TMI Blog2005 (12) TMI 210X X X X Extracts X X X X X X X X Extracts X X X X ..... close down the Kurla Unit. Since all the employees of Kurla Division did not opt for VRS, assessee devised the scheme of transferring the Kurla Factory as going concern to Suvidha Chemicals. Accordingly, an agreement was entered with them and the factory along with employees and all assets were transferred to Suvidha Chemicals vide agreement dated 15-12-1994. As per this agreement, assessee company agreed to transfer the Kurla unit to Suvidha Chemicals as a going concern along with its all assets and liabilities as well as the employees. As a result of transfer of employees, assessee company agreed to transfer all contributions to approved PF other funds to Suvidha Chemicals. Suvidha Chemicals agreed to take over the employees along with undertaking to pay retrenchment compensation. A consideration of Rs. 6,87,50,000 was agreed between the assessee company and Suvidha Chemicals for the said transfer. Subsequently, assessee made another agreement dated 26-9-1995 with Suvidha Chemicals. As per this agreement, at the time of original agreement, there were 250 employees in the Kurla Manufacturing Unit. But 39 employees were transferred or reduced. Therefore, assessee company agreed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment was under this scheme was Rs. 1,39,13,591, which was duly paid in the year itself. However, no provision was made in the books of account in respect of the claim of Rs. 12,36,85,638 under the second VRS and for Rs. 3,75,92,511 in respect of ex gratia payment. 7. The Assessing Officer was of the view that the payments under VRS as well as on account of ex gratia was not allowable as deduction since it related to closure of factory unit at Kurla. The following observations were made by him for rejecting the claim of the assessee: "To be a permissible allowance, the expenditure must be for the purpose of carrying on the business and where the business is closed and as a result of the closure of the business, the liability to pay retrenchment compensation has arisen, the liability to pay the retrenchment compensation cannot be said to be a liability which arose at the time when the business was being run and, therefore, the amounts paid or agreed to be paid towards retrenchment compensation cannot be termed as expenditure wholly or exclusively for the purpose of the business for the liability to pay the retrenchment compensation arose after the closure of the business and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. P.I. Simon [1991] 187 ITR 302 (Ker.), Bansidhar (P.) Ltd. v. CIT [1981] 127 ITR 65 (Guj.), Sassoon J. David Co. (P.) Ltd v. CIT [1979] 118 ITR 261 (SC), CIT v. George Oakes Ltd. [1992] 197 ITR 288 (Mad.), CIT v. Machinery Mfrs. Corpn. Ltd. [1992] 198 ITR 559 (Cal), Pradeep Pictures v. CIT [1983] 143 ITR 300 (MP) and CIT v. Assam Oil Co. Ltd. [1985] 154 ITR 647 (Cal). It was also contended that the various judgments relied upon by the Assessing Officer were not applicable to the appellant since these judgments related to those assesseeS who had closed down their business altogether either by winding up their company or dissolving their partnership firms, and not merely closing down one of the units. It was further submitted that by laying off certain employees the appellant was not deriving any benefit of enduring nature and moreover the Assessing Officer had himself stated that the laying off excess human capital, the appellant had restructured its business which was in contradiction to his conclusion of saying that there was closure of business. It was stated that in fact there was restructuring of the business by the appellant in order to bring about rationalization, economy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Kedarnath Jute Mfg. Co. Ltd v. CIT [1971] 82 ITR 363, wherein, it was held that the factum of making or not making an entry in the books of account was not decisive as far as the issue of accrual of liability was concerned. In another Supreme Court decision in the case of K.J. Francis v. CIT [1999] 236 ITR 308, it was held that in case of promulgation of ordinance, liability arose in the year in which ordinance was passed irrespective of the date of payment or method of accounting followed by the assessee. 12. With regard to the ex gratia payment, it was submitted that the same was also to be made in pursuance of the consent terms, to the employees as a matter of commercial expediency and for the employees carrying out certain obligations and for having cooperated with the appellant by not divulging any information acquired during the course of employment. It was contended that the employees and their union had indeed carried out their obligations in the financial year 1995-96 relevant to the assessment year 1996-97 and the co-operation that was referred to was also an event of 1995-96 and hence, ex gratia was allowable as an expenditure in the year under appeal. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... related to the closure of Kurla unit and, therefore, not allowable as deduction in view of the Hon'ble Supreme Court judgment in the case of CIT v. Gemini Cashew Sales Corpn. [1967] 65 ITR 643. According to him, the nomenclature given by assessee as VRS was not relevant. What was relevant was the intent and purpose of the scheme. Accordingly, he also referred to the schemes appearing in the paper book. Proceeding further, it was also submitted that both the units were different and independent units manufacturing different drugs and, therefore, any payment made to employees on the closure of one unit cannot be allowed as deduction under section 37 of the Act in view of the Hon'ble Madras High Court judgment in the case of India Mfrs. (Madras) (P.) Ltd. v. CIT [1985] 155 ITR 774. Hon'ble Calcutta High Court judgment in the case of Binani Printers (P.) Ltd. v. CIT [1983] 143 ITR 338. He referred to both the decisions and submitted that their Lordships confirmed the disallowance after considering the Hon'ble Supreme Court judgment in the case of Gemini Cashew Sales Corpn. It was also pointed out that in both the above cases, assessee was carrying on more than one activity and payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been given that there was complete inter-lacing, inter-connection, inter-dependence, unity of control, etc., in respect of both the units. Hence, it was argued that the claim was allowable under section 37 of the Act. 17. Rival submissions have been considered carefully in the light of case law referred to and the material produced before us. The first question to be considered is whether payment made under VRS by assessee can be said to be expenditure incurred wholly and exclusively for the purpose of business carried on by it. Heavy reliance has been placed by the Revenue on the judgment of the Apex Court in the case of Gemini Cashew Sales Corpn., while assessee has placed reliance on the later judgment of Hon'ble Supreme Court in the case of K. Ravindranathan Nair. A close and conjoint reading of both the decisions reveals that there is no conflict between these two decisions. 18. In the case of Gemini Cashew Sales Corpn. assessee was a partnership firm consisting of two parties which was dissolved on the death of one of the partners on 24-8-1957. Subsequently, the business of partnership firm was taken over by the remaining partners. The assessee claimed deduction of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned on the mercantile system, if liability to make the payment has arisen during the time of 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 arise 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." 19. In the case of K. Ravindranathan Nair, the assessee had closed 4 units out of 10 units run by it due to labour problems. On 21-11-1970, the assessee entered into a settlement with the trade unions and agreed to pay them for the period of services up to the date of lock out. Accordingly, payment of Rs. 4,18,107 made which was claimed as deduction under section 37 of the Act. The said claim was disallowed by Assessing Officer but the Tribunal allowed the claim of assessee after recording a finding that all the ten units constituted the same business. High Court did not agree with the view of the Tribunal which resulted in further appeal to the Supreme Court. The Apex Court reversed the judg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ligation to pay any amount arises on the closure of entire business, then deduction is not permissible, (ii) if the obligation arises in the course of business carried on by him, the deduction would be allowable if the units closed by assessee and the remaining activities constitute the same business. Therefore, if it is found on facts that closed units was separate business, then obligation arising on the closure of such units would not be allowable as deduction. 21. The decision of Madras High Court in the case of India Mfrs. (Madras) (P.) Ltd. relied on by the Learned Departmental Representative is also in consonance with the above legal position. In that case, the High Court observed that assessee failed to establish that the activity of servicing of typewriters (closed by assessee) was integral part of the business of trading in typewriters. In view of such factual finding, it was held as under: "Where there are two separate and independent businesses carried on by the same assessee, if the assessee chose to close one business and carried on the other business, the retrenchment compensation paid as a result of the closure of one business cannot be claimed as an allowable d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tual obligation which arose on the date of agreement between assessee and union by virtue of the order of the High Court. This agreement was accepted by the workers and there was no option with either party to back out from the agreement. The liability to pay was thus absolute and accrued on 23-1-1996 when agreement and approved by the High Court was signed. Hence, the claim was allowable in the year under consideration despite the fact that no entries were made in the books of account in view of Supreme Court judgment in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363. 27. As per legal position mentioned above, we are in agreement with the Learned Counsel for the assessee that such claim is allowable as deduction under section 37 if it is shown that closed unit at Kurla and other unit at Ankleshwar constituted the same business. Whether two units constituted the same business would depend on the facts of each case. Such finding of fact can be arrived at only after considering the relevant materials or evidences on record. In the present case, the Assessing Officer had no occasion to consider this aspect of the issue since be rejected the claim of assessee on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the Hon'ble Supreme Court in the case of CIT v. Indo Nippon Chemicals Co. Ltd. [2003] 261 ITR 275 wherein, it has been held that unutilized MODVAT credit cannot be considered as income liable to income-tax. Respectfully following the same, this issue is decided in favour of the assessee. The orders of the Learned CIT (Appeals) are, therefore, upheld. 31. The next common issue relates to the disallowance of Rs. 1,45,000 on account of entertainment expenses under section 37(2A) of the Income-tax Act, 1961 (Act). The assessee had declared conferences expenses of Rs. 15,54,855 for Assessment Year 1996-97 and claimed the same as revenue expenditure. Similarly, the expenses for assessment year 1997-98 were of Rs. 12,92,000. The scrutiny of expenses revealed that the expenditure had been incurred on payment to various hotels where various conferences had been held by the assessee in connection with the promotion of sales. Such payments include not only for holding conferences but also for incurring expenses on food, beverages, etc. However, details of such expenses had not been filed by the assessee. The Assessing Officer observed that such business conferences are also attended by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 but the payment was made on 13-8-1996. Since these amounts were not paid by due dates, the disallowance of Rs. 2,18,847 was made for the assessment year 1997-98. The matter was carried in appeal before the Learned CIT (Appeals), before whom, it was submitted that contributions for the months of May and June, 1996, were deposited in Provident Fund Account within time instead of Family Pension Fund Account since stay was granted by the High Court to various unions for joining the new Employees Pension Scheme, 1995. It was further submitted that subsequently, the High Court lifted the stay in July, 1996 and the excess contributions were transferred to Family Pension Fund Account. Thus, there was no violation of any provisions. The Learned CIT (Appeals) accepted such contention of the assessee and deleted the disallowance made by the Assessing Officer. Aggrieved by the same, the Revenue is in appeal before the Tribunal. 35. After hearing both the parties, we do not find any reason to interfere with the order of the Learned CIT (Appeals) since the assessee had deposited the amount in the Provident Fund Account within the stipulated period. Since the High Court had granted the stay, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epted the submissions of the assessee for two reasons namely - (r) that the exchange difference was exclusively on account of import of raw materials and, therefore, the loss increased was not on capital account and (ii) such claim was being made in accordance with the regular accounting practice followed by the assessee year after year, which had been accepted by the Department. Accordingly, he deleted the addition. Aggrieved by the same, the Revenue is in appeal before the Tribunal. 39. After hearing both the parties, we find that this issue is now covered in favour of the assessee by the decision of the Special Bench in the case of Oils Natural Gas Commission v. Dy. CIT [2003] 261 ITR (AT) 1 (Delhi), wherein, it has been held that loss arising on account of fluctuation of foreign exchange rate was allowable as deduction when liability to pay was on revenue account. In the present case, the fluctuating loss was incurred in respect of liability towards payment of raw material and thus, the loss was on revenue account. Following the decision of the Special Bench, we do not find merit in the ground raised by the Revenue. The order of the Learned CIT (Appeals) is, therefore, uphe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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