1976 (12) TMI 85 - AT - Income Tax

Summary

Issues:
1. Reopening of assessment under s. 147 (b)
2. Allowability of gratuity and retrenchment compensation under s. 37 of the Income-tax Act

Analysis:

1. Reopening of assessment under s. 147 (b):
The assessee appealed against the correctness of the reopening of the assessment under s. 147 (b). The assessee's counsel did not press this ground, leading to its rejection. The ITO reopened the assessment due to payments not being incurred in the normal course of business but on account of business closure. The AAC upheld the reopening and disallowance of payments. However, on further appeal, it was argued that the liability to pay the amounts arose during the business's operation, not after closure. The Tribunal found that the liability indeed arose during business operations and before closure, making the payments admissible under s. 37. The lower authorities were deemed to have erred in disallowing the payments, and the appeal was allowed on merits.

2. Allowability of gratuity and retrenchment compensation under s. 37:
The dispute centered on whether gratuity and retrenchment compensation paid to workers were allowable under s. 37 of the Income-tax Act. The ITO disallowed these payments in the reopened assessment, stating they arose due to business closure. The assessee argued that the liability arose during business operations and before closure, making the payments revenue in nature and admissible under s. 37. The Tribunal agreed, emphasizing that the liability had arisen before actual closure and for the purpose of the business. The Tribunal set aside the lower authorities' decisions and directed the ITO to allow the payments under s. 37. The appeal was allowed on merits based on these findings.