Commissioner of Income Tax vs Salem Magnesite Pvt. Ltd.

T.D. Sugla, J.—By this application u/s 256(2) of the Income Tax Act, 1961, the Department requests this court to direct the Tribunal to refer the following three questions as questions of law :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that provision for gratuity of Rs. 44,00,000 being the amount of expenditure to be incurred in consequence of closure of the mining business of the assessee was expenditure wholly and exclusively laid out or expended for the purposes of the said business of the assessee ?

If the answer to the above question is in the affirmative, whether the Tribunal was right in law in holding that the said amount is allowable as deduction in computing the taxable profits of the assessee for the assessment year 1979-80 even though the settlement with the employees'' representatives for payment of the said amount of gratuity was arrived at after the end of the relevant previous year ?

Whether, on the facts and in the circumstances of the case, the Tribunal should not have upheld the disallowance of the said amount in view of the decision of the Bombay High Court in CIT v. W. T. Suren and Co. Ltd. [1983] 138 ITR 91 ?

The Tribunal found that the assessee was engaged in the activities of mining of magnesite and manufacturing batteries and sale of rubber and plastic products and had continued business operations even after the mines were taken over by the State of Tamil Nadu in the year 1978, in fact, this was the finding of the Commissioner (Appeals) which was confirmed by the Tribunal. The first question is thus misconceived and arises only if the business of mining had in fact been closed.

As regards the second question, the facts found by the Commissioner (Appeals) and the Tribunal are that the services of the employees in one of the departments of the assessee were discontinued and the liability in respect of gratuity had become payable. The assessee-company was prepared to make the payment to the employees directly. Since, however, the particular department was taken over by the State of Tamil Nadu, the concerned employees desired that the payment of gratuity should be made to the Government so that they would have the advantage of continuity of service. Initially, the Government was reluctant to accept the proposal. Subsequently, in the year 1981, the State Government agreed to accept the proposal and the payment was made to the State Government on behalf of the employees. The gratuity was payable during the previous year itself. Question No. 2 cannot also be said to be a question of law arising out of the order of the Tribunal.

According to the Department, the Tribunal''s decision is in conflict with the decision of this court in Commissioner of Income Tax, Bombay City-I Vs. W.T. Suren and Co. Ltd., .

We have been taken through our decision in CIT v. W. T. Suren and Co. Ltd. [1983] 138 ITR 91. In this case, no right to gratuity had accrued in favour of the employees whose services were alleged to have been terminated. This was so in view of the assessee''s agreement with the transferee-company to take them up in employment with continuity of employment, there was thus no liability to pay gratuity to the employees as such. The assessee-company had merely made the payment in connection therewith to the transferee-company under an agreement.

In the present case, the assessee-company had not only computed the amount payable to the employees but was also willing to make payment to them. It was the workers who did not want to receive the payment direct as they wanted continuity of service. There were negotiation between the workers and the Government of Tamil Nadu. After the agreement between them, the assessee-company paid the said amount of Rs. 44 lakhs to the Tamil Nadu Government. Thus, even though the workers had the benefit of continuity of service, it was not on account of the assessee-company but as a result of a separate arrangement/agreement between the workers and the Government of Tamil Nadu. This court''s decision in Commissioner of Income Tax, Bombay City-I Vs. W.T. Suren and Co. Ltd., was, therefore, rightly distinguished.

In the above view of the matter, no question of law arises, rule stands discharged with no order as to costs.