COMMISSIONER OF INCOME TAX Vs. UNION SAW MILLS

JUDGEMENT

(1.) THE Revenue is the petitioner herein. THE original respondent was an unregistered firm--an assessee to income-tax. We are concerned with the assessment year 1975-76. Since the firm stood dissolved, additional respondents Nos. 2 to 6 have been impleaded as parties in the original petition. THE accounting period ended on March 31, 1975. During the previous year which ended on March 31, 1975, the assessee closed down its business, retrenched all its employees and sold the mill. Consequently, the assessee paid retrenchment compensation of Rs. 93,504 and Rs. 1,19,869 towards gratuity to the employees. THE Income-tax Officer held that the above amounts cannot be claimed as deduction since they were paid on the closure of the business. THEy were not expenditure laid out wholly and exclusively for the purposes of the business. THE said assessment was upheld in appeal by the Commissioner of Income-tax (Appeals). In second appeal, the Appellate Tribunal agreed with the authorities below that the retrenchment compensation amounting to Rs. 93,504 was not an admissible deduction. It was held that the payment was integrally connected with the closing down of the business of the assessee and, therefore, in the light of the decision of the Supreme Court in CIT v. Gemini Cashew Sales Corporation [1967] 65 ITR 643, the deduction is impermissible. As regards gratuity, the Appellate Tribunal took the view that it was different in character. It was further held that the liability to pay gratuity is not a liability that accrues to an employer only at one point of time, viz., when the liability is to be settled with the employees. It may be a contingent liability. Even so, the liability was there even earlier. THE mere fact that, in this case, the liability accrued to the assessee and the closure of the business simultaneously resulted are just two events that happened at the same time. That will not make any difference. THE Full Bench decision of this court in CIT v. Standard Furniture Co. Ltd. [1979] 116 ITR 751 is clearly applicable and the assessee is entitled to deduction of the gratuity liability. THEreafter, the Revenue filed an application under Section 256(1) of the Income-tax Act, 1961

(2.) TO refer the following question of law for the decision of this court :

(3.) THE Income-tax Appellate Tribunal, in paragraph 6 of its order dated March 26, 1982, held thus :