- (1.) The first ground in this departmental appeal relates to the addition of an amount of Rs, 13,01,382 consisting of payments made by the assessee towards gratuity, retirement benefit, ex gratia, etc., to its employees, as deleted in the first appeal. The assessee claimed expenses towards payments of gratuity of Rs. 10,57,173, retirement benefit of Rs. 2,17,934 and also ex gratia payment of RS 1,75,500 to its retrenched workers. Another amount of Rs. 775 was also debited under the head 'Gratuity' in the head-office account. The assessee was running a flour mill. The assessee submitted before the assessing officer that on account of deteriorating business condition, the assessee declared a closure in its flour mill after running the same for a period of two months only, viz., April and May, 1992, during the year under consideration. All the payments were claimed to have been made to the various workers and employees due to the said closure. The assessing officer was, however, of the opinion that since the assessee had closed its business of running the flour mill, the expenses incurred by the assessee towards making payments to the erstwhile workers by way of gratuity, retirement benefit, etc., had not been incurred wholly and exclusively for the purpose of running the business of the assessee. The assessing officer was furthermore of the view that in any case, since the assessee derived a benefit of enduring nature by retrenching its work-force, the entire expense incurred in that connection was required to be treated as capital expense. The assessing officer furthermore discussed in this connection that the addresses of the retrenched workers were shown to be outside Calcutta and, therefore, it was clear that the workers concerned had left Calcutta at the time the assessment was taken up by the assessing officer. The assessing officer was thus of the opinion that even the genuineness of the payments was also difficult to enquire into. As such, the assessing officer held that the total expense of Rs. 13,01,382 in that regard was not required to be allowed under section 37. He thus disallowed the entire claim.
(2.) Before the Commissioner (Appeals), it was contended on behalf of the assessee that the assessee did not actually close its business permanently and that there was only a temporary cessation of the business during the year under consideration. It was shown that the factory licence of the assessee and also registration with E.S.I. and employees provident fund scheme were continued. It was furthermore shown that during the year under consideration itself the assessee had effected manufacturing sales of Rs. 75,00,000 approximately. By referring to the audited accounts of the assessee for the two successive years, it was pointed out that the assessee continued to carry on its operations of flour-milling and sale of wheat products in those years. Furthermore, it was also pointed out that in addition to the milling of the assessee's own stock of wheat, the assessee also carried on milling of wheats on behalf of the Government of West Bengal, also. In this regard, references were also made to the periodical returns furnished by the assessee with the Director of Rationing, Government of West Bengal, every month not only during the year under consideration but also in the subsequent period. It was furthermore pointed out that the plant and machinery and other assets of the assessee were not at all sold out and were on the other hand, run by the assessee. It was again pointed out that the senior staff members of the mill and also the office staff were not at all disturbed. It was thus contended that in order to run the business in a smooth manner, the assessee resorted to the procedure of declaring the temporary closure and get rid of a large portion of its old work-force, who had become ineffective, in the process. It was thus contended that the assessee was entitled to allowance of the expenses incurred by it solely and exclusively for the purpose of running its business in a better manner. It was furthermore pointed out to the Commissioner (Appeals) that in his order under 144A, the Deputy Commissioner admitted that manufacturing activities were carried on by the assessee during the year under consideration and furthermore that the said manufacturing activities went on continuing during the periods covered by assessment years 1994-95 and 1995-96. Taking into consideration all these aspects, the learned Commissioner (Appeals) held that there was no total closure of the business of the assessee but that a temporary cessation of the work had simply been effected for running the business in a better manner. The Commissioner (Appeals) thus held that, therefore, the expenses incurred by the assessee towards retrenching its staff was required to be allowed as, genuine business expenses incurred by it exclusively in connection with its business operations. Accordingly, the Commissioner (Appeals) deleted the entire addition in this regard.
(3.) At the stage of the hearing of the appeal before us, the learned Departmental Representative pointed out that in the closure notices issued by the assessee to the member of staff as well as furnished before the different authorities, total closure" of the operations of the assessee from 1-2-1993, was mentioned. On the other hand, the learned counsel for the assessee reiterated all the facts submitted before the Commissioner (Appeals) and pointed out that the flour mill actually worked in the subsequent two years. So far as the genuineness of the payments is concerned, the learned counsel for the assessee pointed out to the audited books of accounts and other documents including vouchers, etc., maintained by the assessee and claimed that the genuineness of the payments could not at all be doubted.;