TMI Blog1974 (6) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. It may be mentioned that this subsidiary company was formed in the place of the retreading division of the assessee. This new company took over all the employees belonging to the tyresoles division of the assessee. At the time of the formation of the new company gratuity payable to the transferred employees was calculated on the basis of the rules of the company and the amount thus ascertained was a sum of Rs. 56,275. This amount was transferred to the subsidiary company from the pension and gratuity reserve of the assessee. The assessee claimed that the amount was paid in discharge of their liability for gratuity to the employees transferred to the subsidiary company and as such it was an allowable deduction under section 37 of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of gratuity. Therefore, the assessee had paid the amounts payable as gratuity in discharge of its obligations to the workmen to the transfree-company. Therefore, during the year, the assessee has in effect paid the workmen the amounts due to them. It may be that the workmen in turn had authorised the newly formed company to receive these amounts. Now let us look at it in a different way. Suppose the workmen had been retrenched this year or their services terminated, they would be entitled to the allowance. So what has happened during the year under consideration is that these amounts have been paid to the new company on behalf of the employees. It is not clear, why the Appellate Assistant Commissioner has said, that these amounts ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred for the purpose of carrying on the business and earning profit and that it was a mere transfer of funds as part of the bargain when the new company was formed. It is the liability which arises on transfer of the business and did not arise during any part of the accounting year. Therefore, the claim for deduction under section 37 is not tenable. As has been seen from the facts the assessee-company had a gratuity reserve account. It is from the reserve the said amount was made over to the new company to be kept as gratuity reserve by the new company. It is true that the amount was ascertained with reference to the gratuity payable to the transferred employees on the basis of the rules of the company. But it is still only a transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not admissible. In this connection we may also refer to a decision of the Supreme Court in Commissioner of Income-tax v. Gemini Cashew Sales Corporation . Though the facts are not very similar, the test propounded in that decision can be applied in order to find whether the claim in question was admissible as a deduction under section 37. That was a case in which on the dissolution of a firm by the death of one of the partners the sole surviving partner took over the business and continued on his own account without any interruption in the service of the employees or alteration in the terms of employment. In settling the account of the firm a sum of Rs. 1,41,506 was taken into account as retrenchment compensation payable to the employees u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or vocation ', i.e., business, profession or vocation carried on by the assessee, is a permissible allowance. But to be a permissible allowance the expenditure must be for the purpose of carrying on the business. Where accounts are maintained on the mercantile system, if liability to make the payment has arisen during the time the business is carried on, it may appropriately be regarded as expenditure. But where the liability is, during the whole of the period that the business is carried on, wholly contingent and does not raise any definite obligation during the time that the business is carried on, it cannot fall within the expression ' expenditure laid out or expended wholly and exclusively ' for the purpose of the business. " As alr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly if it is established in India for a charitable purpose and if it fulfils the conditions set out therein. There is no dispute that sub-section (5) to section 88 is complied with in this case. But this claim was rejected on the ground that the amount paid as contribution for charities did not form part of the income assessable for the year and it was paid out from reserve account. On a plain reading of the section we are of the view that the Tribunal is right in holding that no rebate is permissible in respect of the amount. The rebate or deduction is " from the amount of income-tax on his total income with which he is chargeable for any assessment year ". Therefore, unless the donations claimed for rebate had formed part of the assessable ..... X X X X Extracts X X X X X X X X Extracts X X X X
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