- (1.) Two persons- Walter and Ramasubramony - carried on business in cashewnuts as partners in the name and style of Messrs. Gemini Cashew Sales Corporation. The partnership was dissolved on the death of Ramasubramony on August 24, 1957, and the business was taken over and continued by Walter on his own account. The services of the employees were not interrupted and there was no alteration in the terms of employment of the employees of the establishment.
(2.) In proceedings for assessment of tax it was urged on behalf of the firm that an amount of Rs. 1,41,506/- taken into account under the head "Gratuity payable to workers of the business" in settling the accounts of the firm till August 24, 1957, was a permissible outgoing. The Income-tax Officer rejected the claim and the Appellate Assistant Commissoner confirmed that order. The Income-tax Appellate Tribunal held that by the transfer of the undertaking to Walter, there was no interruption in the employment of the workmen of the establishment, that the terms and conditions of service applicable to the workmen were not altered to their detriment, that Walter had not expressly agreed to take over the liability for compensation payable under S. 25-FF of the Industrial Disputes Act, 1947, and since there was dissolution of the partnership on August 24, 1957 and the undertaking was transferred, the workmen became entitled to retrenchment compensation, which the firm was liable to pay. The Tribunal accordingly held that the firm was entitled to deduct the sum of Rs. 1,41,506/- in the computation of income in the assessment year 1958-59.
(3.) In recording their opinion on the following question submitted by the Tribunal: "Whether the allowance of Rs. 1,41,506/- constitutes an allowable expenditure in the assessment of the firm for the year 1958-59", the High Court of Kerala observed that in the determination of the taxable profits of the firm till its dissolution considerations about the liability to pay retrenchment compensation devolving upon Walter as the assignee of the business for valuable consideration were irrelevant, and since it was maintaining accounts on mercantile system, the firm could claim as a permissible outgoing the amount for which liability was incurred though no actual payment was made to the workmen. The Commissioner of Income-tax appeals with special leave, against the order of the High Court recording an answer in the affirmative.;