2016 (9) TMI 513 - HC - Income Tax

Retrenchment compensation paid by subsidiary to the workers of the two units which belonged to the assessee and which were transferred to the subsidiary and which amount was reimbursed by the assessee under a contractual agreement - allowable as an admissible deduction - Held that - The Court held that by virtue of the fact that the employees had been taken over by the transferee company with the benefit of employment on and from the date of transfer, strictly speaking with no right to claim gratuity, it was difficult to see how the payment, which was made by the assessee to the transferee company could be really treated as gratuity. The Court held that it would be more appropriate to describe the payment as a contribution made voluntarily to the transferee company in order to provide funds to it for payment of gratuity, which could be claimed by the employees from the transferee company, though in respect of the period of employment with the assessee company. The judgment of our Court in Suren & Co. (1981 (4) TMI 31 - BOMBAY High Court ), which held the field as on the date of the Tribunal s order, was later on set aside by the Supreme Court in the case of W.T. Suren And Co. Ltd. vs. C.I.T. 1998 (2) TMI 4 - SUPREME Court holding that the amount of gratuity paid to the transferee company was not on account of transfer of the unit but on account of stopping of that business and the employees working in that unit becoming surplus resulting in termination of their services. The payment of gratuity was made by the assessee, not on its own but at the instance and on behalf of the employees, whose services, though terminated in the assessee company, were taken over by the transferee company and that this was a payment of gratuity amount with the consent of the employees. In that view of the matter, the Supreme Court held that the payment of gratuity awarded by the assessee to the transferee company was, in the circumstances of the case, an expenditure wholly laid out or expended for the purpose of the business of the assessee and was an allowable deduction. This judgment of the Supreme Court clearly supports the Assessee s case here, though in the present case, as we have noted above, we are not really concerned with the payment of gratuity, but with payment in accordance with a commercial obligation. In that view of the matter, we are clearly of the opinion that the payment of ₹ 13.91 lakhs made by the Assessee to its subsidiary is an amount expended for the purpose of the business of the Assessee, and is, thus, an admissible deduction.

Summary

Issues Involved:

1. Whether the sum of ?13,91,837/- paid as retrenchment compensation by the subsidiary and reimbursed by the assessee is allowable as an admissible deduction under Section 37 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Allowability of Retrenchment Compensation as Deduction:

The central question is whether the expenditure of ?13,91,837/- claimed by the Assessee is an amount laid out or expended wholly and exclusively for the purpose of its business within the meaning of Section 37 of the Income Tax Act, 1961. The Tribunal had rejected this expenditure on the grounds that it benefited another company and was not necessary for the Assessee to bear it.

Legal Interpretation of "Wholly and Exclusively":

The expression "wholly and exclusively" used in Section 37 does not mean "necessarily." The Supreme Court in Sassoon J. David and Co. P. Ltd. vs. Commissioner of Income Tax, Bombay held that expenditure incurred voluntarily and without necessity, if it promotes the business and earns profits, can be claimed as a deduction. The fact that someone other than the Assessee benefits from the expenditure does not preclude it from being allowed as a deduction.

Commercial Expediency:

The Assessee transferred two units to a wholly-owned subsidiary and agreed to bear retrenchment compensation for employees of these units. This agreement was made to facilitate the smooth operation of the Assessee's remaining business units, indicating commercial expediency. The Tribunal disallowed the expenditure, viewing it as contingent and not arising from the Assessee's business operations. However, the High Court noted that the expenditure was claimed in the year it was paid, not as of the transfer date, and thus could not be described as a contingent liability.

Relevance of Gemini Cashew Sales Corporation Case:

The Tribunal relied on the Supreme Court's decision in Commissioner of Income Tax, Kerala vs. Gemini Cashew Sales Corporation, which held that liability arising from business closure cannot be allowed as business expenditure. However, the High Court distinguished this case, noting that the Assessee continued its business after transferring two units, thus the expenditure was for the purpose of its ongoing business, not due to business closure.

Comparison with Other Cases:

The High Court referred to Pradeep Pictures vs. Commissioner of Income Tax, M.P., where retrenchment compensation paid upon discontinuing business at one of two theatres was allowed as a deduction. The High Court also discussed CIT Bombay City-I vs. W.T. Suren & Co. Ltd., where payment of gratuity on business transfer was initially disallowed but later allowed by the Supreme Court as an expenditure for business purposes.

Conclusion:

The High Court concluded that the payment of ?13.91 lakhs made by the Assessee to its subsidiary was an amount expended for the purpose of the Assessee's business and thus an admissible deduction. The question was answered in the negative, in favor of the Assessee and against the Revenue. The reference was allowed with no order as to costs.