AKILANDESWARI MILLS PRIVATE LIMITED Vs. DEPUTY COMMISSIONER

JUDGEMENT

(1.) THESE appeals arise out of the order of the Income Tax Appellate Tribunal (hereinafter referred to as the 'tribunal') in I. T. A. Nos. 1092/mds/1991 and 2402/mds/1991 dated 14. 8. 2001 in respect of two assessment years, 1988-89 and 1989-90 of the assessee.

(2.) THE point that arises in both the appeals is common regarding the claim of the assessee for deduction of certain amounts of payments of gratuity to the workers whose services were taken over by the assessee for the period of service rendered by them to the transferor company in a take over bid. The appellant (hereinafter referred to as the "assessee") is Sree Akilandeswari Mills Private Limited and it is a wholly owned subsidiary company of Sree Rajendra Mills Limited. On 25. 3. 1983, an agreement was entered into between Sree Rajendra Mills Limited and the assessee, which is a subsidiary of Sree Rajendra Mills Limited, by which the textile unit at Salem called "a" unit belonging to Sree Rajendra Mills was trasnferred to the assessee. The agreement provided, inter alia, for continuity of service of workmen who were employed in the textile unit of Sree Rajendra Mills at Salem taken over by the assessee company and the agreement also protected the conditions of service of workmen taken over by the assessee. Sree Rajendra Mills Limited delivered possession of the scheduled properties to the assessee company on 22. 11. 1982 and the employees of Sree Rajendra Mills working in "a" unit were transferred to the assessee company with the benefit of continuity of service. In the assessment proceedings for the assessment year 1988-89, the assessee company claimed a deduction of a sum of Rs. 7,96,121/- as gratuity payment to workers who had retired during the previous year. The Assessing Officer held that the gratuity payments made to the employees who were employed in the service of the assessee company for less than five years from the date of take over of the "a" unit of Sree Rajendra Mills Limited were not eligible for deduction, and so also, the assessee company was not entitled to claim deduction of the proportionate payment of gratuity paid to the employees with reference to their period of service rendered to the transferor company. The Assessing Officer, in other words, held that the liability towards the payment of gratuity relating to the years of service rendered by the employees in Sree Rajendra Mills Limited prior to take over by the assessee was not allowable as business expenditure in the hands of the assessee and he held that the assessee would be entitled to claim only a deduction of a sum of Rs. 1,22,226/- and disallowed the balance sum of Rs. 6,73,895/- and completed the assessment for the assessment year 1988-89. The assessee carried the matter on appeal before the Appellate Authority and the Commissioner of Income Tax (Appeals) held that the liability of the assessee towards gratuity paid to the employees for their services rendered to their previous employer namely, Sree Rajendra Mills Limited would be capital expenditure and not allowable in computing the income of the assessee. He upheld the disallowance made by the Assessing Officer for the assessment year 1988-89.

(3.) AS regards the assessment year 1989-90, the assessee claimed deduction of a total sum of Rs. 4,08,378 as gratuity paid to 17 employees , who retired during the previous year. The Assessing Officer, following his earlier order, held that the liability of the assessee to the workmen for the gratuity subsequent to the period after take over of the unit of Sree Rajendra Mills Limited would be allowable as business expenditure, but the payment of gratuity relating to the period of service prior to the transfer of the unit was not allowable. He held that the assessee was entilted to claim deduction of a sum of Rs. 71, 848/- and allowed the same and disallowed the balance sum of Rs. 3,36,530/- and completed the assessment. The Commissioner of Income Tax (Appeals), on appeal, by the assessee held that the assessee was entitled to claim full deduction following an earlier order of the Commissioner of Income Tax (Appeals) for the assessment year 1988-89. Hence, the Revenue preferred an appeal before the Income Tax Appellate Tribunal. The appeal preferred by the Revenue and the appeal preferred by the assessee were heard together and the Appellate Tribunal held that the Commissioner of Income Tax (Appeals) was justified in holding that the liability of the assessee towards gratuity payment for the employees for the services rendered by them for the period prior to the take over of the unit would be capital expenditure and was not an allowable expenditure in the hands of the assessee. The Tribunal dismissed the appeal preferred by the assessee for the assessment year 1988-89 ad allowed the appeal preferred by the Revenue for the assessment year 1989-90. It is against the common order by the Tribunal, the assessee has preferred the two appeals.