COMMISSIONER OF INCOME TAX Vs. UNION SAW MILLS
HIGH COURT OF KERALA
COMMISSIONER OF INCOME-TAX
UNION SAW MILLS
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K.S. Paripoornan, J. -
(1.)THE Revenue is the petitioner herein. THE original respondent was an unregistered firm--an assessee to income-tax. We are concerned with the assessment year 1975-76. Since the firm stood dissolved, additional respondents Nos. 2 to 6 have been impleaded as parties in the original petition. THE accounting period ended on March 31, 1975. During the previous year which ended on March 31, 1975, the assessee closed down its business, retrenched all its employees and sold the mill. Consequently, the assessee paid retrenchment compensation of Rs. 93,504 and Rs. 1,19,869 towards gratuity to the employees. THE Income-tax Officer held that the above amounts cannot be claimed as deduction since they were paid on the closure of the business. THEy were not expenditure laid out wholly and exclusively for the purposes of the business. THE said assessment was upheld in appeal by the Commissioner of Income-tax (Appeals). In second appeal, the Appellate Tribunal agreed with the authorities below that the retrenchment compensation amounting to Rs. 93,504 was not an admissible deduction. It was held that the payment was integrally connected with the closing down of the business of the assessee and, therefore, in the light of the decision of the Supreme Court in CIT v. Gemini Cashew Sales Corporation  65 ITR 643, the deduction is impermissible. As regards gratuity, the Appellate Tribunal took the view that it was different in character. It was further held that the liability to pay gratuity is not a liability that accrues to an employer only at one point of time, viz., when the liability is to be settled with the employees. It may be a contingent liability. Even so, the liability was there even earlier. THE mere fact that, in this case, the liability accrued to the assessee and the closure of the business simultaneously resulted are just two events that happened at the same time. That will not make any difference. THE Full Bench decision of this court in CIT v. Standard Furniture Co. Ltd.  116 ITR 751 is clearly applicable and the assessee is entitled to deduction of the gratuity liability. THEreafter, the Revenue filed an application under Section 256(1) of the Income-tax Act, 1961
(2.)TO refer the following question of law for the decision of this court :
"Whether, on the facts and in the circumstances of the case, the assessee is entitled TO the deduction of the gratuity liability and the Tribunal is right in deleting the addition made by the Income-tax Officer ?"
It is thereafter that the Revenue has filed this petition under Section 256(2) of the Income-tax Act to refer the above question of law for the decision of this court.
We heard counsel.
(3.)THE Income-tax Appellate Tribunal, in paragraph 6 of its order dated March 26, 1982, held thus :
".... It is true that the gratuity liability has been held in certain cases as a contingent liability. Nevertheless, it is not a liability that accrues to an employer only at one point of time, viz., when the liability is to be settled with the employees. This is usually done at the time of retrenchment of an employee or on the termination of his services. When such events happen in the normal course of the carrying on of a business, the liability would definitely be an expenditure allowable in the computation of the business income. THE only factor that has to be considered in this case is that instead of the services of individual employees being terminated separately there has been a termination of the services of all the employees. We do not think that this should make any difference. We consider that the accrual of this liability to the assessee and the closure of the business are just two events that have happened at the same time though it may not be considered to be just a coincidence. We feel that the decision of the Kerala High Court in the case of CIT v. Standard Furniture Co. Ltd. [19791 116 ITR 751 [FB], cannot be distinguished in the manner in which it has been distinguished by the Commissioner of Income-tax (Appeals). We feel that the ratio of this decision would apply to the gratuity liability in the case of the assessee also. We, therefore, agree that the assessee is entitled to the deduction of this gratuity liability. THE addition of Rs. 1,19,869 made by the Income-tax Officer and confirmed by the Commissioner of Income-tax (Appeals) is deleted."
We are of the view that the above exposition by the Appellate Tribunal is in accord with the Full Bench decision in CIT v. Standard Furniture Co. Ltd.  116 ITR 751 (Ker). The finding of the Appellate Tribunal that the liability to pay gratuity was not a liability that accrued to the employer only at one point of time, viz., when the liability is to be settled with the employees, that this is usually done at the time of retrenchment of an employee or on the termination of his services and that when such events happen in the normal course of carrying on of a business, the liability would definitely be an expenditure allowable in the computation of the business income is a finding of fact. Since the decision of the Appellate Tribunal is in accord with the Full Bench decision of this court, we are of the view that no referable question of law arises out of the order of the Appellate Tribunal.
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