1979 (3) TMI 94 - AT - Income Tax

Tribunal decision on leave salary, compensation, and notice pay deductions

The Tribunal dismissed the Department's appeal regarding the deduction of provision for unavailed leave salary, citing a previous decision. Regarding the ... - Issues Involved:1. Deduction of provision for unavailed leave salary for assessment years 1971-72 and 1973-74.2. Deduction of compensation and notice pay for assessment year 1973-74.Issue-wise Detailed Analysis:1. Deduction of Provision for Unavailed Leave Salary:The primary issue was whether the provision of Rs. 62,952 in the assessment year 1971-72 and Rs. 67,925 in the assessment year 1973-74 claimed by the assessee for unavailed leave salary of employees should be deducted in determining the assessee's total income. The Tribunal referenced a previous decision by the Madras Bench 'B' of the Tribunal in ITA No. 1961 of 1975-76 dated 2nd March 1977, which involved the same assessee for the assessment year 1970-71. In that case, it was held that such a deduction was admissible. Consequently, the Department's appeal on this point was dismissed as the issue was already settled by the earlier decision.2. Deduction of Compensation and Notice Pay:For the assessment year 1973-74, an additional issue was whether the AAC was correct in directing the ITO to allow the deduction of compensation and notice pay amounting to Rs. 1,30,828 paid to the workers of the foundry section, which was closed. The ITO had initially rejected this claim on the grounds that the payment was voluntary and not incurred wholly and exclusively for the purposes of the business.Upon appeal, the AAC found that the assessee had not closed its foundry division but had reorganized it, leading to some employees opting for voluntary retirement. The compensation and notice pay were paid as per standing orders, and the AAC concluded that this expenditure was wholly and exclusively for the business purpose. The AAC determined that there was 'retrenchment' as defined in section 2(oo) of the Industrial Disputes Act, 1947, and in terms of section 25(f) of the said Act, the employees were entitled to notice pay and compensation. Thus, the assessee was entitled to the deduction of the said expenditure.The Department appealed this decision, arguing that the payment was made due to the closure of the business, as indicated in the Directors' Report dated 19th November 1973, which stated that the foundry operations ceased from 11th July 1973. The Department contended that this was a case of termination of services due to business closure, not retrenchment, and thus, the payment should not be deductible.The assessee's counsel countered that the foundry division had only temporarily ceased operations and had not fully closed. The foundry continued to have its machinery and plant, and pending orders were subcontracted. The foundry division was later revived and continued operations, indicating that the payment was for business reorganization, not closure.The Tribunal, after considering the arguments and evidence, concluded that there was no actual closure of the business. The foundry division's activities were temporarily suspended to reduce excess employees and losses. The payment was made to rearrange the labor force, which was necessary for the proper carrying on of the business. The Tribunal also noted that the foundry division was a department of the assessee's business and not a separate business entity. Therefore, the discontinuance of operations in the foundry division did not amount to business closure.Judgment:The Tribunal held that on the particular facts and circumstances of the case, the payment of compensation and notice pay was made for the purpose of carrying on the business and not on the occasion of the closure of the business. Consequently, the appeals were dismissed, and the deductions claimed by the assessee were allowed.