R.K.ABICHANDANI,J. - (1.)THE assessee registered firm filed its return for Samvat year 2030, i.e., year ended on November 13, 1974, showing total income of Rs. 11,34,329. Admittedly, the business of the firm was closed at the end of the year. The assessee made a provision of Rs. 74,500 in the gratuity account at the close of the year for all the six employees of the firm. Before the ITO, the assessee had claimed deduction in respect of the said amount on the ground that the provision was made on account of the retrenchment of these employees due to closure of the firm and considering their past services. The ITO considered the said claim of the assessee under S. 40A(7)(a) and (b) of the IT Act, 1961 (hereinafter referred to as "the Act"), and held that no such deduction was allowable to the assessee.
(2.)IN its appeal before the AAC, it was contended by the assessee that, though the payment was described as gratuity, it was not by way of gratuity but was compensation for the termination of the services of the employees of the firm. It was, in terms, contended that there was a statutory obligation on the assessee to pay such retrenchment compensation in view of the provisions of s. 25FFF of the Industrial Disputes Act, 1947. The AAC, after examining the relevant provisions of the Industrial Disputes Act, upheld the contention of the assessee that it was under a statutory obligation to pay to its employees compensation in view of the provisions of S. 25FFF of the Industrial Disputes Act. The assessee had worked out the compensation amount under the said provision payable to the employees at Rs. 51,800 and the AAC, accepting that figure, partly allowed the appeal to that extent.
The Revenue, feeling aggrieved by the order of the AAC, allowing deduction of Rs. 51,800 on account of statutory liability of the assessee firm in respect of retrenchment compensation provided for in its accounts for paying to the retrenched employees, appealed before the Tribunal and the assessee, feeling aggrieved by the order in so far as it disallowed the remaining amount of Rs. 22,700, also appealed. Before the Tribunal, it was contended on behalf of the assessee that, though the business of the firm was closed down w.e.f. November 13, 1974, the amounts were credited to the accounts of these employees on the same date and, therefore, the payment was made during the continuance of the business and not after its closure. It was contended that, when the business was to be closed, it was but proper that the employees of the firm should have been remunerated adequately in this manner. On being specifically asked as to whether there was any liability to pay gratuity, learned counsel for the assessee conceded before the Tribunal that the provisions of the Payment of Gratuity Act were not applicable to the assessee and that there was no gratuity scheme adopted by the assessee firm. It was, however, contended that the deduction of the remaining sum of Rs. 22,700 may be allowed as retrenchment compensation or gratuity or some extra payment to the employees for meritorious service on the ground of commercial expediency. On the other hand, it was submitted on behalf of the Revenue that the AAC had gone wrong in allowing the amount of Rs. 51,800 as deduction under S. 37(1) of the Act, by way of retrenchment compensation because such expenditure could never be said to have been made for the purpose of the carrying on of the business of the firm. The Tribunal concluded that the compensation payable under S. 25FFF of the Industrial Disputes Act to the retrenched employees of the assessee firm could not be said to be an expenditure incurred for carrying on the business or an expenditure laid out wholly and exclusively for the purpose of the business of the firm. The Tribunal found that, in fact, it was an expenditure incurred for closing down the business of the firm. The Tribunal, therefore, held that the matter was squarely covered by the decision of the Supreme Court in CIT vs. Gemini Cashew Sales Corporation (1967) 65 ITR 643 (SC) and, therefore, no part of the expenditure amounting to Rs. 74,500 was allowable under the provisions of the Act. The Tribunal, therefore, allowed the appeal of the Revenue dismissing the assessee's appeal.

(3.)THE assessee, feeling aggrieved by the decision of the Tribunal, sought reference and, at its instance, the following question has been referred to us, for our opinion, under S. 256(1) of the Act:
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that no part of the expenditure amounting to Rs. 74,500 is allowable under the IT Act ?"