TaxTMI 
TaxTMI 
1998 (2) TMI 4
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....ith effect from May 1, 1959, the assessee closed its unit for distribution of the products of Taddington Chemical Factory Private Ltd. which business was taken over by Rallis India Ltd. On April 22, 1959, the assessee wrote letters to employees working in the unit dealing with the distribution stating that arrangements had been made for the business conducted by the assessee to be taken over by Rallis India Ltd. and that the transfer would take effect from May 1, 1959. By this letter, the employees were further informed that arrangements had also been made whereby all the employees of the assessee of the distribution unit would be offered similar employment with Rallis India Ltd. on and from May 1, 1959. The employees were, therefore, informed that their employment was to cease on and from April 30, 1959. The employees were further told as under : "(A) If, for any reason, any member of the staff does not wish to accept employment with Rallis India Ltd., retiring gratuity on the normal scale will be paid to him on the close of his service with us as also one month's salary in lieu of notice . . . (D) You will see that, in their offer of employment, Rallis India Ltd. undertake that....
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....ratuity as calculated under our scheme." The assessee had announced a gratuity scheme for its employees on August 31, 1953. It is as under : "The management have pleasure in announcing a gratuity scheme for the members of the staff as under :--- No. of completed years For each year of service of service gratuity equivalent to 5, 6 and 7 Half-a-month's basic salary. 8 and 9 3/4 month's basic salary 10 and above 1 month's basic salary with a maximum of 15 months or Rs. 15,000 which is lower. Gratuity will not be payable to those staff members who have been dismissed for misconduct, etc. The above scheme is being introduced as from September 1, 1953." In respect of the employees whose services had been terminated and who had accepted the offer to join Rallis India Ltd. with continuity of service as offered, their gratuity amounting to Rs. 4,10,177.75 was paid over by the assessee to Rallis India Ltd. on April 30, 1959. This amount was held by Rallis India Ltd. on trust for the benefit of the staff of the assessee and a declaration was made to the effect that Rallis India Ltd. had no beneficial interest in the said sum of Rs. 4,10,177.75 or any part thereof. Though a part of the ....
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....with the assessee in regard to their gratuity and, therefore, no liability survived in the hands of the assessee. The Revenue also submitted that the payment made to Rallis India Ltd. was in pursuance of an arrangement with the assessee which was ceasing to carry on its main business activities which formed the structure of the assessee and thus this was nothing but in the nature of transfer of business by the assessee to Rallis India Ltd. According to the Revenue, therefore, the payment was rightly treated as not deductible from the business income of the assessee-company. After considering the rival contentions of the parties, the Tribunal allowed the appeal in favour of the assessee. The Tribunal held that there was a termination of employment of the employees from the service of the assessee and also that there was a valid discharge of the payment of gratuity; that the assessee was still functioning and payment of the gratuity amount was rightly claimed as deduction. At the instance of the Revenue, the Tribunal referred the aforesaid question to the High Court for its opinion. No question whether there was termination of the services of the employees of assessee was sought to b....
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....would not have been payable to him as profits or dividend if it had not been paid as bonus or commission : Provided that the amount of the bonus or commission is of a reasonable amount with reference to--- (a) the pay of the employee and the conditions of his service : (b) the profits of the business, profession or vocation for the year in question; and (c) the general practice in similar businesses, professions or vocations; . . . (xv) any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation." Income-tax Act, 1961 : "36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28--- (ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission : 37. (1) Any expenditure (not being expenditur....
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....f its profit and loss account. It was not a revenue receipt. It was entered in the balance-sheet as trust amount. Mr. Vellapally said as to how the amount is received and utilised by Rallis India Ltd., the transferee, is also a relevant consideration. If the service of the employee is terminated, he would become entitled to the payment of gratuity as per the scheme of the assessee and instead of getting the amount directly, it was paid to Rallis India Ltd. which created a trust for that amount for the employees so transferred from the assessee to it. This amount could not be forfeited by the transferee company even if an employee transferred from the assessee is ultimately dismissed on the ground of alleged misconduct. He may in that case forfeit his right to get gratuity from Rallis India Ltd. accruing to him after May 1, 1959, while in the service of Rallis India Ltd. Mr. Vellapally, in support of his submissions, relied upon a Full Bench decision of the Kerala High Court (sic) in CIT v. Sri Venkateswara Bank Ltd. [1979] 120 ITR 207 (Mad), CIT v. Sarada Binding Works [1985] 152 ITR 520 (Mad) and CIT v. Salem Magnesite pvt. Ltd. [1991] 189 ITR 154 (Bom). Mr. Iyer in response said....
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....t judgment somewhat in detail. In CIT v. Gemini Cashew Sales Corporation [1967] 65 ITR 643 the question before this court was whether the allowance of Rs. 1,41,506 constituted an allowable expenditure in the assessment of the firm for the year 1958-59 being retrenchment compensation payable under section 25FF of the Industrial Disputes Act. The facts giving rise to the question were that there were two partners constituting the firm. One partner died on August 24, 1957, and the partnership stood dissolved. The business was taken over and continued by the surviving partner on his own account. The services of the employees of the firm were not interrupted and there was no alteration in the terms of their employment. It was urged that since the firm stood dissolved on August 24, 1957, and the undertaking was transferred, the employees became entitled to retrenchment compensation which the firm was liable to pay. Though the assessee failed in its claim before the Income-tax Officer and the Appellate Assistant Commissioner, the Appellate Tribunal held that the firm was entitled to deduct the sum of Rs. 1,41,506 in the computation of its income in the assessment year 1958-59. The Kerala....
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....he undertaking : it has no existence before these events take place." This court also referred to its earlier judgment in Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1. It said that in that case, expenditure which it was estimated had to be incurred to discharge an existing and definite obligation enforceable against the assessee in praesenti, was held a permissible deduction in the computation of income. This court held that the amount claimed as a permissible allowance by the assessee in its profit and loss account cannot, in its judgment, be regarded as properly admissible either under section 10(1) or section 10(2)(v) of the 1922 Act. This is how the court said : "As already observed, the liability to pay retrenchment compensation arose for the first time after the closure of the business and not before. It arose not in the carrying on of the business, but on account of the transfer of the business. During the entire period that the business was continuing, there was no liability to pay retrenchment compensation. The liability which arose on transfer of the business was not of a revenue nature. Profits of a business involve comparison between the state of the business at two spec....
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.... the new company. The amount was calculated on the basis of the scheme of the assessee and was from the pension and gratuity reserve of the assessee. The claim of the assessee that the amount was paid in the discharge of the liability of gratuity to the employees transferred to the new company and hence allowable as deduction was negatived. The High Court relied on the decision of this court in Gemini Cashew Sales Corporation's case [1967] 65 ITR 643. It observed as under : "As already pointed out the liability to make payment to the employees had not arisen during the accounting period. The liability if at all was wholly contingent. The transfer of gratuity reserve from the assessee-company to the new company did not also arise in the course of the business or for the purpose of carrying on the business, but springs from the transfer of the business. Therefore, it cannot be said that the expenditure was laid out or expended wholly or exclusively for the purpose of business or it was a properly debitable item in its profit and loss account as a revenue outgoing, For the foregoing reasons, we answer the first question in the negative and against the assessee." In CIT v. Pathinen G....
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....Ltd. [1977] 109 ITR 788 (Mad). Those are cases where there had been a cessation of the business or a transfer of the undertaking as such. On the facts found, the assessee will be eligible for the allowance under section 37(1). The several clauses under section 36 do not apply here. The question is, therefore, answered in the affirmative as far as allowability under section 37 is concerned and in favour of the assessee." In CIT v. Salem Bank Ltd. [1979] 120 ITR 224 (Mad), the assessee transferred its banking business to the Indian Bank Ltd. and deposited a sum of Rs. 37,560 with the transferee bank for the purpose of ultimate disbursement to its 27 employees (who were transferred to the Indian Bank Ltd.) for the purpose of ultimate disbursement to them at the time of their retirement or earlier as per the provisions of the gratuity scheme of the assessee. The amount was claimed as expenditure under section 36(1)(ii) or section 37(1) of the 1961 Act. The plea of the assessee of its case falling under section 36(1)(ii) was not considered. The court distinguished its earlier judgment in the case of Sri Venkateswara Bank Ltd. [1979] 120 ITR 207 (Mad) and said that section 37(1) was not....
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....t in Gemini Cashew Sales Corporation [1967] 65 ITR 643 and held that the amount in question was an expenditure incurred wholly and exclusively for the purpose of the business of the assessee within the meaning of section 37(1) of the 1961 Act. It upheld the view of the Appellate Tribunal that liability for payment to which the employer was subject under the local Gratuity Act, to the workers was an expenditure wholly and exclusively laid out or expended for the purpose of the business of the assessee. The court disagreed with the view of the Revenue that the incurring of expenditure for payment of gratuity much ahead of the actual time for payment of gratuity could not amount to an expenditure incurred "wholly and exclusively for the purpose of the business". In CIT v. Sarada Binding Works [1985] 152 ITR 520 (Mad), the High Court struck a different note. It had the advantage of the Full Bench decision of the Kerala High Court in Standard Furniture Company Ltd. [1979] 116 ITR 751 (Ker). In this case the assessee, a registered firm, was doing business in the name of Sarada Binding Works, as also in the name of Chandamama Publications. Under an agreement, the assessee gave up possess....
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....cision of the court was : "Whether, on the facts and in the circumstances of the case, the Tribunal should not have upheld the disallowance of the said amount in view of the decision of the Bombay High Court in CIT v. W. T. Suren and Co. Ltd. [1982] 138 ITR 91? " In answer to this question, the High Court distinguished the impugned judgment by saying that no right to gratuity had accrued in favour of the employees whose services were alleged to have been terminated. This is how the court considered its earlier case in W. T. Suren and Co. Ltd. [1982] 138 ITR 91 : "We have been taken through our decision in CIT v. W. T. Suren and Co. Ltd. [1982] 138 ITR 91. In this case, no right to gratuity had accrued in favour of the employees whose services were alleged to have been terminated. This was so in view of the assessee's agreement with the transferee-company to take them up in employment with continuity of employment. There was thus no liability to pay gratuity to the employees as such. The assessee-company had merely made the payment in connection therewith to the transferee-company under an agreement. In the present case, the assessee-company had not only computed the amount paya....
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....pt to one who is dismissed for misconduct, etc. Gratuity is, thus, payable on the termination of employment of the employee on any account except dismissal and calculated on the basis of the number of years of service and at the rate prescribed in the scheme. In the present case, the amount of gratuity which was paid to Rallis India Ltd. on behalf of the employees was not on account of transfer of the distribution unit of the assessee but on account of stopping of that business and the employees working in that unit becoming surplus resulting in termination of their services. Other business of the assessee, as held by the Tribunal, continued. Payment of the gratuity amount to Rallis India Ltd. was not made by the assessee of its own but at the instance and on behalf of the employees whose services though terminated in the assessee-company were taken over by Rallis India Ltd. with the promise of continuity of service in Rallis India Ltd. As far as the assessee is concerned, it was bound to make payment of gratuity to the employees whose services were terminated and, in fact, as noticed above, the employees who did not join Rallis India Ltd. were directly paid gratuity. The assessee ....