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TMI Blog1999 (8) TMI 112X X X X Extracts X X X X X X X X Extracts X X X X ..... compensation'. The AO asked the appellant to explain the reason for making claim during the year under consideration. The appellant filed reply vide letter dt. 9th Dec., 1996. The appellant took plea that due to change in the constitution of the firm, the liability towards employees on account of retrenchment compensation due to workmen upto 31st May, 1994, was calculated and paid. The appellant also filed complete details of working of the retrenchment compensation which included date of appointment, salary drawn, period of service, etc. The appellant also pleaded that in accordance with s. 25FF of the Industrial Disputes Act, 1947, the employees are entitled for retrenchment compensation when ownership of the management of an undertaking is transferred whether by agreement or by operation of law, from the employer in relation to or that undertaking to a new employer; every workman who has been in continuous service for not less than one year in that undertaking immediately before such transfer shall be entitled to notice and compensation in accordance with the provisions of s. 25F, as if the workman had been retrenched. The AO observed that except Sh. Deepak Bhandari, other three ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion Ltd. vs. CIT. 4. The learned Departmental Representative relied on the order passed by the authorities below. 5. The first issue to be decided is to give proper meaning for transfer of ownership of management for the purpose of s. 25FF of the Industrial Disputes Act, 1947. Sec. 25FF reads as follows: "Sec. 25FF. Compensation to workmen in case of transfer of undertakings. Where the ownership of management of an undertaking is transferred whether by agreement or by operation of law, from the employer in relation to or that undertaking to a new employer, every workman who has been in continuous service for not less than one year in that undertaking immediately before such transfer shall be entitled to notice and compensation in accordance with the provisions of s. 25F, as if the workman had been retrenched." In the case of the appellant what has happened was that due to family settlement between the brothers, management of erstwhile firm passed on to Shri Vishwa Nath Behl, Karta of Vishwa Nath Behl, HUF. In the constitution of erstwhile firm, Sh. Vishwa Nath Behl (Karta) was having 25 per cent of share whereas major shareholders of the firm were Sh. Sham Sunder Behl w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been in continuous service of not less than one year in that undertaking immediately before the transfer, shall be entitled to notice and compensation in accordance with the provisions of s. 25F. This is because the section equates such a termination of service with retrenchment as defined in s. 2(oo) of this Act. It matters little who initiates the proceedings towards the termination. If the employer, who has a prior notice of the date and time of the transfer of the industrial undertaking, which is definitely fixed, takes steps to issue retrenchment notice in accordance with law governing the industrial relations resulting in the creating of a liability regarding which deductions can be claimed under the IT Act, then it can reap the benefit of that. The transferor of the undertaking, when the control of management still vests in it, can create that liability, which, though based on legal fiction, is real and effective and can take steps to minimise the losses by issuing retrenchment notices as provided by s. 25FF of the Industrial Disputes Act. The language of the principal clause of s. 25FF makes it clear that if the right of the retrenchment compensation accrues to the workman, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployer to take steps to avert the loss even if the steps result in the maximising of the expenses. If such a step under s. 25FF of the Industrial Disputes Act is taken, as in this case, during the continuation of the business but before the actual transfer, when the assessee is still the owner of the industrial undertaking, under the operation of law, then the amount expended by way of retrenchment compensation will be covered by s. 37 of the Act. It cannot be disputed that the assessee has a right to minimise the incidence of the tax by legitimate means. The steps taken by the assessee in this case in anticipation of the transfer, the date of which was definite, can at the most be said to achieve these objects. The Industrial Disputes Act gives him this right in the wake of the transfer of his undertaking by operation of law. In determining the services of the workmen by issuing termination notices under the provisions of the Industrial Disputes Act, the assessee created a liability, which, in a legitimate way, is recognised by law. He can claim its exclusion from his taxable income as an outgoing and is covered by 37 of the Act. This question is accordingly answered in favour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffered similar employment with Rallis India Ltd. on and from 1st May, 1959. The employees were, therefore, informed that their employment was to cease on and from 30th April, 1959." These facts are, therefore, at par with the facts of the present case. The Hon'ble Supreme Court has given following finding: "In our view, the Kerala High Court in CIT vs. Standard Furniture Co. Ltd. (1979) 8 CTR (Ker)(FB) 54 : (1979) 116 ITR 751 (Ker)(FB), the Madras High Court in Sarada Binding Works case (1985) 152 ITR 520 (Mad) and the Bombay High Court in CIT vs. Salem Magnesite (P) Ltd. (1991) 189 ITR 154 (Bom) have rightly distinguished the judgment of this Court in Gemini Cashew Sales Corporation's case. Retrenchment compensation is not the same thing as gratuity. In Gemini Cashew Sales Corporation's case, this Court considered the question of payment of retrenchment compensation under the provisions of Industrial Disputes Act. That Act contains the provisions under what circumstances a workman is entitled to retrenchment compensation. While s. 25F of that Act prescribed conditions precedent to the retrenchment of workmen, s. 25FF provides for compensation to workmen in the case of transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service rendered in Rallis India Ltd. as per the scheme relating to gratuity of that company. Payment of the amount of gratuity to Rallis India Ltd. was made as per the scheme of the assessee and it was not an ex gratia or some isolated payment. It was never disputed and, in fact, no question was raised, if the services of the employees of the assessee were not terminated and that being the position, the obligation of the assessee to make payment of gratuity to its employees was an obligation in praesenti. Payment of the gratuity amount to Rallis India Ltd. was with the consent of the employees transferred there. We are, thus, of the view that payment of gratuity awarded by the assessee to Rallis India Ltd. in the circumstances of the case was an expenditure wholly laid out or expended for the purpose of the business of the assessee and was allowable deduction. It cannot certainly be said that it was an expenditure incurred much ahead of time as the services of the employees with the assessee were terminated. The Tribunal also found that the assessee was a going concern and only one of its departments was closed. The assessee had not wound up all of its affairs. Only a part of its ..... X X X X Extracts X X X X X X X X Extracts X X X X
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