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Issues Involved:
1. Whether the payment of gratuity in the sum of Rs. 4,08,622 made by the assessee-company to the transferee-company was an allowable deduction. Detailed Analysis: 1. Nature of the Payment and Liability: The court examined whether the payment of Rs. 4,08,622 by the assessee-company to the transferee-company constituted an allowable deduction. The assessee-company terminated its employees on 30th April 1959, and these employees were offered employment by the transferee-company with continuity of service. The court noted that the employees would have been entitled to gratuity if they had not accepted employment with the transferee-company. However, since they did accept, no actual right to claim gratuity accrued against the assessee-company. The court stated, "The liability to pay gratuity to the employees would have arisen only if there was a right which had accrued to the employees to claim any gratuity from the assessee-company." 2. Characterization of the Payment: The court emphasized that the payment made to the transferee-company was not a payment of gratuity to the employees but rather a contribution to the transferee-company to meet future liabilities. It noted, "The payment in the instant case is made not to the employees but is paid to the transferee company in order to enable the transferee-company to meet a future liability for payment of gratuity." 3. Contingent vs. Present Liability: The court discussed the nature of the liability, referencing the Supreme Court's decision in Standard Mills Co. Ltd. v. CWT, which held that the liability to pay gratuity is contingent and not present. The court stated, "The liability of the assessee to pay gratuity to its employees was a mere contingent liability which arose only when the employment of the employee was determined by death, incapacity, retirement or resignation." 4. Relevance of Transfer of Business: The court considered whether the liability arose from the transfer of the business. It referenced the Supreme Court decision in CIT v. Gemini Cashew Sales Corporation, which held that a liability arising from the transfer of a business is not a revenue expenditure. The court observed, "A liability which arises because of the transfer of the business is not a properly debitable item in the profit and loss account as a revenue expenditure." 5. Comparison with Other Judgments: The court reviewed various judgments, including those from the Madras High Court and the Kerala High Court. It agreed with the Madras High Court's view in Stanes Motors (South India) Ltd. v. CIT, which held that a payment made due to the transfer of business does not constitute an allowable deduction. The court stated, "We are inclined to agree with the view taken by the Madras High Court." 6. Conclusion: The court concluded that no liability to pay gratuity had actually arisen against the assessee-company since the employees accepted employment with the transferee-company with continuity of service. Therefore, the payment made to the transferee-company could not be considered a payment of gratuity and was not an allowable deduction. The court stated, "No liability having actually arisen against the assessee-company to pay any gratuity to the employees... the amount paid to M/s. Rallis India could not be considered as a payment of gratuity to the employees and could not, therefore, be held to be an allowable deduction." Judgment: The question referred was answered in the negative and against the assessee. The assessee was ordered to pay the costs of the reference.
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