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2016 (9) TMI 513 - BOMBAY HIGH COURT

2016 (9) TMI 513 - BOMBAY HIGH COURT - TMI - Retrenchment compensation paid by subsidiary to the workers of the two units which belonged to the assessee and which were transferred to the subsidiary and which amount was reimbursed by the assessee under a contractual agreement - allowable as an admissible deduction - Held that:- The Court held that by virtue of the fact that the employees had been taken over by the transferee company with the benefit of employment on and from the date of transfer, .....

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e assessee company. The judgment of our Court in Suren & Co. (1981 (4) TMI 31 - BOMBAY High Court ), which held the field as on the date of the Tribunal's order, was later on set aside by the Supreme Court in the case of W.T. Suren And Co. Ltd. vs. C.I.T. [1998 (2) TMI 4 - SUPREME Court] holding that the amount of gratuity paid to the transferee company was not on account of transfer of the unit but on account of stopping of that business and the employees working in that unit becoming surplus r .....

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nces of the case, an expenditure wholly laid out or expended for the purpose of the business of the assessee and was an allowable deduction. This judgment of the Supreme Court clearly supports the Assessee's case here, though in the present case, as we have noted above, we are not really concerned with the payment of gratuity, but with payment in accordance with a commercial obligation. In that view of the matter, we are clearly of the opinion that the payment of ₹ 13.91 lakhs made by the .....

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l ( Tribunal ) refers the following question for our opinion:" Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the sum of ₹ 13,91,837/which represented retrenchment compensation paid by its subsidiary to the workers of the two units which belonged to the assessee and which were transferred to the subsidiary and which amount was reimbursed by the assessee under a contractual agreement, was not allowable as an admis .....

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by the Assessee to a company floated as a 100% subsidiary of the Assessee. A scheme of voluntary retirement was offered to the employees of the other units. Under this scheme, a sum of ₹ 15.23 lakhs was paid to those employees, who agreed to retire from the services voluntarily. Insofar as the units at Grant Road and Goa transferred to the newly formed subsidiary were concerned, under the transfer terms, the Assessee was to bear retrenchment compensation, if any, payable by the subsidiary .....

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ccording to him, even on the principle of commercial expediency, the payment was not justified. Besides, the ITO observed that the payment was made to the employees of the unit, which was closed. Insofar as the payment of ₹ 13.91 lakhs was concerned, the ITO observed that the event of transfer of business was not incidental to the carrying on of the business but an extraordinary happening which did not constitute the Assessee's business. The ITO, in the premises, did not allow the amou .....

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expediency. The C.I.T. (Appeals) negatived the Revenue's contention concerning the payment being occasioned by a closure, observing that the Assessee continued to carry on its flour milling business even after the transfer of the two units. The C.I.T. (Appeals) also allowed the claim of ₹ 13.91 lakhs towards the retrenchment compensation paid to the employees of transferred units. He held that the units were transferred to a wholly owned subsidiary and at the time of transfer it was ag .....

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ith the conclusion of the C.I.T. (Appeals) insofar as the payment of ₹ 15.23 lakhs made by the Assessee to its own employees was concerned as unexceptionable. The Tribunal, however, held that the payment of ₹ 13.91 lakhs stood on a different footing. According to the Tribunal, that was a payment made by the Assessee, after the unit was transferred. It held that the retrenchment compensation that was paid subsequent to the transfer, though referable to the services rendered .....

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ntral question that we need to consider in this Reference is whether or not the expenditure of ₹ 13.91 lakhs claimed by the Assessee is an amount laid out or expended wholly and exclusively for the purpose of its business within the meaning of Section 37 of the Income Tax Act, 1961. The thrust of the Tribunal's order rejecting this expenditure is that this expenditure incurred by the Assessee benefited another company and could not be considered as incurred for the Assessee's own b .....

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wered this question in the context of a similar phrase used in Section 10(2)(xv) of the Income Tax Act, 1922, which is in pari materia with Section 37 of the present Act. The Court held that the expression wholly and exclusively does not mean necessarily . The Court considered various tests in this behalf, and particularly focused on the test, viz. whether the sum of money was expended on the ground of commercial expediency and in order to indirectly facilitate the carrying on of the business, l .....

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ecessity and if it is incurred for promoting the business and to earn profits, the Assessee can claim deduction under the relevant provision, even though there is no compelling necessity to incur such expenditure. The Court further held that the fact that somebody other than the Assessee is also benefited by the expenditure, did not come in the way of such expenditure being allowed by way of deduction. To the same effect are the observations of a Division Bench of our Court in the case of Tata S .....

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eigh with the Court is whether the expenditure was a part of the process of profit making. The Division Bench relied on the observations of House of Lords in the well known case of British Insulated and Helsby Cables Ltd. vs. Atherton [1926] A.C. 205; 85 L.J.K.B. 336. In that case, the House of Lords, after citing various cases on the point made the following observations :".... It was made clear in the above cited cases .. that a sum of money expended, not of necessity and with .....

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borne out on record that during the year under consideration and for the past three years, the Assessee was in the grip of a serious labour trouble, with plenty of litigations pending under the Industrial Disputes Act before various Labour Courts and Tribunals. In the light of these circumstances, the Assessee thought it fit to hive off its two undertakings, referred to above, to the another company, namely, M/s. Volvis Floor Mills Pvt. Ltd., which was a wholly owned subsidiary of the Assessee. .....

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Section 25FF of the Industrial Disputes Act, payment of retrenchment compensation to the employees of the units proposed to be transferred. Such payment could have been avoided only if there was an agreement between the parties, including the concerned employees, for continuity of their services with the transferee company. Therefore, with a view to ensure that the retrenchment compensation is not required to be paid at the date of transfer, the Assessee provided for a stipulation in the transf .....

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sted on a condition that in case the transferee was at any time required to pay any amount by way of gratuity, retirement compensation or any other benefit to the concerned employees, the transferee shall be entitled to claim reimbursement thereof from the Vendor Assessee. The relevant clause in this behalf in the transfer agreement is quoted below :" 11(c) Notwithstanding anything to the contrary herein contained, it is agreed that as between the Vendor and the Purchaser (but no .....

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ct of the payment attributable to the employees' services with the Assessee Company as of the date of the transfer, is, to our mind, clearly an agreement arising out of commercial expediency. The contractual obligation is undertaken by the Assessee Company with a view to conduct its business in a more efficient manner and clearly comes within the dicta referred to above. 11. The Tribunal disallowed the expenditure on the footing that the amount of ₹ 13.91 lakhs was paid as r .....

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ons arising under the agreement of transfer referred to above qua the transferee company. It is not, therefore, relevant to consider whether any retrenchment compensation per se was payable on the date of transfer or that any such compensation was a remote possibility. The payment is clearly in discharge of a contractual obligation undertaken by the Assessee on account of its business expediency. 12. One of the grounds for disallowing the expenditure was the transfer of the unit or c .....

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the statement of law in Gemini Cashew Sales Corporation to the effect that a liability arising on account of closure of business cannot be allowed as expenditure for the purpose of the business. The Supreme Court holds that to be a permissible allowance the expenditure must be for the purpose of carrying on the business; that where accounts are maintained on the mercantile system, if the liability to make the payment has arisen during the time the business is carried on, it may appropriately be .....

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ot arise when the business of the (transferred) unit was being carried on by the Assessee; and any commitment to pay retrenchment compensation after such transfer, even if it be under a contract, cannot be for the purpose of the business. There is an inherent flaw in the reasoning of the Tribunal. The closure of business to come within the ratio of Gemini Cashew Sales Corporation, must be closure of the business as a whole. The Assessee carrying on business of flour milling at four u .....

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ts existing and continued business and not an expenditure occasioned by closure of business. We may, in this behalf, note the observations of the Madhya Pradesh High Court in the case of Pradeep Pictures vs. Commissioner of Income Tax, M.P.I 1983 [Vol.143] ITR 300. That was a case where retrenchment compensation was paid to employees upon closure of one of the two theatres owned by the assessee. The Court held that discontinuance of business at one theatre did not amount to closure of .....

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shew Sales Corporation [1967] 65 ITR 643 (SC), relied upon by the Tribunal and that in Venkatesa Colour Works v. CIT [1977] 108 ITR 309 (Mad), relied upon by the learned counsel for the Department are, therefore, distinguishable on facts. In these cases, the liability to pay retrenchment compensation had arisen on account of transfer or closure of the business carried on by the assessee and it was, therefore, held that the liability arose not in the carrying on of the business of the assessee, b .....

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d on the decision of our Court in the case of CIT Bombay CityI vs. W.T. Suren & Co. Ltd. 1982 (Vol. 138) ITR 91. Our Court in that case was concerned with payment of gratuity made consequent to a transfer of business. The Assessee in that case was a wholly owned subsidiary of the transferee company. At the date of the transfer, an option was given to the employees of the transferor company (i.e. the assessee) either to accept employment with the transferee company or accept termin .....

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loyees had been taken over by the transferee company with the benefit of employment on and from the date of transfer, strictly speaking with no right to claim gratuity, it was difficult to see how the payment, which was made by the assessee to the transferee company could be really treated as gratuity. The Court held that it would be more appropriate to describe the payment as a contribution made voluntarily to the transferee company in order to provide funds to it for payment of gratuity, which .....

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