TMI Blog1991 (5) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... 986 and R. A. No. 131/(Coch.) of 1986, respectively, praying that the Tribunal may be pleased to refer certain questions of law, specified in the respective reference applications for the decision of this court. Accordingly, the Tribunal has referred four questions of law in I. T. R. No. 72 of 1987 at the instance of the assessee. At the instance of the Revenue, the Tribunal has referred two questions of law in I. T. R. No. 117 of 1987. Since the parties involved in both the references are the same and they relate to the same assessment year 1971-72, we heard the above references together and a common judgment is delivered in the said referred cases. The four questions of law referred at the instance of the assessee to this court for decision in I. T. R. No. 72 of 1987 are as follows " 1. Whether, on the facts And in the circumstances of the case, the Tribunal was right in law in holding that the Ernakulam Electrical Undertaking which constitutes a profit-making apparatus and the business of the electrical undertaking falls within the definition of 'capital asset' as defined in section 2(14) of the Income-tax Act, 1961, the transfer of which will attract capital gains ? 2. Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. The Board fixed it at Rs. 71,22,600 plus solatium at 20 per cent. thereon. The assessee claimed Rs. 1,30,69,200 including solatium as compensation. The matter was finally referred to the arbitrators on August 22, 1978 ; the arbitrators passed the award and determined the purchase price due to the assessee (licensees in respect of the Ernakulam Electrical Undertaking) at Rs. 88,97,000 excluding solatium. The award was filed in the court for acceptance in 0. P. No. 67 of 1978. By judgment dated October 28, 1978, the court directed the Kerala State Electricity Board to pay to the assessee a sum of Rs. 88,97,000 excluding solatium. There was no break-up of the compensation amount in respect of plant, machinery, lands, buildings, etc. The Income-tax Officer happened to pass the order of assessment for the year 1971-72 on March 27, 1974, long before the arbitrators passed their award or the court determined the compensation. By order dated March 27, 1974, the Income-tax Officer determined the total income of the assessee for the year at Rs. 97,78,410. He levied tax on capital gains at Rs. 1,36,69,200 including solatium, based on the assessee's own claim. This order was set aside in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsation as rightly held by the Commissioner of Income-tax (Appeals). It is thereafter at the instance of the assessee as well as the Revenue that the Income-tax Appellate Tribunal has referred the questions of law formulated hereinabove which are said to arise out of the appellate order for the decision of this court. The questions referred at the instance of the assessee turn on the exigibility to tax of amounts received on acquisition to capital gains and whether the gratuity paid is a permissible deduction for the year in question. In the questions referred at the instance of the Revenue, the sole question that arises for consideration is whether retrenchment compensation is a permissible deduction. We heard counsel for the assessee, Mr. C. M. Devan, as also counsel for the Revenue, Mr. P. K. R. Menon. The broad facts of this case are as follows : The Kerala State Electricity Board, by their letter dated March 7, 1969, exercised its option to purchase the Ernakulam electrical undertaking and required the assessee-company to sell the undertaking to the Board at the expiry of the period of the running licence. The assessee immediately thereafter served notice to its employees in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 1971-72-the Commissioner of Income-tax (Appeals) held against the assessee. Disposing of I. T. A. No. 318/(Coch.) of 1983 and I. T. A. No. 360/ (Coch.) of 1983 (the appeals filed by the assessee-company and the Revenue), by a common order dated January 31, 1986, the Tribunal affirmed the decision of the Commissioner of Income-tax (Appeals) on the above questions. It should be stated that further relief was given to the assessee in the appeal filed by it, affording relief regarding profits under section 41(2) of the Income-tax Act, 1961, with which we are not concerned in these references. We shall first take up the points that arise for consideration in I. T. R. No. 72 of 1987 the reference at the instance of the assessee. There are four questions, as stated in paragraph 2 supra. But they involve three distinct points : (1) When the undertaking as a whole, as a going concern, is transferred and compensation is received therefor, is the compensation, so received, exigible to capital gains tax ? (2) Is solatium paid for the transfer of the undertaking part of the sale consideration and forms part of the capital asset ? and (3) Is the assessee-company entitled to deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered that the undertaking, as a whole, was transferred as a going concern, there was a transfer of the capital asset and so the assessee was rightly taxed on capital gains. We are of the view that the aforesaid conclusions of the Tribunal covering questions Nos. 1, 3 and 4 in I. T. R. No. 72 of 1987 are valid and justified in law. A Bench of this court in CIT v. Smt. M. Subaida Beevi [1986] 160 ITR 557 (Ker) at pages 562 and 563 considered the question as to whether the solatium received by the assessee as a result of the transfer of the capital asset and forming part of the profits or gains arising therefrom is exigible to tax under section 45 of the Income-tax Act, 1961. Following the decision of the Gujarat High Court in Vadilal Soda Ice Factory's case [1971] 80 ITR 711, and the later decision in Hamidkhan Samsherkhan v. Special Land Acquisition Officer, AIR 1982 Guj 157, Bench of this court held that solatium forms part of the consideration for the land (capital asset) transferred by way of acquisition and so exigible to tax. In West Coast Electric Supply Corporation Ltd. v. CIT [1977] 107 ITR 483, a Bench of the Madras High Court, construing section 12B of the Indian Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer of the asset and not confined to the liability for gratuity of the current accounting year. It is argued that gratuity liability accrued even on the date of the Ordinance, December 10, 1969. It did not accrue during the accounting period April 1, 1970, to March 31, 1971 assessment year 1971-72. It had accrued even earlier. The plea of the assessee was that it had applied to the Government for exemption from the provisions of the Gratuity Act on April 15, 1969, and the application was disposed of only on July 14, 1970. The assessee had also filed a writ petition in the Kerala High Court questioning the validity of the Act. Though no provision was made by the assessee in the accounting period relevant to the assessment year 1970-71, nor was it claimed in that year, in the accounts for the year ending on March 31, 1970, it was indicated that there was a possible liability under the above head. When the undertaking was about to be transferred to the Board, the Board insisted that the issue relating to gratuity and retrenchment compensation should be settled as a condition precedent for the payment of compensation money. A memorandum of settlement, under a tripartite agreement d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is not entitled to the claim of gratuity during the assessment year in question is sound. The plea that the statutory liability got itself transformed into a contractual liability, even if it is acceptable, is relevant only for the assessment year 1973-74 and not for this assessment year 1971-72. The earlier decisions of this court brought to our notice-L. J. Patel and Co.'s case [1974] 97 ITR 152 and K. A. Karim and Sons' case [1982] 133 ITR 515 [FB]-are binding on us. A Bench of this court, in an unreported decision in I.T.R. No. 121 of 1986 (since reported in CIT v. Poyilakkada Fisheries (P.) Ltd. [1992] 197 ITR 85), judgment dated June 25, 1990, had followed the said earlier decisions. In the light of the above decisions of this court, we are satisfied that the Tribunal was justified in holding that the assessee is not entitled to the claim of gratuity during the assessment year in question. The assessee which is maintaining its accounts on mercantile basis should have claimed the liability for gratuity in the assessment year 1970-71 when the liability accrued. The liability cannot be claimed in the subsequent assessment year. The Bench decisions of this court in CIT v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . .The assessee-company gave notice soon thereafter to its employees that their services would not be required after the undertaking vested in the Board and the undertaking ultimately vested in the Board on December 3, 1970, and from these facts it is clear that, during the continuation of the business, but before the transfer, the assessee issued notices of termination to the workmen and by issuing such notices, the assessee created a liability which is a legitimate liability, which had accrued during the accounting period relevant to the assessment year in question. The amount so expended by the assessee, by way of retrenchment compensation, will be covered by section 37 of the Income-tax Act and so is permissible deduction. The Tribunal also concurred with the view of the Commissioner of Income-tax (Appeals) that the retrenchment compensation is deductible from the capital gains as a charge on the amount of compensation. Emphasis was laid on the fact that the assessee did not get the benefit of the amount that was required to be paid over to the Board towards the retrenchment compensation, that the notice of retrenchment was given by the assessee in the relevant year of account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in Ambala Cantt. Electric Supply Corporation Ltd.'s case [1982] 133 ITR 343, that the amount of retrenchment compensation will be covered by section 37 of the Income-tax Act is justified in law. It cannot be said that the Appellate Tribunal was wrong when it held that, alternatively, the retrenchment compensation is deductible from the capital gains as a charge on the amount of compensation. That is only an alternative finding concurring with the conclusion of the Commissioner of Income-tax (Appeals). We are, therefore, of the view that the Appellate Tribunal was justified in law in holding that the relief by way of deduction for retrenchment compensation, claimed by the assessee, is permissible under section 37 of the Income-tax Act. Alternatively, and in any view of the matter, the concurrent finding arrived at by the Commissioner of Income-tax (Appeals) and the Appellate Tribunal, that the retrenchment compensation is deductible from the capital gains, as a charge on the amount of compensation, cannot be said to be erroneous on the facts of this case and in the light of the decisions adverted to by the Appellate Tribunal. We, therefore, answer questions Nos. 1 and 2 referred t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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