Commissioner of Income Tax vs Nazeena Traders (Private) Ltd.

M.N. Chandurkar, C.J.—In the assessment year 1973-74, the assessee was carrying on transport business. Finding gradually that the

transport business was not maintainable, the assessee decide to wind up the trabsport business which consisted of both transport of goods and

transport passengers. The assessee-company by different resolutions of the board of directors commencing from January 8, 1972, decided to

retrench the employees. By a resolution dated November 14, 1972, it decided to carry on only business of goods transport. However, by a

resolution dated December 31, 1972, the assessee-company decided to sell away the lorries to an associate company, that is, Road Transport

Corporation (Private) Ltd. In the year 1973, by a resolution of the board of directors dated January 3, 1973, the assessee-company again decided

to make an application for bus routes and further to bid in the auction of forest coupes and later on the company took to mining. In the assessment

year 1973-74, a sum of Rs. 4,32,420 was claimed by the assessee on account of payment of gratuity, retrenchment compensation and notice pay

to its employees paid from time to time in the calendar year 1972. The Income Tax Officer held that section 25FFF of the Industrial Disputes Act,

1947, was not applicable. According to him, the business was not continued as a transport business and the payment was not a statutory obligation

but was voluntary in nature, thought it was made in accordance with the memorandum of settlement with the employees dated July 23, 1954, u/s

18 of the Industrial Disputes Act.

The Appellate Assistant Commissioner found that the assessee had two wings of business, namely, passenger transport and goods transport,

and that since the operational costs of transport of passengers had gone up without revision in passenger fares, the company did not think it

worthwhile to run the passenger division. The last transport bus was sold in November, 1972, till which time the transport business was carried on.

He took view that the assessee had a statutory obligation to pay gratuity, retrenchment compensation and notice pay the employees. He as also of

the view that the passenger transport and goods transport was single business because there was interlocking and interlacing of funds and a

common management and combined office. He took the view that only a part of the business was wound up and there was no closure of the

business. Finding that the payment of retrenchment compensation and notice pay had to be made in compliance with section 25F of the Industrial

Disputes Act, he directed the allowance of the amount of Rs. 4,32,420.

The Revenue filed an appeal before the Tribunal against the order of the Appellate Assistant Commissioner. The Tribunal on the facts found that

the activities of the different departments of the assessee itself had never stopped, but there was only a period of inactivity. In view of this, the

Tribunal took the view that the payment of gratuity, retrenchment compensation and notice pay was not made in the course of the winding up of the

business but was made in the course of the business and it was, therefore, and admissible deduction.

Two questions of law arising out of this order were sought by the Revenue to be referred and the Tribunal, therefore, referred the following two

questions :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the activities of the different

departments of the assessee-company constituted only a single business ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the payment of Rs. 4,32,420 representing

gratuity paid (Rs. 2,64,239), retrenchment compensation paid (Rs. 1,13,241) and notice pay (Rs. 54,940) was an admissible deduction in

computing the total income for the assessment year 1972-73 ?

It appears that in question No. 2, at the end, the assessment year has been wrongly mentioned and it ought to be 1973-74.

Learned counsel for the Revenue strenuously argued that the business of passenger transport was closed down by the assessee and this must,

therefore, be treated as a case of closure of business. This argument is obviously advanced with a view to avail of the decision of the Supreme

Court in Commissioner of Income Tax, Kerala Vs. Gemini Cashew Sales Corporation, Quilon, , where it was held that the liability to pay

retrenchment compensation u/s 25FF arose for the first time after the closure of the business and not before and it arose not in the carrying on of

the business but on account of the transfer of the business. Apart from the fact that on facts, the Tribunal has found that the activities of the different

departments constituted only a single business, it is clear to us that the main business of the assessee-company was transport business. It was this

business which consisted of transport of goods and transport of passengers. Merely because the transport of passengers was stopped, the

transport business as such did not itself cease. That business continued to be carried on and this is clearly a case of a part of the activity in the

business being required to be closed down as that activity being uneconomical. There is not other view possible so far as the first question is

concerned. It has therefore, to be answered in the affirmative and against the Revenue.

In so far as the second question is concerned we need merely refer to the decision of the Supreme Court in Sassoon J. David and Co. Pvt. Ltd.,

Bombay Vs. Commissioner of Income Tax , Bombay, , wherein it was observed as follows (p. 271) :

It is too late in the day now whatever may have been the position about two decades ago, to treat the expenditure incurred by a management in

paying reasonable sums by way of gratuity, bonus, retrenchment compensation or compensation for termination of service as not business

expenditure. Such expenditure would ordinarily fall within the scope of section 10(2)(xv) of the Act which authorize the deduction of any

expenditure ture not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for

the purpose of business or profession or vocation.

The payment of gratuity was clearly in accordance with the agreement reached u/s 18. In so far as the retrenchment compensation and notice

pay are concerned, the concept of retrenchment has now been given a very wide meaning by the Supreme Court in State Bank of India v. N.

Sundara Money [1976] 49 FJR 78; [1976] 1 LLJ 478. The Supreme Court has held that whatever be the reason, every termination spells out

retrenchment. If the assessee has incurred by way of compensation, notice pay and gratuity so that his other business must continue to yield profit,

it is difficult to see why such expenditure cannot be treated as business expenditure. Therefore we must answer this question also in the affirmative

and against the Revenue.

Accordingly both the questions are answered in the affirmative and against the Revenue. The Revenue to pay cost. Counsel''s fee Rs. 500.