1983 (8) TMI 73 - AT - Income Tax

Summary

Issues:
1. Disallowance of retrenchment compensation
2. Disallowance of inauguration expenses

Analysis:

Issue 1: Disallowance of Retrenchment Compensation
The appeal was filed against the disallowance of retrenchment compensation and inauguration expenses. The Income Tax Officer (ITO) disallowed the retrenchment compensation on the grounds that the assessee had undertaken future liabilities from the sale deed and that the expenditure was not necessarily allowable. The Commissioner (A) rejected the submissions of the assessee, citing relevant court decisions and holding that the liability would have been that of the ex-employer. The assessee argued that the compensation was incurred during the course of business and relied on a Supreme Court decision to support their claim. The Tribunal analyzed the liability for retrenchment compensation and held that no part of the expenditure was made on account of the vendor. The Tribunal emphasized that all expenditure incurred by the assessee is allowable unless prohibited by statute. Referring to the Supreme Court judgment, the Tribunal concluded that the entire expenditure of retrenchment compensation was allowable under section 37 of the Income Tax Act.

Issue 2: Disallowance of Inauguration Expenses
Regarding the disallowance of inauguration expenses, the Commissioner (A) confirmed the disallowance, stating that the expenses were capital in nature. The assessee argued that the expenses were allowable as the business had already started, and some element of advertisement was involved. The Tribunal observed that the expenses were incurred after taking over the mills and were related to the distribution of pendaboxes and ice-cream. The Tribunal held that the assessee was entitled to the deduction of the entire inauguration expenses. Emphasizing the changing trends in commercial philosophy and the importance of publicity in business operations, the Tribunal concluded that the expenses were motivated by publicity and employee morale, thus justifying their allowability. The Tribunal highlighted the need to adapt revenue customs to evolving commercial practices and allowed the appeal in favor of the assessee.

In conclusion, the Tribunal allowed the appeal, holding that the entire retrenchment compensation and inauguration expenses were allowable deductions under the Income Tax Act.