1998 (2) TMI 4 - SC - Income Tax

Assessee, a subsidiary company was closed and was transferred to holding company - Whether the payment of gratuity which the assessee-company made to Rallis India Ltd., was an allowable deduction u/s 10(2)(xv) - Held, yes - set aside the judgment of the High Court and answer the question in affirmative, in favour of the assessee and against the Revenue

Summary

Issues Involved:
1. Whether the payment of gratuity by the assessee to Rallis India Ltd. was an allowable deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922.
2. Whether there was a termination of the services of the employees of the assessee.
3. Whether the payment of gratuity to Rallis India Ltd. was a business expense deductible under the Income-tax Act.

Issue-wise Detailed Analysis:

1. Allowable Deduction of Gratuity Payment:
The core issue was whether the payment of Rs. 4,08,622 by the assessee to Rallis India Ltd. could be considered an allowable deduction. The High Court had ruled against the assessee, stating that since the employees were given continuity of employment, there was no retirement from the assessee, and thus, no gratuity payment liability existed. The Supreme Court, however, distinguished between retrenchment compensation and gratuity, noting that gratuity accrues year after year and is payable at termination unless due to misconduct. The Court concluded that the payment to Rallis India Ltd. was an expenditure laid out for the business of the assessee and thus allowable as a deduction under section 10(2)(xv) of the 1922 Act.

2. Termination of Services:
The High Court had erroneously focused on whether there was a termination of the employees' services, which was not the question referred to it. The Supreme Court clarified that the services of the employees were indeed terminated by the assessee, which created a liability for gratuity payment. This termination was necessary for the continuity of service with Rallis India Ltd. The Supreme Court held that the payment of gratuity by the assessee was a discharge of its liability and not merely a contingent liability.

3. Business Expense Deductibility:
The Revenue argued that the payment was not for carrying on the business but for closing it, and thus, not deductible. The Supreme Court disagreed, noting that the payment was made to keep the employees contented and satisfied, which is a valid business consideration. The Court emphasized that the payment was made as per the assessee's gratuity scheme and was not an ex gratia payment. The Tribunal's finding that the assessee was a going concern and only one department was closed further supported the argument that the payment was a business expense.

Conclusion:
The Supreme Court allowed the appeal, set aside the High Court's judgment, and held that the payment of Rs. 4,08,622 made to Rallis India Ltd. was an allowable deduction. The Court affirmed that the payment was an expenditure wholly laid out for the purpose of the business of the assessee and thus deductible under section 10(2)(xv) of the 1922 Act.