COMMISSIONER OF INCOME TAX Vs. RADIO TALKIES

JUDGEMENT

(1.) BY this reference under S. 256(1) of the IT Act, 1961, the Tribunal, Bombay Bench, Mumbai, has referred the following question of law to this Court for opinion at the instance of the Revenue :

(2.) THE material facts giving rise to this reference are as under : The assessee, who was carrying on the business of exhibiting films, closed its business in March, 1972, and the property consisting of land and building was sold. The assessment which was originally made on 18th Sept., 1978, was set aside and fresh assessment was made. The ITO, who was asked to make a fresh assessment, referred the matter for valuation of the property to the Valuation Officer. On the basis of the valuation report, the ITO took the value of the property as on 1st Jan., 1954, at Rs. 7,31,000 and assessed the capital gains at Rs. 11,24,999. In ascertaining the capital gains, the assessee claimed before the ITO that as the assessee had paid Rs. 74,687 as retrenchment compensation to the ex - employees of the assessee, which was a condition precedent to the sale of the property, he was entitled to deduction of the same in computation of capital gains. The ITO rejected the above claim of the assessee. The CIT(A) upheld the above order of the ITO. The assessee went in further appeal to the Tribunal. Before the Tribunal it was contended that the assessee was required to pay retrenchment compensation to its employees before completion of the sale and that being so, it was an expenditure incurred wholly and exclusively in connection with such transfer. Reliance was placed by the assessee on cl. 15 of the sale deed which required the assessee to terminate the services of the employees employed by it in the theatre and also pay and discharge all liabilities or claims of the said employees for gratuity, retrenchment compensation, bonus, etc., if any, and indemnify the assignees against such claims. The Tribunal accepted the contention of the assessee and held that in view of cl. 15 of the agreement which made it obligatory on the assessee to discharge all its liabilities on account of gratuity, retrenchment compensation, bonus, provident fund, etc. the amount of retrenchment compensation paid by the assessee to its employees was expenditure wholly and exclusively incurred in connection with the agreement of sale and hence allowable as a deduction under S. 48(i) of the Act. Hence this reference at the instance of the Revenue.

(3.) WE have carefully considered the submissions of Mr. Desai. Sec. 48 of the Act, as it stood at the material time, reads as follows :