2018 (10) TMI 1307 - HC - Income Tax

Disallowance of Retrenchment Compensation, Renovation expenses, Repairs and maintenance, Advertisement expenses and Sales promotion expenses - Held that - The assessee had taken a contention that the assessee had continued the business. In fact, it was the partnership which had continued the business. In such circumstance, there can be no claim of retrenchment compensation by the assessee who had sold the establishments and business was also continued by the transferee firm. With respect to renovation expenses and repairs and maintenance, the Assessing Officer found that since the business itself was sold, there was no reason for incurring such expenses. The assessee had taken a specific contention that the renovation was done with a view to sell the business to the partnership firm. The Assessing Officer took the view that if the renovation was done after the decision to sell the business was taken, then necessarily it is not an expenditure incurred for the business of the assessee. We do not think such a view can be taken especially since the assessee had a case that he expended the amounts for the purpose of sale, in which sale he had also declared long term capital gains coming to ₹ 75 lakhs. In such circumstances, the renovation expenses and expenses for repairs and maintenance have to be allowed as an expenditure under Section 37. Advertisement expenses and sales promotion expenses; which were also carried out prior to the same and after the sale. The dis-allowance has been made by the A.O only to that portion expended after the sale, which also we find to be proper. The order of the A.O on that count is liable to be restored. Retrenchment compensation is concerned the order of the A.O is restored. As far as renovation and repairs and maintenance, the dis-allowance made by the A.O is bad in law and the order of the Tribunal is upheld. On the question of advertisement expenses and sales promotion, the question is answered in favour of the Revenue and against the assessee and the order of the AO is restored which declined the advertisement expenses and sales promotion expenses after the date of sale.

Summary

Issues:
1. Disallowance of various expenses claimed by the assessee under Section 37 of the Income Tax Act, 1961.
2. Interpretation of the applicability of retrenchment compensation in the context of a business sale to a partnership firm.

Issue 1: Disallowance of Expenses
The assessee claimed expenses under Section 37 of the Income Tax Act, 1961 for retrenchment compensation, renovation expenses, repairs and maintenance expenses, advertisement expenses, and sales promotion expenses related to a retail business in Home Appliances sold to a partnership firm. The Assessing Officer disallowed these expenses, citing that since the business was sold, there was no justification for incurring such expenses. However, the assessee argued that the renovation and maintenance expenses were done in preparation for the sale, which also resulted in long-term capital gains. The Tribunal upheld the allowance of renovation and maintenance expenses as legitimate business expenditures under Section 37.

Issue 2: Retrenchment Compensation
The Assessing Officer relied on the Supreme Court's decision in Gemini Cashew Sales Corporation to disallow retrenchment compensation claimed by the assessee. The court in the Gemini case held that retrenchment compensation was not justified when a business continued after a transfer or dissolution. In this case, the assessee contended that the business was continued by the partnership firm, not by him personally. Therefore, the claim for retrenchment compensation was deemed invalid. The Tribunal upheld the Assessing Officer's decision to disallow retrenchment compensation but allowed expenses for advertisement and sales promotion only up to the date of the business sale.

In conclusion, the Tribunal affirmed the first appellate authority's decision to allow renovation and maintenance expenses as legitimate business expenditures under Section 37. However, the disallowance of retrenchment compensation was upheld, considering the business continuity under the partnership firm. The disallowance of advertisement and sales promotion expenses after the business sale was also upheld.