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TMI Blog2008 (1) TMI 256X X X X Extracts X X X X X X X X Extracts X X X X ..... 1988-89 and 1989-90 of the assessee. The point that arises in both the appeals is common regarding the claim of the assessee for deduction of certain amounts of payments of gratuity to the workers whose services were taken over by the assessee for the period of service rendered by them to the transferor-company in a take over bid. The appellant (hereinafter referred to as "the assessee") is Sree Akilandeswari Mills Private Limited and it is a wholly owned subsidiary company of Sree Rajendra Mills Limited. On March 25, 1983, an agreement was entered into between Sree Rajendra Mills Limited and the assessee, which is a subsidiary of Sree Rajendra Mills Limited, by which the textile unit at Salem called "A" unit belonging to Sree Rajendra Mills was transferred to the assessee. The agreement provided, inter alia, for continuity of service of workmen who were employed in the textile unit of Sree Rajendra Mills at Salem taken over by the assessee-company and the agreement also protected the conditions of service of workmen taken over by the assessee. Sree Rajendra Mills Limited delivered possession of the scheduled properties to the assessee-company on November 22, 1982, and the employ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and allowed the same and disallowed the balance sum of Rs. 3,36,530 and completed the assessment. The Commissioner of Income-tax (Appeals), on appeal, by the assessee held that the assessee was entitled to claim full deduction following an earlier order of the Commissioner of Income-tax (Appeals) for the assessment year 1988-89. Hence, the Revenue preferred an appeal before the Income-tax Appellate Tribunal. The appeal preferred by the Revenue and the appeal preferred by the assessee were heard together and the Appellate Tribunal held that the Commissioner of Income-tax (Appeals) was justified in holding that the liability of the assessee towards gratuity payment for the employees for the services rendered by them for the period prior to the take over of the unit would be capital expenditure and was not an allowable expenditure in the hands of the assessee. The Tribunal dismissed the appeal preferred by the assessee for the assessment year 1988-89 and allowed the appeal preferred by the Revenue for the assessment year 1989-90. It is against the common order by the Tribunal, the assessee has preferred the two appeals. The appeals were admitted and the following question of law was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld to be an allowable expenditure. Learned counsel, therefore, submitted that on the basis of the decisions of this court, the Tribunal was not correct in holding the amount paid to the employees towards gratuity is not an allowable expenditure. Learned counsel also submitted that the Commissioner of Income-tax (Appeals) allowed the claim of the assessee for the assessment year 1987-88 which was confirmed by the Tribunal, and the order of the Appellate Tribunal for the earlier year has been accepted by the Revenue and therefore, the amounts claimed for both the assessment years in question are not capital expenditure, but allowable as business expenditure. Mr. K. Subramaniam, learned senior standing counsel appearing for the Revenue, on the other hand, submitted that the amount paid by the assessee to the employees for the service rendered prior to the take over of the textile unit by the assessee is a capital expenditure and he referred to the terms of the agreement and submitted that the amounts paid to the employees for the period prior to the take over formed part of the sale consideration and hence, it is capital in nature. Learned counsel relied on the following decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT [1961] 43 ITR 281 has dealt with a case where a running business was taken over by the transferee and the transferee discharged its liability to pay bonus under the award and it was held, on the facts of the case, that the payment of bonus was an expenditure incurred for business purpose as the liability accrued after the date of transfer of the business. This court, while so holding, held that if the transferor's liability was an ascertained one on the date of transfer and it was an accrued liability on the date of transfer which was taken into account in reckoning the payment of consideration, the liability discharged later by the transferee would be capital in nature. In the aforesaid decision, this court held as hereunder: "... Under normal circumstances, the payment of bonus to the employees would be a trading expense, and it would not be an expenditure of a capital nature. If the liability to pay the bonus had been that of the transferor as an accrued liability, and that liability was transferred to the transferee under the terms of the contract of the transfer, that is, if the liability so transferred was one of the factors taken into account to fix the price payable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the cost of acquisition of the assets transferred. The Calcutta High Court held as under: "In terms of section 4(1) of the Payment of Gratuity Act, the liability of the employer to pay gratuity to its employees accrues as soon as the concerned employee completes five years' continuous service, from the date the service is reckoned to be continuous, though payable on superannuation or retirement or resignation or death or disablement due to accident or disease. Sub-section (2) prescribes fifteen days' wages based on the rate of wages last drawn by the employee for every completed year of service or part thereof in excess of six months. Thus, with the continuation of employment, the gratuity continues to accrue on account of the respective employee. The right to receive gratuity is a right vested in the employee on completion of five years continuous service receivable from the date from which continuous service is reckoned. The employees, whose service was continuing after the transfer of the undertaking, were entitled to claim gratuity from the transferor on account of cessation of employment under him. But for their continuation under the assessee, it was not payable till t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igh Court in Hotel Broadway Complex v. CIT [1992] 198 ITR 361 was considering a similar question and held as follows: "The existence of arrears of property tax should be presumed to be known to the assessee when it was constituted, because any prudent person who transacts any dealing in relation to an immovable property is expected to verify the tax liability in relation to the said property; arrears of property tax attach themselves as a burden on the property by operation of law. The nature of property tax is quite different from other taxes like sales tax or income-tax; property tax due to a municipal body is reflected in the municipal property registers. It is not possible to hold that the partners who joined Ananthasivan should be assumed to be ignorant about property tax arrears. If knowledge of the tax arrears is attributed to them, then, necessarily the said liability would go into the computation of the firm's capital. The assessee cannot take advantage of the fact that these were not reflected in the books of the previous firm, since a prudent businessman is expected to probe into the tax liabilities attached to a business premises. In these circumstances, the payments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Madhya Pradesh High Court considered section 40A(7) of the Income-tax Act and the question whether it was a capital expenditure or not was not the subject-matter of consideration. Learned counsel for the assessee submitted that the claim of the assessee was upheld by the Appellate Tribunal for the earlier assessment year 1987-88 and hence, the Appellate Tribunal should not have taken a different view for the subsequent assessment years 1988-89 and 1989-90. We are of the view that there is no question of res judicata, and further the Appellate Tribunal itself has found that when the order was passed for the assessment year 1987-88, it had no occasion to go through the agreement under which the transfer took place. On the other hand, the agreement was placed before the Appellate Tribunal during the course of hearing of the appeals before the Tribunal and the Appellate Tribunal, after going through the terms of the agreement, held that the amount paid was capital expenditure. Hence, we do not find any infirmity on the part of the Appellate Tribunal in taking a different view from its earlier view taken for the assessment year 1987-88 and on that account, the order of the Appell ..... X X X X Extracts X X X X X X X X Extracts X X X X
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