TMI Blog1990 (7) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... issued notice under section 263 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). On a consideration of the objections raised by the company, the Commissioner of Income-tax, adverting to the circumstances under which the company came to be wound up, took the view that the payment of Rs. 1,06,044 was not made in the course of carrying on the business or for the purpose of furthering the cause of carrying on the business or to keep it going, but only because the business was closed down and, therefore, it was not an admissible deduction under section 37 of the Act. The Income-tax Officer was directed to disallow the claim for deduction of Rs. 1,06,044 and increase the total income of the assessee by that amount and also to take steps to determine the additional amount of income-tax and recover the same. Aggrieved by this, the assessee preferred an appeal before the Income-tax Appellate Tribunal and it was found that the retrenchment compensation was paid not for the purpose of keeping the trade going generally to earn profits, but to discharge the liabilities to facilitate the winding up and in view of that finding, the Tribunal agreed with the conclusion of the Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion under section 37(1) of the Act in computing the income chargeable under the head "Profits and gains of business". Under section 37(1) of the Act, any expenditure laid out or expended wholly and exclusively for purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". In this case, the amount of Rs. 1,06,044 had been paid by the assessee by way of retrenchment compensation under section 25FFF of the Industrial Disputes Act. That liability arose on the closure of the undertaking, whatever was the cause for such closure. The notice for the meeting on September 15, 1973 as well as the explanatory note appended thereto, when considered in the light of the resolutions passed, to voluntarily wind up the company and to appoint liquidators, clearly establishes that a decision had been taken to wind up the company dictated by reasons of economy, financial stringency and dwindling business. The notices issued to the workmen referred to in paragraph 6 of the order of the Tribunal show that the decision had been taken to wind up the business of the company and that the employees will be retrench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness activities and not to carry on its business and the service of notices to that effect on the employees of the company was also only in furtherance of the decision to close down and not to continue to run the business. In other words, it is only the decision to close down the business of the company that gave rise to the need for payment of retrenchment compensation and the issue of notices to that effect on the employees of the company and that cannot be construed in any manner as an attempt to further the cause of business or doing something that will aid in the carrying on of the business or prolonging the life of the business with a view to make profits. Considering the notice of the meeting, the explanatory statement, the resolutions passed and the contents of the notice issued to workmen, it is clearly made out that the carrying on of the business of the company was farthest from the minds of those responsible for the running of the affairs of the company and, therefore, the payment of retrenchment compensation by the assessee-company cannot be considered to be an item of expenditure laid out or expended wholly and exclusively for the purpose of the business. The scope a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies of the company, earlier resolved to be wound up. We may also refer to the circumstances that after September 15, 1973, no fresh contracts were entered into, but the prior commitments alone came to be discharged and that is attributable only to the act of the liquidators with a view to wind up the affairs of the company, incidentally fulfilling the obligations then in existence. We are, therefore, of the view that the decision in Sassoon J. David and Co. P. Ltd. v. CIT [1979] 118 ITR 261 (SC) cannot be pressed into service by counsel for the assessee. In CIT v. Gemini Cashew Sales Corporation [1967] 65 ITR 643 (SC), relied on by learned counsel for the Revenue, a firm stood dissolved on the death of one of the partners and the surviving partner took over and continued the business and in the process of settling the accounts of the firm, a certain amount was taken into account as retrenchment compensation payable to the employees under section 25FF of the Industrial Disputes Act arising on a transfer of ownership. The question arose whether the sum would constitute an allowable expenditure in computing the income of the firm and the Supreme Court pointed out that the present valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted out that the closure of the business and the accrual or arising of the liability to pay compensation are concurrent and one cannot be separated from the other and, therefore, the compensation payable under section 25FFF of the Industrial Disputes Act cannot be said to be an expenditure incurred by the assessee for carrying on the business or an expenditure laid out wholly and exclusively for the purpose of the business and further that the expenditure incurred by the assessee was not for carrying on the business, but for closing down the business and the expenditure cannot, therefore, be said to be exclusively or wholly laid out for the purpose of the business or an expenditure incurred for the purpose of carrying on the business. While holding so, reference was made to CIT v. Gemini Cashew Sales Corporation [1967] 65 ITR 643 (SC). After extracting the passage at page 650, the Division Bench proceeded to observe that "if the word 'closure' is substituted for the word 'transfer', namely, 'a deduction which is proper and necessary for ascertaining the balance of profits and gains of the business is undoubtedly properly allowable, but where a liability to make a payment arises not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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