COMMISSIONER OF INCOME TAX Vs. VENKATESWARA BANK LIMITED

JUDGEMENT

(1.) IN this reference under Section 256(1) of the I.T. Act, 1961, the following question has been referred :

(2.) THE assessee is a public limited company carrying on banking operations. On 29th December, 1967, it entered into an agreement to transfer a substantial part of its business to the Indian Overseas Bank Ltd. At the time of the transfer, the assessee paid a sum of Rs. 26,032 as " gratuity" to its employees and claimed the same as deduction in the computation of its income. THE ITO disallowed the claim for deduction on the ground that the amount paid to the employees, though termed as " gratuity ", is in effect " retrenchment compensation " paid to the employees of the assessee and since the assessee had ceased its business activities even after effecting a transfer on 29th December, 1967, the amount claimed could not be allowed as deduction. THE assessee appealed to the AAC who disagreed with the finding of the ITO and held that a sum of Rs. 8,110 relating to the ex-secretary was liable to be allowed as deduction and confirmed the disallowance of the balance of Rs. 17,922. THE assessee appealed to the Appellate Tribunal against the disallowance and the Tribunal by its order dated the 17th April, 1974, directed the allowance of the entire amount as a deduction under Section 37(1) if not under Section 36(1)(ii). THE revenue has filed the reference questioning the correctness of the Tribunal's conclusion on this aspect.

(3.) THE AAC has gone into the question as to whether the assessee stopped its business or continued it after entering into the agreement with the Indian Overseas Bank on 29th December, 1967. He has pointed out that for the next assessment year 1969-70, the assessee has been assessed on a business income of Rs. 26,630. He has pointed out in para. 6 of his order that though a very large part of the assets and liabilities of the assessee was transferred on 29th December, 1967, to the Indian Overseas Bank Ltd., the assessee's business did not cease, and that the assessee continued to be a banking company under the banking law. He has specifically found that the licence issued to the assessee as a banking company had not been cancelled nor has it been permitted to wind up its affairs by the issue of a requisite certificate by the Reserve Bank, On these facts, he came to the conclusion that only a part of the business had been transferred and that the remaining part of the business continued. When the matter came up before the Tribunal, the Tribunal accepted this finding of the AAC and proceeded to consider the allowability of the amount in question only on the basis of this finding. THE result is that the finding of the AAC which has not been disturbed by the Tribunal is that the assessee continued to carry on its business. THE point now to be considered is whether the payment of gratuity with reference to its employees who were found to be surplus at the time of the transfer of a part of the business is an allowable deduction under Section 37(1). A payment made in the course of carrying on its business as gratuity cannot be equated to a terminal payment on the closure of the business so as to be disallowed. THEre was no closure on the facts. THErefore, such a claim cannot also be equated to a payment made at the time of the transfer of the undertaking of the assessee as in the cases cited. It is not necessary, therefore, to go into the decisions in CIT v. Gemini Cashew Sales Corporation, 1967 65 ITR 643 and CIT v. Pathinen Grama Arya Vysya Bank Ltd., 1977 109 ITR 788 . Those are cases where there had been a cessation of the business or a transfer of the undertaking as such. On the facts found, the assessee will be eligible for the allowance under Section 37(1). THE several clauses under Section 36 do not apply here. THE question is, therefore, answered in the affirmative as far as allow-ability under Section 37 is concerned and in favour of the assessee. THE assessee will be entitled to its costs. Counsel's fee Rs. 500.