid in the course of carrying on the business is revenue expenditure deductible under section 37 of the Income-tax Act, 1961.

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