COMMISSIONER OF INCOME TAX Vs. SARADA BINDING WORKS

JUDGEMENT

(1.) THE assessee, in this case, is a registered firm. During the accounting period ending with March 31, 1972, the assessee did business in the name of Sardar binding works as also in the name of Chandamama Publications. By an agreement entered into between the assessee, represented by its managing partner, B. Viswanatha Reddy, and another partnership called Chandamama Publications, represented by its managing partner, B. Nagi Reddy, the assessee gave up possession of all the assets and liabilities, as detailed in the schedule to the agreement, in Chandamama Publications. On a settlement of the assets and liabilities as described in the schedule to the agreement, the excess of liabilities over assets came to Rs. 67, 687 and the assessee paid the said sum to the transferee who succeeded to the business of Chandamama Publications. One of the clauses in the agreement was that all the employees in that business would become employees of the transferee on terms no less favourable to them with continuity of service. THE liabilities as worked out in the schedule included an amount of Rs. 80,309, which was a provision for gratuity due to the employees of the business taken over by the transferee. THE assessee claimed as deduction provision for gratuity of Rs. 68,380 relating to Sarada Binding Works as also 80,309 relating to Chandamama Publications.

(2.) BOTH these amounts were disallowed by the ITO on the ground that they were not admissible as a deduction. The assessee appealed to the AAC, contending that, in view of the decision in Tata Iron & Steel Company Limited v. Bapat [1975] 101 ITR 292, the provision for gratuity made on an actuarial basis would be an admissible deduction. The AAC found on the basis of the certificates produced by the assessee and on the basis of the actuarial valuation, that the liability to gratuity as on March 31,1971, was Rs. 63,923 and as on March 31, 1972, was Rs. 1,54,178, the difference being Rs. 90,255. The AAC, therefore, felt that the sum of Rs. 90,255 represented the incremental gratuity liability relating to the year in question and that it should be allowed as a deduction.

(3.) THEN we come to the second question which relates to the allowability of the deduction claimed by the assessee in a sum of Rs. 80,309 which is found to have been paid by the assessee to the purchaser as per the terms of the settlement for the purpose of enabling the purchaser to discharge the assessee's gratuity liability for the period during which the employees who had been transferred to the services of the purchaser, were working under the assessee. In this case, under the terms of the agreement, the buyer has taken over the employees of the assessee's business, Chandamama Publications, with continuity of service and all accrued monetary benefits. So the purchaser, as part of the arrangement for sale of the business, has taken over the gratuity liability so far accrued. The purchaser has taken over that liability of the assessee on the assessee paying a sum of Rs. 80,309. As regards the actual amount of liability, whether it is Rs. 80,309 or not, an enquiry has been directed by the Tribunal. Thus, the question for consideration at this stage is whether the amount paid by the assessee to the bear, can be allowed as deduction.