2014 (5) TMI 893 - HC - Income Tax

Allowability of deduction of payment on retrenchment of workmen revenue or capital expenditure - Held that - There is as such dependable evidence to show that the business of the assessee was continuing Following C.I.T. Vs. Assam Oil Co. Ltd. 1985 (2) TMI 29 - CALCUTTA High Court - the assessee s business in which the disputed payments were made did not come to a closure and that the assessee made such payments in order to effect economy and rationalisation of its personnel - No asset of enduring nature came into existence by reason of the payments though benefits accrued to the assessee thereunder which would continue not only for one year but in future years - But this benefit cannot be related to any asset as such - the interest paid by the assesee for the purpose of borrowing money for payment to the workers, would also amount to a business expenditure Decided against Revenue.

Summary

Issues:
1. Deduction of payment of Rs.1,08,41,068 on retrenchment of workmen.

Analysis:
The primary issue in this case revolved around the deduction of a payment of Rs.1,08,41,068 made on retrenchment of workmen. The Assessing Officer initially refused to treat this expenditure as revenue expenditure, arguing that the compensation was paid in connection with the complete closure of the factory and manufacturing unit. However, the C.I.T. appeal reversed this decision, emphasizing the lack of evidence to establish a cessation of business and allowing the deduction in full. The Tribunal also upheld this decision, highlighting that the expenses were incurred during the continuance of the business, unlike cases where businesses had come to a complete closure. The appellant challenged this order, leading to the present appeal.

The appellant's counsel did not dispute that the payments were made before the business was closed down. The Tribunal's order for subsequent assessment years indicated that the manufacturing business continued. The key question was whether these compensation payments could be considered as revenue expenditure given the ongoing nature of the business. The amicus curiae referred to relevant case law, including a Division Bench judgment of the Calcutta High Court and the Karnataka High Court, to support the argument that such payments could be allowed as deductions if made for the purpose of business and not related to any enduring asset. The Division Bench judgments emphasized that such expenditures should be allowed as deductions in computing business income.

In conclusion, the Court acknowledged the arguments presented and answered the question in favor of the assessee, allowing the deduction of the retrenchment benefits and also considering the interest paid for borrowing money for the payments as a business expenditure. The Court appreciated the services of the amicus curiae and noted that other questions raised in the appeal were not pursued by the appellant's counsel.