TMI Blog2006 (2) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... the business was leased out to a lessee carrying on the very same business out of which he is deriving income by way of rent. The said rental income is income from business. The assessee has not closed its business activity. It is being continued even after closure of the manufacturing activity - question of law is answered in the affirmative, in favour of the assessee and against the Revenue - - - - - Dated:- 7-2-2006 - Judge(s) : P. VISHWANATHA SHETTY., N. KUMAR. JUDGMENT The judgment of the court was delivered by N. Kumar J.-This reference arises under section 256(1) of the Income-tax Act, 1961 (for short hereinafter referred to as "the Act"), at the instance of the Revenue for our opinion on the following question of law: " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivity of the assessee had come to a close as a whole. In fact, it took note of the fact that in the subsequent years the Assessing Officer has himself allowed the claim of the assessee. They also looked into the books of profit and loss account and balance-sheet for the assessment years 1981-82, 1982-83, 1984-85 which showed that the assessee had not stopped the entire business. Therefore, it was held that though the assessee had stopped the manufacturing activity, he had not stopped the business and therefore he was entitled to the deduction of expenditure which was paid by way of retrenchment compensation. Aggrieved by these two orders the Revenue has sought this reference. Learned counsel appearing for the Revenue submitted that the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nveniently be carried on. Again the Supreme Court in the case of Sassoon J. David and Co. P. Ltd. v. CIT [1979] 118 ITR 261 dealing with retrenchment compensation itself held that when the company was neither dissolved nor was its business undertaking sold, it continued to exist as juristic entity, it cannot be said that the business is closed and payment of retrenchment compensation cannot be given deduction. Further, it was also observed that it is too late in the day now, whatever may have been the position about two decades ago, to treat the expenditure incurred by a management in paying reasonable sums by way of gratuity, bonus, retrenchment compensation or compensation for termination of service as not business expenditure. Such exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... else. Therefore it is clear, to be eligible for deduction under section 37(1) of the Act, the expenditure should be laid down or expended wholly and exclusively for the purpose of business or profession. The expenditure incurred by the management in paying retrenchment compensation for termination of service is a business expenditure, provided the employer continues to carry on the business after such retrenchment. However, if the retrenchment is done consequent to closure of business, then the amount paid towards retrenchment compensation cannot be claimed as business expenditure, as on the date the retrenchment compensation is paid the assessee is not carrying on any business. But if the assessee continues to carry on business and if on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputing the income chargeable under the head "Profits and gains of business or profession" under section 37(1) of the Act. In the instant case, the material on record and the finding recorded by the authorities clearly show that the assessee was carrying on two lines of business, i.e., manufacturing and trading, and he has stopped the manufacturing activity temporarily as a consequence of which he has retrenched all the employees who were employed in the manufacturing unit by paying retrenchment compensation. The said manufacturing unit which was a capital asset of the business was leased out to a lessee carrying on the very same business out of which he is deriving income by way of rent. The said rental income is income from business. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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