Sabyasachi Mukharji, J. - (1.) In this reference under Section 256(1) of the Income-tax Act, 1961, we are concerned with the assessment year 1962-63. The question in respect of which this reference arises is whether the sum of Rs. 1,51,008 was allowable as a deduction in the hands of the assessee. The assessee is a subsidiary of J. Lyons, (London) (hereinafter called "the London company"). The London company had another subsidiary by the name of Lyons (India) Pvt. Ltd. (hereinafter called " the Indian company"). The assessee was purchasing tea and exporting it to the London company. The assessee-company was purchasing tea in India and exporting it to U.K. and other countries but its transactions were not with the London company. The assessee did not have any staff of its own for effecting these purchases. The necessary staff was maintained by the Indian company. The assessee-company utilised for several years the services of the said staff and was making payments to the Indian company, on an agreed basis. . The assessee, however, had sustained losses in the earlier years. During the year ending on 31st March, 1961, the turnover of the assessee Was Rs. 58.63 lakhs and it had sustained a loss, as per its books, of Rs. 87,163. There were similar losses in the earlier years. It is not necessary to refer in detail to those losses. At the end of the relevant year the assessee had an unadjusted loss of Rs. 2,58,268 computed under the Income-tax Act. In the relevant accounting year, for a short period, M/s. Lyons (India) Pvt. Ltd. made available its staff towards the assessee's business. Lyons (India) Pvt. Ltd., however, discontinued their business in tea. It was stated that the company had not been wound up and was at the relevant time an existing company. The assessee severed its connection as regards the loan of staff with M/s. Lyons (India) Pvt. Ltd. After the Indian company had discontinued its business in tea, the assessee began to export tea to all persons including the London company. The Indian company retrenched some of their staff consequent on the assessee's terminating the previous arrangement of getting the staff on loan from that company and perhaps also due to its closing its own export activity. The assessee- company thereupon entered into an arrangement with Liptons Ltd. in order to attend to the export business thereafter. Liptons Ltd. were paid at an agreed rate depending on the quantity of tea exported. As a result of the retrenchment, the Indian company paid retrenchment compensation due under the Industrial Disputes Act. There was a certain arrangement regarding insurance policy, which was also made with the Life Insurance Corporation. The total sum for these purposes amounted to over Rs. 3 lakhs. The assessee was debited with 50 per cent, thereof, namely, Rs. 1,51,008. This amount was claimed as deduction by the assessee in its income-tax assessment.
(2.) The Income-tax Officer held that these payments did not constitute "business expenses. The Income-tax Officer was of the view that it was difficult to understand why the assessee was liable to meet the expenses connected with the retrenchment of the employees of the Indian company and, therefore, it was held by the Income-tax Officer that the expenditure had not been laid, out wholly and exclusively for the purpose of the business.
(3.) There was an appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the amount in question did not by any stretch of imagination constitute business expense of the assessee and as such was not deductible in computing the total income. The Appellate Assistant Commissioner held that the employees were not those of the assessee and merely because they were rendering services to the assessee, for which the assessee was paying certain amount, it did not follow that retrenchment-compensation also had to be shared by the assessee also and that there was no agreement to that effect between the two companies. He, therefore, upheld the order of the Income-tax Officer on the question of disallowance.;