1979 (3) TMI 37 - HC - Income Tax

Summary

Issues Involved:
1. Whether the expenditure of Rs. 37,560 is allowable under Section 36(1)(ii) or Section 37(1) of the Income-tax Act, 1961.
2. Whether the assessee-company continued its business after transferring its banking business to the Indian Bank.
3. Whether the amount deposited for gratuity can be considered as an expenditure incurred for the purposes of the business.

Detailed Analysis:

Issue 1: Allowability of Expenditure under Section 36(1)(ii) or Section 37(1) of the Income-tax Act, 1961
The primary issue was whether the sum of Rs. 37,560, deposited by the assessee-company for the gratuity of 27 employees, is an allowable expenditure under Section 36(1)(ii) or Section 37(1) of the Income-tax Act, 1961. The Tribunal had upheld the assessee's claim for allowance under Section 37(1) of the Act. However, the court focused on the allowability under Section 37(1) only, as the Tribunal did not consider Section 36(1)(ii).

For an expenditure to be claimed under Section 37(1), it must be established that the expenditure was incurred in the year of assessment and exclusively for the purposes of the business. The court found that the liability to pay gratuity did not arise in the course of the business but was a result of the transfer of the business. The court cited the Supreme Court's decision in CIT v. Gemini Cashew Sales Corporation [1967] 65 ITR 643, which held that such liabilities arising after the closure of business cannot be considered as business expenditure.

Issue 2: Continuation of Business Post-Transfer
The assessee argued that it continued its business even after transferring its banking business to the Indian Bank, as it had investments in fixed deposits, securities, house properties, and shareholdings, which generated income. The court, however, determined that the mere receipt of income from these assets did not imply that the assessee was carrying on its banking business, which was the primary business for which the company was incorporated. The court emphasized that the nature of the income (interest, dividends, and rent) did not change merely because it was treated as business income by the ITO.

Issue 3: Expenditure for Business Purposes
The court examined whether the deposit of Rs. 37,560 for gratuity could be considered an expenditure incurred for the business purposes of the assessee-company. The court found that the liability to pay gratuity did not arise at the time of the transfer but was a future obligation. The transfer of the amount to the transferee-bank was seen as a creation of a reserve for a future liability rather than an expenditure incurred exclusively for the business. The court referenced the decision in Stanes Motors (South India) Ltd. v. CIT [1975] 100 ITR 341 (Mad), which held that such transfers do not constitute business expenditure under Section 37(1).

The court also distinguished this case from CIT v. Sri Venkateswara Bank Ltd. [1979] 120 ITR 207 (Mad), where the transferor-company had not transferred its entire business and had actually paid gratuity to its employees, thus qualifying for deduction under Section 37(1).

Conclusion:
The court concluded that the sum of Rs. 37,560 deposited by the assessee-company for the gratuity of 27 employees is not allowable as a deduction under Section 37(1) of the Income-tax Act, 1961. The court answered the question in the negative and in favor of the revenue, stating that the expenditure did not meet the criteria of being incurred exclusively for the purposes of the business. The revenue was awarded costs from the assessee, with counsel's fee set at Rs. 300.