TaxTMI 
TaxTMI 
TaxTMI 
2016 (9) TMI 513
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....respectively, and one each in Goa and Bhopal. During the relevant previous year the Assessee reorganized its business by transferring some of its units and retrenching some of the employees of the other units retained by it. The units at Grant Road and Goa were transferred by the Assessee to a company floated as a 100% subsidiary of the Assessee. A scheme of voluntary retirement was offered to the employees of the other units. Under this scheme, a sum of Rs. 15.23 lakhs was paid to those employees, who agreed to retire from the services voluntarily. Insofar as the units at Grant Road and Goa transferred to the newly formed subsidiary were concerned, under the transfer terms, the Assessee was to bear retrenchment compensation, if any, payable by the subsidiary to the employees of the transferred units. A payment of Rs. 13.91 lakhs was required to be made to the subsidiary as a contractual liability arising out of this term. 4. The assessee claimed in the assessment proceedings both these payments (i.e. Rs. 15.23 lakhs and Rs. 13.91 lakhs) as allowable expenditure. The ITO disallowed the claim of the sum of Rs. 15.23 lakhs paid under the scheme of voluntary retirement on the ground ....
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....ation that was paid subsequent to the transfer, though referable to the services rendered by the recipients to the Assessee, cannot be considered as an expenditure laid out wholly and exclusively for the purpose of the Assessee's own business. It held that at the time the transfer was effected, the retrenchment compensation was in the realm of a remote possibility. The liability by way of such compensation could not have been ascertained or quantified and, in the premises, the amount was not laid out for the purpose of business. 7. In these premises, the central question that we need to consider in this Reference is whether or not the expenditure of Rs. 13.91 lakhs claimed by the Assessee is an amount laid out or expended wholly and exclusively for the purpose of its business within the meaning of Section 37 of the Income Tax Act, 1961. The thrust of the Tribunal's order rejecting this expenditure is that this expenditure incurred by the Assessee benefited another company and could not be considered as incurred for the Assessee's own business; that it was not necessary for the Assessee to bear it. 8. We need to first address ourselves to the question as to what is me....
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....of the process of profit making. The Division Bench relied on the observations of House of Lords in the well known case of British Insulated and Helsby Cables Ltd. vs. Atherton [1926] A.C. 205; 85 L.J.K.B. 336. In that case, the House of Lords, after citing various cases on the point made the following observations :".... It was made clear in the above cited cases .. that a sum of money expended, not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the grounds of commercial expediency, and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade." 9. Now, in the light of this statement of law, one has to consider whether the expenditure of Rs. 13.91 lakhs in the present case is an amount laid out or expended wholly and exclusively for the purposes of business. It is borne out on record that during the year under consideration and for the past three years, the Assessee was in the grip of a serious labour trouble, with plenty of litigations pending under the Industrial Disputes Act before various Labour Courts and Tribunals. In the light of these cir....
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....e Vendor as its own business liability or outgoing and in case the Purchaser will hereafter pay such amount to any of the concerned employees, the Purchaser shall be entitled to claim reimbursement thereof from the Vendor." 10. This agreement to reimburse the transferee company in respect of the payment attributable to the employees' services with the Assessee Company as of the date of the transfer, is, to our mind, clearly an agreement arising out of commercial expediency. The contractual obligation is undertaken by the Assessee Company with a view to conduct its business in a more efficient manner and clearly comes within the dicta referred to above. 11. The Tribunal disallowed the expenditure on the footing that the amount of Rs. 13.91 lakhs was paid as retrenchment compensation subsequent to the transfer and that such payment, as on the date of the transfer, was in the realm of a remote possibility. In the first place, the expenditure of Rs. 13.91 lakhs is claimed in the year the amount was actually paid and not as of the date of the transfer. It cannot, accordingly, be described as a contingent liability. Secondly, and in any event, the amount is paid not by way of retre....
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....ss to come within the ratio of Gemini Cashew Sales Corporation, must be closure of the business as a whole. The Assessee carrying on business of flour milling at four units cannot be said to have closed its business after it transferred two of the four units to another company. The Assessee continued to carry on the business of flour milling, according to it presumably more smoothly and efficiently after transfer of two units, inter alia by undertaking the commercial obligation of discharging the compensation payable to the employees of the transferred units in the event of their future retrenchment. That is clearly an expenditure incurred for the purpose of its existing and continued business and not an expenditure occasioned by closure of business. We may, in this behalf, note the observations of the Madhya Pradesh High Court in the case of Pradeep Pictures vs. Commissioner of Income Tax, M.P.I 1983 [Vol.143] ITR 300. That was a case where retrenchment compensation was paid to employees upon closure of one of the two theatres owned by the assessee. The Court held that discontinuance of business at one theatre did not amount to closure of business and distinguished Gemini Cashew ....
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....the fact that the employees had been taken over by the transferee company with the benefit of employment on and from the date of transfer, strictly speaking with no right to claim gratuity, it was difficult to see how the payment, which was made by the assessee to the transferee company could be really treated as gratuity. The Court held that it would be more appropriate to describe the payment as a contribution made voluntarily to the transferee company in order to provide funds to it for payment of gratuity, which could be claimed by the employees from the transferee company, though in respect of the period of employment with the assessee company. The judgment of our Court in Suren & Co. (supra), which held the field as on the date of the Tribunal's order, was later on set aside by the Supreme Court in the case of W.T. Suren And Co. Ltd. vs. C.I.T.1998 [Vol.230] ITR 643, holding that the amount of gratuity paid to the transferee company was not on account of transfer of the unit but on account of stopping of that business and the employees working in that unit becoming surplus resulting in termination of their services. The payment of gratuity was made by the assessee, not on....