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Issues Involved: The judgment involves the admissibility of claimed deductions in the computation of business income under section 37(1) or section 28(i) of the Income-tax Act, 1961 for two sums in each of the referred cases.
Issue 1 - Claimed Deductions for Compensation to Workers: The partners of two separate partnership firms decided to dissolve the firms and close down the factory, leading to an agreement with workers for compensation under section 25-FFF of the Industrial Disputes Act, 1947. The dispute arose regarding the deductibility of these compensation amounts in the assessment year 1967-68. The Income-tax authorities rejected the claim, leading to the reference to the High Court. The High Court analyzed the relevant provisions of the Industrial Disputes Act and the Income-tax Act, emphasizing that the liability to pay compensation arises only on the closure of the business. The court rejected the argument that the liability was ascertained during the relevant account year, stating that the crucial point is the accrual or arising of the liability. Since the business was closed on July 15, 1967, the liability to pay compensation arose at that time, not earlier. Therefore, the compensation amount cannot be considered an expenditure incurred for carrying on the business. The court drew support from a Supreme Court decision which highlighted that liabilities arising after the business closure cannot be treated as revenue outgoings for the purpose of determining profits. The court concluded that the claimed deductions for compensation to workers were not allowable under section 37 of the Income-tax Act, as they did not qualify as expenditure laid out wholly and exclusively for the purpose of carrying on the business. Issue 2 - Legal Interpretation and Precedent: The High Court further discussed the legal interpretation of the relevant provisions of the Income-tax Act and the Supreme Court decision in Commissioner of Income-tax v. Gemini Cashew Sales Corporation [1967] 65 ITR 643 (SC). The court highlighted that the liability to pay compensation arises only on the closure of the business, not before, and such liabilities do not fall within the permissible allowances for business expenditure. The court noted that the Supreme Court's decision regarding liabilities arising from the transfer of ownership or management of an undertaking was analogous to the present case involving closure of the business. The court emphasized that the claimed deductions for compensation were not properly debitable items in the profit and loss account as revenue outgoings. Therefore, the court upheld the Tribunal's conclusion and answered the referred questions in the affirmative against the assessees. In conclusion, the High Court affirmed that the compensation amounts paid to workers upon the closure of the business were not admissible as deductions in the computation of business income under the Income-tax Act, 1961.
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