Retrenchment compensation during voluntary winding up is not a business deduction when paid to facilitate closure and reduce liquidation losses.

Retrenchment compensation paid after a company resolved to enter voluntary winding up was held not deductible in computing business income. The expenditure was incurred to facilitate an orderly closure of the undertaking and limit liquidation losses, not to carry on the business in the ordinary sense or earn profit. Continued activities during liquidation did not change the character of the payment, because its object remained winding up rather than trade. The payment was therefore not laid out wholly and exclusively for the purpose of business and was disallowed as a business deduction.

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Issues: Whether retrenchment compensation paid to employees after the company entered voluntary winding up was an admissible deduction in computing business income.

Analysis: The payment was examined in the context of a voluntary winding up under the Companies Act, 1956, where the company had resolved to cease business and appoint liquidators. The compensation was paid not to keep the business going for profit but to enable an early and orderly closure of the undertaking with minimum financial loss. The fact that some activities continued during liquidation and were assessed under the head "business" did not alter the character of the payment, because the expenditure was incurred for winding up and not for carrying on the trade in the ordinary sense.

Conclusion: The retrenchment compensation was not laid out wholly and exclusively for the purpose of business and was not deductible.

Ratio Decidendi: Expenditure incurred after a decision to wind up, where its object is to facilitate closure and reduce liquidation losses rather than to carry on trade for profit, is not an allowable business deduction.

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