1979 (2) TMI 148 - AT - Income Tax

Tribunal denies deduction for retrenchment compensation, deeming it non-profitable.

PN. GANESAN PVT. LTD. Versus ITO.

PN. GANESAN PVT. LTD. Versus ITO. - TTJ 008, 135, Issues:- Admissibility of retrenchment compensation as a deduction for the assessment year 1974-75 under the IT Act 1961.Analysis:The appeal in question pertains to the admissibility of retrenchment compensation as a deduction for the assessment year 1974-75 under the IT Act 1961. The Commissioner, after scrutinizing the records, concluded that the retrenchment compensation paid by the assessee was not incurred for the purposes of business. The Commissioner based this decision on various materials, including a notice of an extraordinary general meeting held on 15th Sept., 1973, resolutions passed subsequently, and judicial pronouncements such as the decision in CIT vs. Gemini Cashew Sales Corporation. The Commissioner directed the ITO to disallow the claim for deduction of Rs. 1,06,044, leading to the appeal by the assessee.The assessee's counsel argued that even after the company went into voluntary liquidation, business activities continued, with some employees remaining in service. Referring to the decision in Liquidator, Delta Plantation Co. Ltd. vs. State of Madras, the counsel contended that the compensation was essential for maximizing returns from the business carried on by the Liquidator. On the other hand, the Departmental Representative argued that the expenditure was not incurred for the purpose of earning profits, citing the decision in Godden vs. A. Wilson's Stores (Holdings) Ltd. The Tribunal considered these arguments and examined the intention behind the voluntary winding up of the company to determine the admissibility of the compensation.The Tribunal analyzed the notice of retrenchment issued to an employee, emphasizing the company's intention to wind up voluntarily and cease business operations except as required for beneficial winding up. The Tribunal referred to legal commentary on the effects of voluntary winding up, highlighting that the purpose of the compensation was to mitigate financial losses during the winding-up process. Drawing parallels to precedents such as Mysore Standard Bank Ltd. vs. CIT, the Tribunal concluded that the compensation was not aimed at keeping the trade going to earn profits but rather to facilitate an early closure with minimal financial impact. Despite the assessment of income from activities by the Liquidator under the 'business' head, the Tribunal upheld the Commissioner's decision that the retrenchment compensation was not an admissible deduction. Consequently, the appeal by the assessee was dismissed.