2004 (6) TMI 15 - HC - Income Tax

Single business various units of the assessee - business expenditure - Assessee in its business wisdom attempted to avoid incurring loss by reducing the workforce of one of the units running at a loss for earning profit from the other units, which the assessee deemed fit for the purpose of carrying on the business. Therefore, the said payment was an allowable deduction - on the basis of the finding arrived at by Tribunal itself about the unity of control and management, the Tribunal could not have denied deducibility of the amount even though it might have been made voluntarily or ex gratia when made for reducing out some of the workforce to get rid of the incurring of loss and for earning profit, and for which under the law retrenchment compensation was payable, and was so paid as a prudent businessman

Issues Involved:
1. Whether the Allahabad unit constituted a part of a single business carried out by the assessee.
2. Whether there was inter-connection, inter-lacing, and inter-dependence between the various units of the assessee.
3. Whether the Tribunal was justified in upholding the disallowance of Rs. 18,40,250 by the Commissioner of Income-tax.

Issue-wise Detailed Analysis:

1. Whether the Allahabad unit constituted a part of a single business carried out by the assessee:

The Tribunal held that the Allahabad unit did not constitute a part of a single business carried out by the assessee. The assessee failed to produce evidence of inter-connection and inter-lacing between the various units. The accounts were maintained separately, and the units were scattered across India, with the head office in Delhi and the registered office in Calcutta. The Tribunal concluded that the Allahabad unit was not part of a single business due to the lack of established inter-connection and inter-lacing.

2. Whether there was inter-connection, inter-lacing, and inter-dependence between the various units of the assessee:

The Tribunal noted that the assessee did not provide sufficient material to show inter-connection, inter-lacing, and inter-dependence between the Allahabad unit and other units. Despite the unity of control and management, the Tribunal required additional evidence of inter-connection and inter-lacing, which was not provided by the assessee. Therefore, the Tribunal found that the various units did not constitute a single integrated business.

3. Whether the Tribunal was justified in upholding the disallowance of Rs. 18,40,250 by the Commissioner of Income-tax:

The court examined whether the expenditure for closure compensation was incurred for the purpose of business. The Tribunal's finding of unity of control and management led to the conclusion that the business was a single entity. The court held that the expenses incurred for closing a unit to prevent loss and ensure profitability of the remaining business were deductible. The denial of closure approval under the Industrial Disputes Act was immaterial for income-tax assessment. The court concluded that the expenditure was bona fide and for the purpose of business, thus allowable under section 37.

Conclusion:

The Tribunal's approach in requiring additional evidence for inter-connection and inter-lacing, despite finding unity of control and management, was erroneous. The court held that once the business is established as a single entity, inter-connection and inter-lacing are presumed. The expenditure for closure compensation was deemed deductible as it was incurred for the purpose of business. The reference was allowed, and the third question was answered in favor of the assessee.

Order:

The reference succeeds, and the third question is answered in favor of the assessee and against the Department. There will be no order as to costs.

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