TMI Blog1983 (8) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... s in that business would become employees of the transferee on terms no less favourable to them with continuity of service. The liabilities as worked out in the schedule included an amount of Rs. 80,309, which was a provision for gratuity due to the employees of the business taken over by the transferee. The assessee claimed as deduction provision for gratuity of Rs. 68,380 relating to Sarada Binding Works as also Rs. 80,309 relating to Chandamama Publications. Both these amounts were disallowed by the ITO on the ground that they were not admissible as a deduction. The assessee appealed to the AAC, contending that, in view of the decision in Tata Iron Steel Company Limited v. Bapat [1975] 101 ITR 292, the provision for gratuity made on an actuarial basis would be an admissible deduction. The AAC found on the basis of the certificates produced by the assessee and on the basis of the actuarial valuation, that the liability to gratuity as on March 31, 1971, was Rs. 63,923 and as on March 31, 1972, was Rs. 1,54,178, the difference being Rs. 90,255. The AAC, therefore, felt that the sum of Rs. 90,255 represented the incremental gratuity liability relating to the year in question and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the liability to pay gratuity is not a contingent one and if the gratuity liability stood calculated on a scientific and actuarial method each year, the gratuity liability could be taken to be an accrued liability accrued each year. The same view has also been taken by the Supreme Court in Vazir Sultan's case [1981] 132 ITR 559. Having regard to the said decisions, the first question has to be answered in the affirmative and against the Revenue. Then we come to the second question which relates to the allowability of the deduction claimed by the assessee in a sum of Rs. 80,309 which is found to have been paid by the assessee to the purchaser as per the terms of the settlement for the purpose of enabling the purchaser to discharge the assessee's gratuity liability for the period during which the employees who had been transferred to the services of the purchaser, were working under the assessee. In this case, under the terms of the agreement, the buyer has taken over the employees of the assessee's business, Chandamama Publications, with continuity of service and all accrued monetary benefits. So the purchaser, as part of the arrangement for sale of the business, has taken ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly arisen on transfer. But for the said agreement, the assessee would have been liable to pay gratuity to the employees on their transfer, as the transfer of their services would amount to termination of their services under it. Though the said payment is not made directly to the employees as such, the amount is admittedly paid for discharging the assessee's liability to pay gratuity to its employees for the period ending with the date of transfer. We are of the view that such payment should be taken to be a payment made to discharge the assessee's liability for gratuity and as such it has to be deducted. The learned counsel for the Revenue, however, relies on a decision of the Bombay High Court in CIT v. W. T. Suren Co. Ltd. [1982] 138 ITR 91, wherein the court has held that the payment made by the transferor towards the gratuity liability in such circumstances, as in this case, where the employees are taken over by the transferee with continuity of service, is not the payment of gratuity to employees and, hence, it is not allowable as business expenditure under s. 10(2)(xv) of the Indian I.T. Act, 1922. The court has taken the view therein that unless a payment is made to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enti. Admittedly, the payment made to the purchaser was for the discharge of an obligation incurred already while the business was carried on by the assessee and it was not a payment made in respect of liability arising after the transfer or on the closure of business, as was the case in CIT v. Gemini Cashew Sales Corporation [1967] 65 ITR 643 (SC). In CIT v. Mysore Spinning Manufacturing Co. Ltd. [1970] 78 ITR 4, the Supreme Court has dealt with a case relating to a transfer of accumulated balance to the Employees' Provident Fund under the Employees' Provident Funds Act, 1952. In that case, the assessee had been maintaining two unrecognised provident funds and from time to time the assessee and its employees made contributions to the two funds. After the Employees' Provident Funds Act, 1952, came into force, the assessee was required to transfer all the accumulations in the fund to the Employees' Provident Fund and the assessee accordingly transferred. The amount so transferred included sum of Rs. 3,01,772 representing the assessee's contribution to the two funds up to the date of transfer and the interest accrued thereon. The assessee claimed deduction of that amount in computi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss expenditure. In that case, the annuities granted by the company, which were paid under deduction of income-tax, were payable generally out of the company's assets and were not charged specifically upon any particular fund or property belonging to the company and, therefore, the lump sum paid to purchase the annuity was held to be an expense incurred in the business and not in the nature of capital expenditure and as such it was an admissible expense in computing the company's profit assessable to income-tax. In Green (HM. Inspector of Taxes) v. Cravens Railway Carriage and Wagon Company Ltd. [1951] 32 TC 359, the assessee introduced in 1944 a staff assurance scheme, based upon a single assurance policy, the annual premiums on which were paid wholly by the company. In order that a number of employees of long service should benefit fully, the company undertook to pay certain additional annual premiums. In 1946, the company paid lump sum in commutation of these additional premiums. The question that arose was whether the said lump sum payment could be deducted in computing the profits of the company. The court held that the payment was a proper deduction in computing the profits an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounts to be kept as deposit so that the payment could be made as and when the occasion to pay gratuity arose. The assessee's claim for deduction of the said amount paid to the transferee-bank as an expenditure under s. 36(1)(ii) or under s. 37 of the Act was negatived by the lower authorities but was allowed by the Tribunal. However, when the matter came up before this court, this court held that since the liability arose in the course of carrying on banking business and as the banking business having been completely transferred, the assessee cannot claim deduction of this amount as business expenditure, after it ceased to carry on the banking business either under s. 37 or under s. 36(1)(ii). In taking that view, this court has followed the decision of the Supreme Court in CIT v. Gemini Cashew Sales Corporation [1967] 65 ITR 643 and the decision of this court in Stanes Motors (South India) Ltd. v. CIT [1975] 100 ITR 341, which are also cases of closure of business and the payment being claimed as business expenditure after the closure of the business. Therefore, after a due consideration of the matter, we are answering the second question in the affirmative and against the Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X
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