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TMI Blog1976 (6) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... ctually the transfer took place on December 14, 1964. One of the agreements entered into between the two parties which is relevant and which is annexure " E " to the statement of the case is the agreement dated April 11, 1964. That agreement, among others provided for the valuation of the various items of assets and liabilities of the assessee to be taken over by the Karur Vysya Bank Ltd. in the process of taking over the banking business of the assessee. Clause 2 of this agreement refers to the assessee-bank's buildings at Main Road, Batlagundu, and at North Street, Ramnad Fort, Ramnad, and fixed their value at Rs. 25,000 each. Clause 3 refers to the furniture and fixtures of the assessee and fixes their aggregate value at Rs. 60,000 based on the current market value. Clause 4 states : " the transferor-bank (assessee) shall transfer and the transferee-bank (Karur Vysya Bank Ltd.) shall take over from the transferor-bank the liabilities and assets as described in Schedules " A " and " B ", respectively, as on April 3, 1964, subject to the variations on the date of actual transfer." Schedule " A " to the said agreement deals with the liabilities as on April 3, 1964. Equally, Sched ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re sold to Karur Vysya Bank Ltd. and that the loss sustained as a result of such sale should be deducted from the profits of the assessee. The Tribunal also pointed out that the taxing authorities have included in the income from business, profits referable to the provisions of section 41(2) arising from the transfers of immovable properties and furniture and that that could be so only if there was a transaction of sale. It is the correctness of this conclusion of the Tribunal that is challenged before this court in the form of the first question extracted already. The learned standing counsel for the department contended that even if the loss is not a capital loss and is a revenue loss, still every revenue loss cannot be allowed as a deduction and only a revenue loss incurred in the carrying on of the business can be allowed as a deduction and that in the present case the revenue loss is not deductible. We are of the opinion that this contention is not well founded. We have referred to the agreement entered into between the parties for the purpose of showing that each and every one of the items of the assets and liabilities of the assessee was separately valued and was sold sepa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... buying land, developing it and then selling it, pursuant to an agreement sold the business as a going concern with its goodwill and all stock-in-trade, etc., to a company promoted by the partners of the firm, the company undertaking to discharge all debts and liabilities, development expenses and liability in respect of deposit made by intending purchasers. The consideration of Rs. 34,99,300 was paid by the allotment of shares of the face value of Rs. 34,99,300 to the partners or their nominees. The schedule to the agreement indicated that the sum of Rs. 34,99,300 was arrived at by valuing the land, goodwill, motor car and lorries and other items of assets at separate figures, the value of all of which totalled Rs. 34,99,300. With reference to those facts, the Supreme Court held that the sale was the sale of a whole concern and no part of the price was attributable to the cost of the land and no part of the price was taxable, that the fact that in the schedule to the agreement the price of the land was stated did not lead to the conclusion that part of the slump price was necessarily attributable to the land sold, that what was given in the schedule was the cost price of the land a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the second proviso to section 10(2)(vii). While coming to this conclusion, the Supreme Court distinguished its decision in the earlier case, namely, Commissioner of Income-tax v. Mugneeram Bangur and Co. (Land Department) [1965] 57 ITR 299 (SC) and the decision of the Judicial Committee in Doughty v. Commissioner of Taxes [1927] AC 327 (PC) already referred to. The Supreme Court observed [1967] 63 ITR 224, 231 (SC) : " It was also said that the transfer, was a slump sale of the assets and there being no separate sale of the property described in the second schedule, the difference between the written down value and the cost price was not liable to be included as income in the process of assessment. Reliance in this behalf was placed upon the observations of the Judicial Committee of the Privy Council in Doughty v. Commissioner of Taxes [1927] AC 327 (PC). In that case two partners carrying on business as general merchants and drapers sold the entire assets and goodwill of the partnership business to a limited company in which they became the only shareholders. The nominal value of the shares being more than the sum to the credit of the capital account of the partnership in its l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that were entered into between the assessee-company and Karur Vysya Bank Ltd., there was also an agreement to which the staff association of the assessee was also a party. The terms of that agreement provided for the transferee-bank employing all the employees of the transferor-bank who have not completed the age of 60, on the basis of a fresh contract, but on the same terms and conditions as to remuneration and security of tenure as the employees were then enjoying under the transferor-bank, as employees of the transferee-bank. However, in the transferor-bank, there was a provision for payment of gratuity to the employees on retirement. With reference to this provision, the assessee transferred a sum of Rs. 30,790 to the Karur Vysya Bank as being gratuity payable to the employees who were taken over by the said bank. This amount, the assessee claimed as deductible under section 37 of the Income-tax Act, 1961. The Income-tax Officer and the Appellate Assistant Commissioner rejected the claim of the assessee, while the Appellate Tribunal sustained the claim of the assessee to the extent of Rs. 18,931. For so sustaining, the Tribunal relied upon two circumstances. The first circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it as an item in the determination of the profits of the firm under section 10(1) of the Income-tax Act cannot, therefore, be sustained. Under section 10(2)(xv) of the Indian Income-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." We are of the opinion that the above principle laid down by the Supreme Court app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansferee-bank, in consideration of the transferee-bank taking them over and treating them to be in continuous service with the benefit of their service in the transferor-bank. However, one crucial thing to be noticed is that this expenditure was not incurred during the course of carrying on the business or for the purpose of carrying on the business. The obligation of the assessee-bank to pay gratuity to its employees was at the time of the retirement of the employees concerned. We are assuming for the purpose of the present case that when the assessee-bank transferred a part of its business and thereby it compelled the employees to retire from its business, the gratuity was payable to them. Still the obligation to pay the gratuity arises only by virtue of transfer of the business and, as a matter of fact, the transfer of the business and the obligation to pay the gratuity are contemporaneous or simultaneous. Therefore, the payment of gratuity cannot be said to be an item of expenditure incurred in the course of carrying on the business or for the purpose of carrying on the business. In this context, the following observations of this court in the decision referred to above, namely ..... X X X X Extracts X X X X X X X X Extracts X X X X
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