TMI Blog1979 (3) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... mployees who are to be taken over by the transferee-company. There was also tripartite discussion between the assessee-company, its employees' union and the transferee-company. As a result of the discussion, it was agreed with the consent of the employees' union that in respect of 27 members of the staff who will not be in a position to put in a service of 10 years in the transferee-bank, the assessee-company will pay gratuity and in respect of the rest of the staff, the transferee-company had to pay gratuity. This arrangement is contained in the letter dated January 31, 1966, sent by the assessee-bank to the Indian Bank in which it is stated that the amount of gratuity to those 27 persons might be kept as a deposit in the Indian Bank so that it may be paid to them at the time of their retirement or early. Subsequent to this letter, the board of directors of the assessee-bank, by a resolution dated June 7, 1967, resolved to take over the liability for payment of gratuity to the 27 persons. In pursuance of this resolution, a sum of Rs. 37,560 came to be deposited with the Indian Bank on June 16, 1967, for the purpose of ultimate disbursement to the 27 employees at the time of their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bear the liability to pay gratuity amount to 27 workmen who will not be in a position to put in 10 years of service in the transferee-company, the transferee-company had agreed to bear the liability to pay gratuity amounts to the other employees. In pursuance of this arrangement, the assessee-company had deposited the said sum of Rs.37,560 to the transferee-bank so that it may be paid to the said 27 employees at the time of their retirement or early in pursuance of the provisions of the gratuity scheme which governed them while they were in service with the assessee-company. The question is whether the said sum of Rs. 37,560 which has been deposited by the assessee-bank with the transferee-company for future payment to the said 27 employees when the occasion for payment of gratuity arises, can be taken to be an expenditure laid out or expended wholly and exclusively for the purposes of the business of the assessee-company so as to attract the provisions of s. 37(1) of the Act. Though the question referred seems to suggest that the said sum of Rs. 37,560 has been allowed as a deduction under s. 36(1)(ii) or under s. 37(1) of the Act, having regard to the fact that the Tribunal has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king business and it was carrying on that business till the business was transferred to the Indian Bank. It is true that after the transfer of its business, it had certain assets such as house property, securities, fixed deposits in banks, and shares in certain companies and these assets have brought in income by way of rents from house properties, interest from fixed deposits and securities, and dividends from the shareholdings. As a matter of fact, in the assessment year in question, the assessee had received a sum of Rs. 599 as income from house property, Rs. 8,187 as interest income, and a sum of Rs. 1,500 as dividend income. The question is whether the receipt of income from certain assets retained by the assessee-company can lead to an inference that the assessee-company is carrying on its usual business which is a banking business. It is no doubt true that the ITO has assessed the interest income as business income in the assessment years. But so long as the nature of the income has been shown as the income from interest, the treatment of the said interest income as business income by the ITO will not change its nature. From the mere receipt of income in the year of accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sferred employees on the date of transfer of the retreading business and, therefore, there being no present obligation to pay any gratuity at the time of transfer, the mere transfer of the fund from the assessee-company to the new company cannot be taken to be an expenditure incurred wholly and exclusively for the purposes of the assessee's business. As in that case, here also all the employees of the assessee-bank had been taken over by the transferee-company and, therefore, there is no present obligation to pay gratuity on the date of transfer. The assessee had transferred an amount of Rs. 37,560 to the transferee-company so as to enable the transferee-company to pay the gratuity amount to the 27 employees as and when occasion arises. This cannot be taken to be an actual payment to the employees concerned and as a discharge of the obligation of the assessee-company of its liability to pay gratuity to its employees. The deposit of the amount by the assessee-company with the transferee-company may, if at all, amount to a creation of a reserve for meeting a liability which the assesseee-company has undertaken as a result of an agreement entered into with the transferee-bank in futur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability, which could not have been there if the business was continued in the year of account and which arose as a result of the transaction under which the business of the assessee had been transferred cannot be said to be an expenditure incurred for the purpose of carrying on the business in the accounting year. Learned counsel for the assessee relies on a decision of the Division Bench of this court in T. C. No. 183 of 1975 CIT v. Sri Venkateswara Bank Ltd. (since reported in [1979] 120 ITR 207 (Mad)) and submits that the facts in that case were on all fours with the present case before us and, therefore, the principle of that decision will squarely apply. In that case, a sum of Rs. 26,032 was claimed as deduction under s. 36(1)(ii) or under s. 37(1) of the I.T. Act, 1961. In that case also, the assessee-company was taken over by the Indian Overseas Bank. At the time of the transfer, the assessee paid a sum of Rs. 26,032 as gratuity to its employees and this was claimed as deduction in the computation of income of the transferor-company. When the matter came to this court, this court took the view that the entire business of the transferor-company has not been transferred and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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