9911796707
TMI Blog1991 (5) TMI 108X X X X Extracts X X X X X X X X Extracts X X X X ..... the employees, whose services were terminated. The assessee firm stopped its business activities on 31st March, 1982. The payment of gratuity was in connection with the winding up of the business. In the above circumstances, the ITO disallowed the claim of the assessee in respect of deduction of the payment of terminal gratuity paid to the employees of the assessee as the expenditure incurred was not carrying on business. 3. On further scrutiny of the statements, the ITO noticed that the total salary included in the debit of Rs. 1,75,765 under the head 'salary and allowances' was only Rs. 2,277 whereas the other items like ESI contribution, Provident Fund contribution, bonus, etc. were not in proportion to the amount of salary. Therefore, he was of the view that the assessee cannot run a bar attached hotel and restaurant with a nominal salary payment of Rs. 2,277. The salary paid by the assessee to its employees during the preceding year amounted to Rs. 50,293. In fact, the assessee has paid advances towards salary to its employees which have been subsequently adjusted against the amounts credited in their names. The books of account maintained by the assessee do not reveal a cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). The assessee contended before him that the assessee maintained proper books of accounts as in the earlier years and the ITO did not give any reason for rejection of the books of account. The gratuity paid to the employees on the termination of their services was an admissible deduction. The credits appearing in the names of employees were only for the purpose of adjustment of the salary advances and the credits of Rs. 55,300 were satisfactorily explained. The estimate of income at Rs. 4 lakhs was without any basis. On the consideration of these submissions, the CIT(A) held that the decision of the Supreme Court in the case of CIT vs. Gemini Cashew Sales Corporation (1967) 65 ITR 643 (SC) was not applicable to the claim of the assessee for gratuity liability and alleged cash credits in the names of the employees were also not cash credits but only credits by way of adjustments. Hence, he found that there were no serious defects in the accounts warranting a rejection of accounts under s. 145 of the IT Act, 1961. He also noticed that some expenses debited to the profit and loss account would involve a personal or inadmissible element but even such elements were not of a substantial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we hold that the rejection of the account as such under s. 145(2) is not in order. 9. The next question that arises for our consideration is whether the assessee is entitled to deduction of payment of gratuity of Rs. 40,360 paid at the time of the termination of the services of the employees. Admittedly, the assessee stopped the business on 31st March, 1982 and paid a sum of Rs. 40,360 towards the termination of services to the employees as gratuity and the assessee claimed this amount as deduction under s. 37 of the IT Act, 1961. But on the other hand the learned departmental representative argued that the claim of the assessee for deduction of gratuity payment will squarely fall under s. 40A(7) and without complying the conditions laid down therein, the assessee is not entitled to get the gratuity payment as deduction. Then the question arises for our consideration is whether the claim of the assessee would be allowed under s. 40A(7), which reads as follows: "40A(7)(a) subject to the provisions of cl. (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s an allowable deduction. The Supreme Court held as follows: "Liability to pay retrenchment compensation arises under s. 25FF when there is a transfer of ownership or management of an undertaking : it arises on the transfer of the undertaking and not before. Transfer of ownership or management of an undertaking in law operates, except in the conditions set out in the proviso, as retrenchment of the workmen. But until there is a transfer of the undertaking resulting in determination of employment, the workmen do not become entitled to retrenchment compensation. So long as the ownership of the business continues with the employer, the right of the workmen to claim compensation remains contingent. A workman may, before the transfer of ownership of the business, himself terminate the employment: in none of these cases the owner of the business is under any obligation to pay retrenchment compensation to the workman". In this case, there is no transfer of ownership or management of undertaking arises. But the assessee stopped its business. Further in the case of death or superannuation or self-termination, the Court has found that retrenchment compensation is not payable. On the othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... retires or his services is terminated and claim the payment made as an expenditure incurred for the purpose of business under s. 37. He might, if he followed the mercantile system, provide for the payment of gratuity which became payable during the previous year and claim it as an expenditure on accrued basis under s. 37 of the said Act. Since the amount of gratuity payable in any given year would be a variable amount depending upon the number of employees who would be entitled to receive the payment during the year, the amount being a large one in one year and a small one in another year, the employer often finds it desirable and/or convenient to set apart for future use, a sum every year to meet the contingent liability as a provision for gratuity or a fund for gratuity. He might create an approved gratuity fund for the exclusive benefit of his employees under an irrevocable trust and make contributions to such fund every year. Contingent liabilities do not constitute expenditure and cannot be the subject matter of deduction even under the mercantile system of accounting. Expenditure which was deductible for income-tax purposes is towards a liability actually existing at the time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appearing in the books of accounts of the assessee aggregating to Rs. 55,300. The explanation of the assessee that the usual practice followed by the assessee is that the employees will be paid advance salary as and when they require money and ultimately the advances would be adjusted against the salary due to them. But this explanation was not found satisfactory in the light of the fact that there was no corresponding debit entries under the head salary to the equal amount credits in the names of the employees. On the other hand it was noticed that there were deficits of cash balances on the relevant dates. Hence the explanation offered by the assessee was rightly rejected by the ITO. But the view of the CIT(A) is that the alleged credits in the name of the employees are not cash credits but only credits by way of adjustment. This view of the CIT(A) is not supported by any material on record. Hence, we are unable to agree with the CIT(A) on this point and his finding is thus modified. 15. Having regard to the fact that the assessee is entitled to deduction of gratuity coupled with the presence of unexplained cash credits of Rs. 55,300 and also the fact that the assessee had gon ..... X X X X Extracts X X X X X X X X Extracts X X X X
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