1969 (6) TMI 4 - HC - Income Tax

Loss on account of the payment of retrenchment compensation to the employees of A Ltd. with a view to effect the sale of that company - held that it is admissible as deduction in computing the assessee s income from business

Issues Involved:
1. Deductibility of sundry advances of Rs. 17,400.
2. Deductibility of loans of Rs. 35,000.
3. Deductibility of payments made for settlement of claims of employees of Amco Ltd. amounting to Rs. 35,000.

Detailed Analysis:

1. Deductibility of Sundry Advances of Rs. 17,400
The first issue pertains to whether the sum of Rs. 17,400 advanced by the assessee to Amco Ltd. for ensuring continuity of production can be claimed as a deductible expense. The Income-tax Officer and the Appellate Assistant Commissioner rejected this claim, arguing that clause 13 of the agreement made such advances optional and not obligatory, classifying them as capital losses rather than business losses. They also argued that these advances were made to facilitate the winding up of Amco Ltd. and were imprudent given the company's financial condition.

The Tribunal, however, negated these contentions, stating that the advances were made in the normal course of business. The Tribunal held that the absence of a binding obligation under clause 13 did not affect the claim, as the loss was incidental to the business. The Tribunal's view was supported by the established custom in Bombay for managing agents to finance companies they manage, as recognized in Commissioner of Income-tax v. Tata Sons Ltd.

In the arguments before the court, it was emphasized that the managing agents had a business justification for making these advances to ensure the continuity of Amco Ltd.'s production, even though they were not legally obliged to do so. The court concluded that the advances were a normal business decision and were made wholly and exclusively in the interest of the assessee's business.

2. Deductibility of Loans of Rs. 35,000
The second issue concerns the deductibility of loans amounting to Rs. 35,000. The counsel for the Commissioner did not advance any arguments against this item, acknowledging that these were pure loans advanced by the managing agents to the company in the course of their business. Consequently, the court found no dispute in allowing this amount as a deductible expense.

3. Deductibility of Payments Made for Settlement of Claims of Employees of Amco Ltd. Amounting to Rs. 35,000
The third issue involves the deductibility of Rs. 35,000 paid by the assessee for the settlement of claims of Amco Ltd.'s employees. The payment was made under a guarantee given to the State Bank of India, Bangalore, to satisfy the Mysore Government's condition for transferring Amco Ltd.'s immovable property to another party. This guarantee was necessary to avoid a larger financial loss for the assessee, who had already guaranteed a Rs. 3 1/2 lakhs overdraft to the Central Bank of India.

The court found that the payment was a prudent business decision made to avoid a greater loss and was necessary to fulfil the terms of a settlement with the workers. The court rejected the department's contention that the payment was made to facilitate the winding up of Amco Ltd. or to release the property from the Mysore Government. Instead, it held that the payment was made in the normal course of business and was wholly and exclusively for the purpose of the assessee's business.

The court also noted that the settlement agreement with the workers was binding under the Industrial Disputes Act, making the payment a legal obligation for the assessee. Thus, the payment was considered a business expenditure.

Conclusion
The court answered both questions in the affirmative, allowing the deductions for the sundry advances of Rs. 17,400 and the payment of Rs. 35,000 for the settlement of employee claims. The Commissioner was directed to pay the costs of the assessee.

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