1965 (7) TMI 8 - HC - Income Tax

Whether the compensation gratuity and other payments made to retrenched employees are allowable expenditure u/s 5(j)of Kerala Agricultural Income Tax Act 1950 in computing the taxable income and the Tribunal was justified in rejecting the claim - held yes

Summary

Issues:
1. Allowability of compensation, gratuity, and other payments to retrenched employees as expenditure under section 5(j) in computing taxable income.
2. Rejection of claims of the assessee in respect of written off dues of the tenant and beekeeping expenses under relevant sections of the Act.

Analysis:
The judgment delivered by the High Court of Kerala pertains to an income-tax referred case involving the assessment of agricultural income-tax for the year 1957-58. The case was referred by the Agricultural Income-tax Appellate Tribunal, Trivandrum, encompassing three assessment years. The court specifically addressed two questions related to the deductibility of certain expenditures. The first issue focused on whether the compensation, gratuity, and other payments made to retrenched employees are allowable under section 5(j) in computing taxable income. The court observed that the retrenchment compensation was paid due to the acquisition or sale of land from which agricultural income was derived. While a portion of the claimed amount was allowed, the balance was disallowed as it did not qualify as an allowable deduction. The court emphasized that in cases of transfer leading to the termination of employees' services, which may be deemed as retrenchment under the Industrial Disputes Act, the amount paid may not be deductible if full consideration was received without transferring the liability. Consequently, the court ruled that the balance of the compensation claimed was not an allowable deduction.

Moving on to the second issue, the court examined the claim of Rs. 6,055 written off as bad debts by the assessee. The court noted that the assessee maintained accounts on the mercantile system of accounting and the amount in question represented a bad debt written off during the relevant period. Referring to precedents set by the Privy Council and the Supreme Court, the court determined that the deduction claimed for the bad debt should be allowed. Citing previous decisions of the court, the judgment established that the principles governing the allowance of deductions align with the aforementioned cases. Consequently, the court ruled in favor of the assessee regarding the deduction for the written-off bad debts, answering the second question in the negative, thereby favoring the assessee and ruling against the department.

In conclusion, the High Court of Kerala decided the income-tax referred case by disallowing the deduction for retrenchment compensation while allowing the deduction for the written-off bad debts. The judgment was rendered with no order as to costs, concluding the matter based on the aforementioned terms.