1991 (5) TMI 10 - HC - Income Tax

Accounting Business Expenditure Capital Asset Capital Gains Gratuity Retrenchment Compensation

Summary

Issues Involved:

1. Exigibility to capital gains tax on the transfer of the Ernakulam Electrical Undertaking.
2. Inclusion of solatium in the sale consideration for capital gains computation.
3. Deductibility of gratuity paid by the assessee.
4. Deductibility of retrenchment compensation as business expenditure or from capital gains.

Summary:

Issue 1: Exigibility to Capital Gains Tax
The Tribunal held that the transfer of the Ernakulam Electrical Undertaking constitutes a transfer of a 'capital asset' u/s 2(14) of the Income-tax Act, 1961, and is thus exigible to capital gains tax. The Tribunal relied on the Gujarat High Court decisions in Sarabhai M. Chemicals Pvt. Ltd. and Artex Manufacturing Co., concluding that the transfer of an undertaking as a whole, even as a going concern, is subject to capital gains tax.

Issue 2: Inclusion of Solatium in Sale Consideration
The Tribunal determined that solatium is part of the sale consideration and should be included in the computation of capital gains. This conclusion follows the Gujarat High Court decision in Vadilal Soda Ice Factory and was affirmed by the Kerala High Court in CIT v. Smt. M. Subaida Beevi, which held that solatium forms part of the consideration for the transferred capital asset.

Issue 3: Deductibility of Gratuity Paid
The Tribunal rejected the assessee's claim for deduction of gratuity paid during the assessment year 1971-72. It held that the liability for gratuity accrued in the assessment year 1970-71, and thus, the claim should have been made in that year. The Tribunal relied on the decisions of the Kerala High Court in L. J. Patel and Co. and K. A. Karim and Sons, which establish that liabilities must be claimed in the year they accrue.

Issue 4: Deductibility of Retrenchment Compensation
The Tribunal allowed the deduction of retrenchment compensation as business expenditure u/s 37 of the Income-tax Act. It distinguished the Supreme Court's decision in Gemini Cashew Sales Corporation, emphasizing that the liability for retrenchment compensation arose before the undertaking was taken over by the Kerala State Electricity Board. The Tribunal also held that the retrenchment compensation is deductible from the capital gains as a charge on the amount of compensation, following the Punjab and Haryana High Court decision in Ambala Cantt. Electric Supply Corporation Ltd. v. CIT.

Conclusion:
All four questions referred in I.T.R. No. 72 of 1987 were answered against the assessee and in favor of the Revenue. The two questions in I.T.R. No. 117 of 1987 were answered in favor of the assessee and against the Revenue.