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TMI Blog1967 (4) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... t order. The Income-tax Appellate Tribunal held that by the transfer of the undertaking to Walter, there was no interruption in the employment of the workmen of the establishment, that the terms and conditions of service applicable to the workmen were. not altered to their detriment, that Walter had not expressly agreed to take over the liability for compensation payable under section 25FF of the Industrial Disputes Act, 1947, and since there was dissolution of the partnership on August 24, 1957, and the undertaking was transferred, the workmen became entitled to retrenchment compensation, which the firm was liable to pay. The Tribunal accordingly held that the firm was entitled to deduct the sum of Rs. 1,41,506 in the computation of income in the assessment year 1958-59. In recording their opinion on the following question submitted by the Tribunal : " Whether the allowance of Rs. 1,41,506 constitutes an allowable expenditure in the assessment of the firm for the year 1958-59 ", the High Court of Kerala observed that in the determination of the taxable profits of the firm till its dissolution, considerations about the liability to pay retrenchment, compensation devolving upon Wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those applicable to him immediately before the transfer ; and (c) the new employer is, under the terms of such transfer or otherwise, legally liable to pay to the workman, in the event of his retrenchment, compensation on the basis that his service has been continuous and has not been interrupted by the transfer." Under section 25FF the right of the workmen to retrenchment compensation arises on transfer of ownership or management from the employer in relation to the undertaking to a new employer. But in the conditions set out in the proviso no such right accrues. It is common ground that the first and the second conditions in the proviso are satisfied. Counsel for the Commissioner contended that the third condition of the proviso was also satisfied, and no right to retrenchment compensation arose in favour of the workmen under section 25FF of the Industrial Disputes Act. Counsel for the Commissioner contended that the liability of the partners in a firm to pay retrenchment compensation being joint and several. when the undertaking carried on by a firm is continued by one of the partners after its dissolution, and the services of the workmen are not terminated and the terms and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to pay compensation becomes definite only when there is retrenchment by the employer, or when the ownership or management of the undertaking is, except in the cases contemplated by the proviso, transferred to a new employer, and not till then. The right therefore arises from determination of employment, or from transfer of the undertaking : it has no existence before these events take place. The judgment of this court in Calcutta Co. Ltd. v. Commissioner of Income-tax on which reliance was placed by counsel for the assessee, has no bearing on the present case, for in that case, expenditure which it was estimated had to be incurred to discharge an existing and definite obligation enforceable against the assessee in praesenti was held a permissible deduction in the computation of income. The Calcutta Co. Ltd. had sold plots of land for building purposes undertaking to develop them within six months by laying out roads, providing drainage and installing lights, etc. In the accounts of the company maintained according to the mercantile system, the company had credited the full sale price of the plots agreed to be paid by the purchasers, but not actually received, and against the price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employees for their services in that year an immediate payment and also a future payment in some subsequent year, may properly deduct, not only the immediate payment, but the present value of the future payment provided such present value can be satisfactorily determined or fairly estimated. Apart from special circumstances, such a procedure, if practicable, is justified because it brings the true costs of trading in the particular year into account for that year and thus promotes the ascertainment of the 'annual profits or gains arising or accruing from' the trade. " Lord MacDermott was of the view that the provision made by the company led to anomalies, and was not admissible as made, and the case should be remitted to the Special Commissioners whether it is practicable to arrive at satisfactory deductions. Lord Radcliffe with whom the Lord Chancellor and Lord Tucker agreed was of the view that there is no rule of law which forbids the introduction of a provision for future payments in or payments out, if the right to receive them or the liability to make them, is in legal terms contingent at the closing of the relevant year. The question which arises in the present case is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax Act in the computation of taxable profits (omitting parts of the clause not material) " any expenditure laid out or expended wholly and exclusively for the purpose of such business, profession or vocation ", i.e., business, profession or vocation carried on by the assessee, is a permissible allowance. But to be a permissible allowance the expenditure must be for the purpose of carrying on the business. Where accounts are maintained on the mercantile system, if liability to make the payment has arisen during the time the business is carried on, it may appropriately be regarded as expenditure. But where the liability is, during the whole of the period that the business is carried on, wholly contingent and does not raise any definite obligation during the time that the business is carried on, it cannot fall within the expression " expenditure laid out or expended wholly and exclusively " for the purpose of the business. Two cases illustrative of the principle may be noticed. It was held by the Madras High Court in Commissioner of Income-tax v. Indian Metal and Metallurgical Corporation that a provision made in the annual accounts maintained by an employer setting apart by way ..... X X X X Extracts X X X X X X X X Extracts X X X X
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