TMI Blog1985 (2) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... uary 18, 1959. It was arranged that the expenses incurred by the assessee prior to the registration of the rupee company were to be met by the latter and that the assets and properties of the assessee utilised in prospecting and field work would also be taken over by Oil India Ltd. at an agreed consideration to be settled between the parties. From its incorporation in 1959 till the end of December, 1961, Oil India Ltd. had no employees of its own and the operations in different areas allotted to it were carried out by the employees of the assessee. On December 31, 1961, the services of the employees of the assessee who were working in the extended areas were transferred to Oil India Ltd. The conditions of service of the persons so transferred were protected and the liability for payment to the said employees for the services rendered by them up to December 31, 1961, was taken over by Oil India Ltd. No retrenchment compensation was paid to the employees by the assessee whose services were so transferred. After the transfer of the new areas to Oil India Ltd., the assessee's business stood restricted to the operations in the Digboi fields and the refinery located there. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITO rejected such claim on the ground, inter alia, that the said scheme was not a general scheme applicable to all the employees of the assessee but had a limited purpose of retrenching only selected employees declared by the assessee to be surplus. The scheme gave the company an absolute and unfettered discretion and did not confer upon the employees in general a right to receive such compensation in the event of their voluntary retirement. He held that the scheme did not have the effect of creating any impetus or incentive, that the payments were made not under any contractual or other liability and that the amount represented gratuitous payment to selected employees. The ITO found that the necessity to pay this amount arose for the first time after the assessee transferred its business of drilling and other operations to Oil India Ltd. on account of such transfer. The ITO also held that the discharge of selected employees resulted in an enduring benefit to the assessee and, therefore, the expenditure was capital in nature. On appeal, the AAC after considering the records held that the payment of retrenchment compensation by the assessee was not related to the business tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal was allowed. There was a further appeal before the Income-tax Appellate Tribunal by the Revenue. In the appeal, it was contended on behalf of the Revenue, inter alia, that the question of retrenchment and compensation arose as result of closure of a part of the business of the assessee which was transferred to Oil India Ltd. Such compensation when paid was not deductible as business expenditure. It was contended that the scheme was not voluntary but selective and depended entirely on the decision of the management of the assessee. The scheme did not bring about any contract as the employees were not party to the scheme and the payments thereunder were not under any contractual obligation. It was contended further that the scheme was undertaken for restructuring the business of the assessee after closure of a substantial part thereof. The expenditure incurred under the scheme related to the restructuring of the capital and the basic organisation of the business and was not a revenue expenditure. By incurring the expenditure, the assessee got rid of a large number of its employees thereby reducing its further expenditure and obtaining an enduring benefit. It was conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue reiterated all the contentions made on behalf of the Revenue before the Tribunal. He submitted further that the expenditure incurred was against partly contingent liability. If any particular employee had been retrenched the assessee would have had to face a claim for compensation. The expenditure incurred was, therefore, de hors the business carried on by the assessee in the relevant year. It was submitted that the matter should be remanded to the Tribunal for an enquiry whether the expenditure was incurred for effecting economy or for restructuring of the fixed capital of the company. Learned advocate for the assessee contended to the contrary and submitted that on the facts found, which remain unchallenged, the question referred has to be answered in favour of the assessee. In support of the respective contentions of the parties, a number of decisions were cited at the Bar. The same are considered hereafter. (a) Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC). In this case, the assessee had acquired from the Government of Assam lease of certain limestone quarries for a number of years against payment of half yearly rent, royalty and further payments by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... untary retirement scheme and observed as follows (p. 538 of 41 FJR) : " The voluntary retirement scheme enabled the younger workmen to continue in service while it offered a temptation for the older employees to retire from service. The voluntary retirement scheme has not been challenged as mala fide by the unions. We are in agreement with the view of the Tribunal that the payment of compensation to induce the workmen to retire prematurely was an item of expenditure incurred by the company on the ground of commercial expediency in order to facilitate the carrying on of the business and it was an expenditure allowable under section 37(1) of the Income-tax Act. It was not an expenditure of a capital nature. The Tribunal was justified in declining to add back this item of expenditure to the gross profits. " (d) Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC). In this case, the Supreme Court held that expenditure incurred in the purchase of loom hours by a jute mill was in implementation of part of a scheme which enabled the mill to remove a restriction in the number of its working hours, that no new asset was created and that there was no addition to or expansion of the profit-m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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