AI Drafter 
TaxTMI 
TaxTMI 
2008 (1) TMI 256
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...., 1983, an agreement was entered into between Sree Rajendra Mills Limited and the assessee, which is a subsidiary of Sree Rajendra Mills Limited, by which the textile unit at Salem called "A" unit belonging to Sree Rajendra Mills was transferred to the assessee. The agreement provided, inter alia, for continuity of service of workmen who were employed in the textile unit of Sree Rajendra Mills at Salem taken over by the assessee-company and the agreement also protected the conditions of service of workmen taken over by the assessee. Sree Rajendra Mills Limited delivered possession of the scheduled properties to the assessee-company on November 22, 1982, and the employees of Sree Rajendra Mills working in "A" unit were transferred to the assessee-company with the benefit of continuity of service. In the assessment proceedings for the assessment year 1988-89, the assessee company claimed a deduction of a sum of Rs. 7,96,121 as gratuity payment to workers who had retired during the previous year. The Assessing Officer held that the gratuity payments made to the employees who were employed in the service of the assessee-company for less than five years from the date of take over of the....
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....ate Tribunal held that the Commissioner of Income-tax (Appeals) was justified in holding that the liability of the assessee towards gratuity payment for the employees for the services rendered by them for the period prior to the take over of the unit would be capital expenditure and was not an allowable expenditure in the hands of the assessee. The Tribunal dismissed the appeal preferred by the assessee for the assessment year 1988-89 and allowed the appeal preferred by the Revenue for the assessment year 1989-90. It is against the common order by the Tribunal, the assessee has preferred the two appeals. The appeals were admitted and the following question of law was framed for consideration: "Whether, on the facts and circumstances of the case, the Tribunal was right in confirming the disallowance of gratuity paid to the retiring employees?" Heard Mr. P. P. S. Janardhana Raja, learned counsel for the appellant, and Mr. K. Subramaniam, learned senior standing counsel for the Revenue. Mr. Janardhana Raja, learned counsel for the assessee, submitted that services of the workmen employed in the textile unit of the predecessor company were continued with the assessee with n....
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.... and therefore, the amounts claimed for both the assessment years in question are not capital expenditure, but allowable as business expenditure. Mr. K. Subramaniam, learned senior standing counsel appearing for the Revenue, on the other hand, submitted that the amount paid by the assessee to the employees for the service rendered prior to the take over of the textile unit by the assessee is a capital expenditure and he referred to the terms of the agreement and submitted that the amounts paid to the employees for the period prior to the take over formed part of the sale consideration and hence, it is capital in nature. Learned counsel relied on the following decisions in support of his submissions: (i) Associated Printers (Madras) P. Ltd. v. CIT [1961] 43 ITR 281 (Mad); (ii) Dashmesh Transport Co. P. Ltd. v. CIT [1980] 125 ITR 681 (P&H); (iii) CIT v. Datta Tin Works P. Ltd. [1988] 172 ITR 667 (Ker); (iv) Puspa Perfumery Products P. Ltd. v. CIT [1992] 194 ITR 248 (Cal); (v) Hotel Broadway Complex v. CIT [1992] 198 ITR 361 (Karn); (vi) CIT v. Plasmac Machine Mfg. Co. Ltd. [1993] 201 ITR 650 (Bom); (vii) CIT v. Hyderabad Race Club [2001] 249 ITR 391 (AP); (....
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.... on the date of transfer which was taken into account in reckoning the payment of consideration, the liability discharged later by the transferee would be capital in nature. In the aforesaid decision, this court held as hereunder: "... Under normal circumstances, the payment of bonus to the employees would be a trading expense, and it would not be an expenditure of a capital nature. If the liability to pay the bonus had been that of the transferor as an accrued liability, and that liability was transferred to the transferee under the terms of the contract of the transfer, that is, if the liability so transferred was one of the factors taken into account to fix the price payable by the transferee, then the amount expended in discharge of the liability so transferred would have been part of the price paid by the transferee for the acquisition of the business. Whether the accrued liability that was so transferred was a liability to an employee, or any other trade liability, can make no difference in principle." The Punjab and Haryana High Court in Dashmesh Transport Co. P. Ltd. v. CIT [1980] 125 ITR 681, while considering the case of discharge of liability of the transferor-comp....
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....n days' wages based on the rate of wages last drawn by the employee for every completed year of service or part thereof in excess of six months. Thus, with the continuation of employment, the gratuity continues to accrue on account of the respective employee. The right to receive gratuity is a right vested in the employee on completion of five years continuous service receivable from the date from which continuous service is reckoned. The employees, whose service was continuing after the transfer of the undertaking, were entitled to claim gratuity from the transferor on account of cessation of employment under him. But for their continuation under the assessee, it was not payable till the occurrence of any of the conditions mentioned in section 4(1)(a), (b) and (c) of the Payment of Gratuity Act. The payment of gratuity to these employees till the date of transfer was deferred by reason of the terms of the agreement and the liability accrued till that date and payable by the transferor was taken over by the assessee. Thus, this liability became part of the consideration paid for the assets transferred and is liable to be added to the consideration mentioned in the agreement. It can....
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....property tax is quite different from other taxes like sales tax or income-tax; property tax due to a municipal body is reflected in the municipal property registers. It is not possible to hold that the partners who joined Ananthasivan should be assumed to be ignorant about property tax arrears. If knowledge of the tax arrears is attributed to them, then, necessarily the said liability would go into the computation of the firm's capital. The assessee cannot take advantage of the fact that these were not reflected in the books of the previous firm, since a prudent businessman is expected to probe into the tax liabilities attached to a business premises. In these circumstances, the payments made towards property tax arrears cannot be held to be in the nature of non-capital expenditure at all." We hold that the Tribunal was correct in holding that only after adjusting the liability towards gratuity, the sale consideration of Rs. 10 lakhs was arrived at. We therefore hold that the assessee by virtue of the deed of transfer had taken over the liability of the transferor-company towards its gratuity liability of the employees of the transferor-company on the date of transfer and it was....