STANES MOTORS SOUTH INDIA LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee is a public limited company. For the assessment year 1963-64 corresponding to the accounting year ending March 31, 1963, it claimed a deduction of a sum of Rs. 56,275 under Section 37 of the Income-tax Act, 1961. During the year under consideration, a new company was formed under the name and style of Stanes Tyre and Rubber Products Ltd., which is a fully owned subsidiary company of the assessee. It may be mentioned that thus subsidiary company was formed in the place of the retreading division of the assessee. This new company took over all the employees belonging to the tyresoles division of the assessee. At the time of the formation of the new company gratuity payable to the transferred employees was calculated on the basis of the rules of the company and the amount thus ascertained was a sum of Rs. 56,275. This amount was transferred to the subsidiary company from the pension and gratuity reserve of the assessee. THE assessee claimed that the amount was paid in discharge of their liability for gratuity to the employees transferred to the subsidiary company and as such it was an allowable deduction under Section 37 of the Income-tax Act of 1961. THE Income-tax Officer was of the view that the said amount made over to the new company was kept as a reserve by the new company and no payment of any amount to the employees as such was made. THErefore, this amount which has merely changed hands from the assessee-company to the new company, amounted to only a transfer and not an expenditure. In that view he rejected the claim for deduction. THE Appellate Assistant Commissioner also took the same view and held that the amount was not paid to the new company on behalf of the employees, that there was only a transfer of funds and that, therefore, the amount is not deductible as an expenditure. THE Tribunal considered that, as Section 25FF of the Industrial Disputes Act did not apply to the facts of this case, no compensation was payable to the employees on their transfer from the assessee-company to the subsidiary company, but all the same held that the amount is deductible for the following reasons :

(2.) AT the instance of the revenue the following question has been referred :

(3.) AS already pointed out the liability to make payment to the employees had not arisen during the accounting period. The liability if at all was wholly contingent. The transfer of gratuity reserve from the assessee-company to the new company did not also arise in the course of the business or for the purpose of carrying on the business, but springs from the transfer of the business. Therefore, it cannot be said that the expenditure was laid out or expended wholly or exclusively for the purpose of business or it was a properly debitable item in its profit and loss account as a revenue outgoing. For the foregoing reasons we answer the first question in the negative and against the assessee.