TaxTMI 
TaxTMI 
1979 (3) TMI 94
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.... case of the very same assessee for the asst. yr. 1970-71 wherein it was held that such a deduction was admissible. Therefore, the Department fails on this point. 3. Coming to the next ground in the appeal for the asst. yr. 1973-74, the ITO negatived the claim for deduction of compensation and notice pay paid to the employees on the ground that the payment was voluntary or in the alternative it was for closing down and not for continuing the business and hence was not an expenditure incurred wholly and exclusively for the purposes of the business. 4. On appeal before the AAC it was contended that the assessee had not closed its foundry division and in the process of reorganisation certain employees opted for voluntary retirement and in those cases, the compensation and notice pay as per the standing orders were paid and in such circumstances the expenditures was wholly and exclusively laid out for the purpose of the business and, therefore, should be allowed as a deduction. The AAC found that the assessee was having a foundry division and they were running it on their own and that they had certain difficulties and, therefore, they decided to entrust this job to sub-contractor....
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.... before us. He took us through page Ad-6 of the said report, where, under the sub-head ' Foundry' it is mentioned that 'in view of the considerable losses being incurred by the Department year after year and in view of the non-cooperation of the workers in the Company's efforts to avoid losses in this Department, it was decided that the company should cease its foundry operations, and that "in accordance with this decision, the foundry Department discontinued its activities as from the 11th July,1973, after conforming all the statutory formalities". He also referred to the last sentence in the said paragraph wherein it is stated that 'consequent on the closure of the foundry, it is expected that the Company would be in a position to concentrate and deploy its managerial and technical talent and its finances for the development of its major Department, namely, Tool Works". He pointed out that this foundry division (Department) is a separate business as is evident from the fact that it is possible to arrive at separate profits for this division and all the particulars for this foundry division are available separately. He further contended that the foundry division was selling its ca....
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....actual facts prevailing at that time. According to him his case would come within the ratio of the decision of the Supreme Court reported in Malayalam Plantations. (3). 7. In reply, Mr. Gopal pointed out that there was neither modernisation of the division nor reorganisation in this case unlike cases where the management chooses to bring in sophisticated machinery involving displacement of workers. Further, the Directors' report which goes to the shareholders and to the Registrar of Companies cannot be brushed aside lightly. On the other hand it contains the solemn truth, brought out to the shareholders and to the various other areas where such reports are relied upon. He, therefore, contended that the occasion for the payment was the dominant factor in this case and the occasion being the closure of the business, as is evident from the Director's report, he would plead for the restoration of the disallowance. 8. We have considered the rival submissions. We have also gone through the printed copy of the Directors' report dt. 19th Nov., 1973. If one has to literally apply the contents of the report of the board of directors, ignoring the realities of the case, there would be n....
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....oard of Directors made it appear so for the purpose of reducing the losses by carrying out reduction in the strength of workers. The Board achieved this object as is evident from the fact that there has been actual reduction in the strength of the staff and the foundry having been revived again on the same scale as before. It is in this background that the payment made to the employees has to be considered. What was going on behind the minds of the Board is a delicate matter on the facts of this case and that cannot be obviously be set out in the Directors' report to the shareholders. It is common knowledge as well established practice that in banking companies certain items like secret reserves are not revealed in the balance sheet or the report. In the same way any move on the part of the Directors, though for the purpose of preserving the business, has to be done in a most confidential way. Certainly no information in this regard will be given out in the Director's report. Therefore, in the matter of dealing with labour, certain steps have to be taken by the management and such steps would hold good as in this case, only if there is ceasing or discontinuing of the activities. Th....