- (1.) THE Income-tax Appellate Tribunal, Amritsar Bench, has referred the following question for our opinion : " Whether, on the facts and in the circumstances of the case, and, in law, the Income-tax Appellate Tribunal was justified in allowing deduction for Rs. 22,569 representing provision made by the assessee in its accounts for the year ended 31st May, 1965, towards the liability to pay retrenchment compensation as per Section 25ff of the Industrial Disputes Act, 1947 ?"
(2.) IN order to decide the aforesaid question, certain salient features of the case may be noticed :
(3.) M/s. Ellora Silk Mills, Bombay, the assessee-firm was running a manufacturing unit and carrying on business in the manufacture and sale of art silk, linen and nylon fabrics and was also dealing in all types of yarn in Bombay. By virtue of an agreement dated 1st April, 1965, the running business carried on by the assessee in the name of M/s. Ellora Silk Mills with all its assets and liabilities was sold to a private limited company in the name of M/s. Ellora Silk Mills (P.) Ltd. as on 31st March, 1965. The assessee claimed a sum of Rs. 22,569 by way of retrenchment compensation payable to its workers in accordance with the provisions of the Industrial Disputes Act, 1947. According to the assessee, a provision for the above amount was made in the books of account of the assessee on 20th March, 1965, and this amount appeared in the balance-sheet prepared by the assessee as on 31st March, 1965. It was pointed out that since the assets and liabilities of the assessee-firm as per balance-sheet as on 31st March were transferred to M/s. Ellora Silk Mills Pvt. Ltd. and the said company took over the above liability, this amount should have been allowed as a deduction in the hands of the assessee. The ITO disallowed the assessee's claim with the following observations : "compensation payable has been debited at Rs. 22,569 but this liability has been taken over by the company. Clause 3 (c) provides that all the assets and liabilities have been taken over. Clause 8 (c) of the sale deed provides that the company shall be liable to pay to such employees in the event of retrenchment of any of them compensation payable in accordance with the law on the basis that his services had been continuous and not been interrupted by such transfer. Since the services of the employees were continuous and the company undertook to pay compensation there was no occasion to create this liability. Moreover, it is the liability of the company. The amount of Rs. 22,569 debited is, therefore, disallowed. ";