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TMI Blog2016 (9) TMI 513X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts (i.e. ₹ 15.23 lakhs and ₹ 13.91 lakhs) as allowable expenditure. The ITO disallowed the claim of the sum of ₹ 15.23 lakhs paid under the scheme of voluntary retirement on the ground that the same was exgratia in nature and, according to him, even on the principle of commercial expediency, the payment was not justified. Besides, the ITO observed that the payment was made to the employees of the unit, which was closed. Insofar as the payment of ₹ 13.91 lakhs was concerned, the ITO observed that the event of transfer of business was not incidental to the carrying on of the business but an extraordinary happening which did not constitute the Assessee's business. The ITO, in the premises, did not allow the amount of ₹ 13.91 lakhs as business expenditure. 5. When the matter went to the C.I.T. (Appeals), the C.I.T. (Appeals) was of the opinion that the disallowance of ₹ 15.23 lakhs was not in order. He held that this payment, which was made in terms of an agreement with a recognised union, resulted in reduction of a lot of surplus employees in the Mazgaon unit and such retrenchment facilitated carrying on of the Assessee's business smoot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred by the Assessee benefited another company and could not be considered as incurred for the Assessee's own business; that it was not necessary for the Assessee to bear it. 8. We need to first address ourselves to the question as to what is meant by the expression wholly and exclusively used in Section 37. Does it mean necessarily or does it include any expenditure incurred in the course of its business by the Assessee voluntarily and without any necessity. In the case of Sassoon J. David and Co. P. Ltd. vs. Commissioner of Income Tax, Bombay 1979 (Vol.118) ITR 261, the Supreme Court has answered this question in the context of a similar phrase used in Section 10(2)(xv) of the Income Tax Act, 1922, which is in pari materia with Section 37 of the present Act. The Court held that the expression wholly and exclusively does not mean necessarily . The Court considered various tests in this behalf, and particularly focused on the test, viz. whether the sum of money was expended on the ground of commercial expediency and in order to indirectly facilitate the carrying on of the business, laid down in Gorden Woodroffe Leather Manufacturing Co. vs. CIT [1962] Supp. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is borne out on record that during the year under consideration and for the past three years, the Assessee was in the grip of a serious labour trouble, with plenty of litigations pending under the Industrial Disputes Act before various Labour Courts and Tribunals. In the light of these circumstances, the Assessee thought it fit to hive off its two undertakings, referred to above, to the another company, namely, M/s. Volvis Floor Mills Pvt. Ltd., which was a wholly owned subsidiary of the Assessee. The rationale of this decision is explained in the agreement for transfer entered into between the Assessee and Volvis. The agreement recites that the transfer is with a view to reorganise the manufacturing business activities of the vendor and so as to run and operate the remaining units in Bombay (referred to as A Mills) and Goa as separate units under a separate corporate existence and for better administration and control of these two units. Transfer of other units would have entailed, under Section 25FF of the Industrial Disputes Act, payment of retrenchment compensation to the employees of the units proposed to be transferred. Such payment could have been avoided only if there was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealm of a remote possibility. In the first place, the expenditure of ₹ 13.91 lakhs is claimed in the year the amount was actually paid and not as of the date of the transfer. It cannot, accordingly, be described as a contingent liability. Secondly, and in any event, the amount is paid not by way of retrenchment compensation but by way of discharging its commercial obligations arising under the agreement of transfer referred to above qua the transferee company. It is not, therefore, relevant to consider whether any retrenchment compensation per se was payable on the date of transfer or that any such compensation was a remote possibility. The payment is clearly in discharge of a contractual obligation undertaken by the Assessee on account of its business expediency. 12. One of the grounds for disallowing the expenditure was the transfer of the unit or cessation of its business in the light of the law laid down by the Supreme Court in the case of Commissioner of IncomeTax, Kerala vs. Gemini Cashew Sales Corporation 1967 [Vol. LXV] ITR 643. The Tribunal held that the Assessee had ceased to carry on the business of the transferred unit as after the transfer it became th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner of Income Tax, M.P.I 1983 [Vol.143] ITR 300. That was a case where retrenchment compensation was paid to employees upon closure of one of the two theatres owned by the assessee. The Court held that discontinuance of business at one theatre did not amount to closure of business and distinguished Gemini Cashew Sales Corporation on that basis. The relevant observations of the court are quoted below : Now, if there is no closure of the business of exhibition of films by the assessee during the relevant assessment year, the liability of the assessee to pay retrenchment compensation on account of discontinuance of its business at one theatre, cannot be held to be a liability arising on account of closure of its business. The decision in CIT v. Gemini Cashew Sales Corporation [1967] 65 ITR 643 (SC), relied upon by the Tribunal and that in Venkatesa Colour Works v. CIT [1977] 108 ITR 309 (Mad), relied upon by the learned counsel for the Department are, therefore, distinguishable on facts. In these cases, the liability to pay retrenchment compensation had arisen on account of transfer or closure of the business carried on by the assessee and it was, therefore, held tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. Ltd. vs. C.I.T.1998 [Vol.230] ITR 643, 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. 14. In that view of the matter, we are clear ..... X X X X Extracts X X X X X X X X Extracts X X X X
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