2015 (3) TMI 446 - AT - Income Tax

Disallowance of gratuity and compensation, payment made to common support staff and expenses in respect of processing unit which was permanently closed down - whether the processing business was a separate business not related with the other business of the assessee? - CIT(A) deleted disallowance - Held that - Assessee has not closed down his business as a whole but had stopped the processing division, which is only one of the division of the Textile business carried on by the assessee. The closure of the processing division was done on commercial expediency. A perusal of the various documents placed on record also makes it clear that there was interconnection, interlacing and unity of control and management, common decision making mechanism and use of common funds in respect of entire textile business of the assessee. The assessee has taken a decision on commercial expediency to downsize its operation and effected the closure of processing unit which has not resulted into closure of the textile business of the assessee as a whole. The detailed findings recorded by the CIT(A) have not been controverted by the department by brining any positive material on record. The case of Gemini Cashew Sales Corporation 1967 (4) TMI 4 - SUPREME Court as applied by the AO is distinguishable on facts, insofar as business of the erstwhile partnership was dissolved by death of one of the two partners. The partnership firm was dissolved, it was held by the Hon'ble Court that retrenchment compensation was not allowable in the year of dissolution of partnership firm, whereas the facts in the instant case clearly distinguishable wherein textile business of assessee was continued. The findings recorded by CIT(A) are as per material on record, which have not been controverted by Ld DR by bringing any positive material on record. Accordingly, we do not find any reason to interfere in the findings recorded by the CIT(A), which resulted into deletion of addition made by the AO. - Decided against revenue.

Summary

Issues Involved:
1. Disallowance of gratuity and compensation payments.
2. Disallowance of expenses related to a permanently closed processing unit.
3. Application of judicial precedents and interpretation of business closure.

Detailed Analysis:

Issue 1: Disallowance of Gratuity and Compensation Payments
The Revenue appealed against the CIT(A)'s order, which deleted the disallowance of Rs. 2,61,36,753/- for gratuity and compensation payments made to employees of a closed processing unit. The AO had disallowed this amount based on the Supreme Court's decision in Gemini Cashew Sales Corporation, arguing that the termination payments were not allowable as deductions since the processing activity was permanently closed. The CIT(A), however, observed that the appellant's textile business was a composite one, with interdependent divisions. The closure of the processing unit did not equate to the closure of the entire business. The CIT(A) relied on the Bombay High Court's decision in Pfizer Ltd., which held that retrenchment compensation is allowable if the business as a whole continues. The CIT(A) concluded that the gratuity and compensation payments were allowable since the overall business was not closed, only a division was downsized.

Issue 2: Disallowance of Expenses Related to a Permanently Closed Processing Unit
The AO also disallowed Rs. 10,00,000/- out of general charges and miscellaneous expenses, estimating that these were related to the closed processing unit. Additionally, 25% of the gratuity and compensation payments to common support staff, amounting to Rs. 20,06,098/-, were disallowed on the same basis. The CIT(A) deleted these disallowances, noting that the business as a whole continued to operate, and the closure of the processing unit was a part of a commercial restructuring. The CIT(A) emphasized that the expenses related to the processing unit were still part of the overall textile business, which had not ceased operations.

Issue 3: Application of Judicial Precedents and Interpretation of Business Closure
The CIT(A) and the Tribunal both referred to several judicial precedents to support their decisions. The Bombay High Court in Pfizer Ltd. and the Delhi High Court in D.C.M. Ltd. held that retrenchment compensation is allowable if the business continues, even if a unit is closed. The Supreme Court in Veecumsees and the Madras High Court in R.M. Maruthai Naidu & Sons also supported the view that closure of a part of the business does not affect the deductibility of related expenses if the overall business continues. The Tribunal agreed with the CIT(A) that the AO's reliance on Gemini Cashew Sales Corporation was misplaced, as that case involved the dissolution of a partnership, not the closure of a business division.

Conclusion:
The Tribunal upheld the CIT(A)'s order, confirming that the gratuity and compensation payments, as well as the general charges and miscellaneous expenses, were allowable deductions. The Tribunal emphasized the interdependence and unity of control within the appellant's textile business, which continued to operate despite the closure of the processing unit. The appeal by the Revenue was dismissed, affirming that the expenses related to the closed unit were part of the overall business expenses and thus deductible.