Commissioner of Income Tax vs Sri Ramavilas Service Ltd.

Venkataswami, J.—At the instance of the Revenue, the Tribunal has referred the following two questions under s. 256(1) of the IT Act,

1961, for the decision of this Court :

(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the provision for monetary value of the

unavailed leave salary of the employees should be allowed as a deduction ? and

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 23,084 being the retrenchment

compensation and notice pay to the employees voluntarily retired would be an admissible deduction ?

Mr. C. V. Rajan, learned counsel appearing for the Revenue, submitted that he has instructions not to press the first question. Accordingly, we

are returning the first question without giving any answer.

So far as the second question is concerned, the brief facts are the following :

The assessee claimed a sum of Rs. 23,084 as compensation paid to the employees who retired voluntarily, and that the said sum must be treated

as business expenditure. The ITO did not agree that the said sum was expended by way of business expenditure as it cannot be considered as

statutory liability in terms of the provisions of ss. 25F, 25FF or 25FFF of the Industrial Disputes Act. The ITO further held that the payment must

be treated as voluntary, and, on that ground, disallowed the claim of the assessee. On appeal by the assessee, the AAC allowed that claim,

applying the decision of the Tribunal in ITA No. 193 of 1977-78. On further appeal by the Revenue, the Tribunal upheld the order of the AAC.

Hence, the present reference at the instance of the Revenue.

It is seen from the order of the ITO that the payment of Rs. 23,084 was as per the scheme agreed to between the assessee and the employees.

That being the position, can it be said that the amount represented a voluntary payment as contended by the Revenue, or can it be treated as

business expenditure, as contended by the assessee, is the question to be decided.

This matter is no longer res integra. In Commissioner of Income Tax Vs. George Oakes Ltd., , a Division Bench of this Court had occasion to

decide an identical issue, and we are told that the assessee in that case was a sister concern of the assessee in the case on hand. Ratnam, J., as the

learned judge then was, speaking for the Bench, while answering a question identical to the present one, has observed as follows :

.... In other words, though under the provisions of the Industrial Disputes Act as such, no liability was cast on the assessee for making available

the benefits of retrenchment to the nine retired workmen, yet, under the standing orders, it became necessary for the assessee to meet that

obligation. The purpose of retrenching the nine workmen, as found by the Tribunal, was only to contain the loss, reorganise the branch by reducing

the staff and to bring about a reduction in the wage bill as well. These are matters of management pertaining to business considerations and

expediency and the expenditure incurred by the assessee in this regard was for purposes of business and also with a view to maintaining good

relationship with labour and the expenditure has to be considered as having been laid out wholly and exclusively for business purposes of the

assessee. A reference in this connection may be made to Sassoon J. David and Co. Pvt. Ltd., Bombay Vs. Commissioner of Income Tax ,

Bombay, , where the Supreme Court stated that it is too late in the day now to treat the expenditure incurred by a management in paying

reasonable sums by way of compensation for termination of service as not business expenditure. It is also significant that it is not the stand of the

Revenue that the sum of Rs. 2,481 representing the payment of notice pay to the nine workmen is not reasonable. Therefore, the third question is

answered in the affirmative and against the Revenue.

As noticed by the learned judges in the decided case of CIT vs. George Oakes Ltd. (supra), here also there was a scheme pursuant to which

the amount in question was given. The decision of the Supreme Court referred to above (in the extract given supra), fully supports the stand taken

by the assessee, and in the circumstances, we find no difficulty in answering the second question against the Revenue and in the affirmative. The

Revenue will pay the costs which are fixed at Rs. 500.