The following ground is raised in this appeal directed against the order passed by the Commissioner (Appeals) : "That in the facts and circumstances of the case the learned Commissioner (Appeals) is not justified in sustaining the addition of Rs. 6,65,627. The liability had fallen on the corporation by view of operation of section 25F of the Industrial Dispute Act and is of allowable nature." The appellant in this case is a corporation owned by the Himachal Pradesh Government and as noted in the assessment order it carries on trading business in iron and steel, cement, etc., and it is also engaged in manufacturing business in respect of poles. It is also constructing industrial sheds on behalf of the Government.
In the course of the assessment proceedings, the assessing officer noticed that the assessee had claimed an amount of Rs. 6,65,627 in connection with the closing down of three of its units i.e., Paper Conversion Unit, Parwanoo, Concrete Pole Unit, Parwanoo and Nahan Hosiery at Nahan. It was claimed before the assessing officer that these units were suffering losses and had to be closed down and the deduction claimed represented the compensation paid in accordance with section 25F of the Industrial Disputes Act, 1947. The assessing officer accepted that the payment of compensation "was indeed a legal liability" but he opined that the expenditure not being laid out for the purpose of business was not allowable and section 37 of the Income Tax Act was not applicable. In other words, the view of the assessing officer was to the effect that expenditure incurred for closing down a business could not be allowed under section 37 and he, therefore, made an addition to the returned figures.
Before the Commissioner (Appeals) the assessee contended that the three units of the corporation were closed down to save the corporation from suffering continuous losses. By drawing attention to section 25F of the Industrial Disputes Act, 1947, the learned counsel contended that the liability to pay compensation was a statutory liability and, therefore, clearly allowable under section 37 of the Income Tax Act, 1961.
According to the learned counsel, in case the compensation was not paid by closing the various units, then the corporation would incur further losses. In support of the arguments, reliance was placed on the decision of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 1TR 363 (SC). The Commissioner (Appeals) by a short order upheld the view taken by the assessing officer.
Before us the matter has been argued at length on behalf of both the sides and dealing at the outset with the arguments of the learned counsel for the appellant he contended that the corporation had five manufacturing units out of which three were closed down on the basis of a conscious decision of the management. The resolutions of the Board of Directors authorising the closure were referred to, copies thereof being appended on the compilation filed during the course of the hearing. The main reasons for the closure, according to the learned counsel, were : The further submission was to the effect that it was not a closure of the business as a whole but only a part of the business which was not generating any profits. According to the learned counsel, the various units were controlled by the head office of the corporation at Shimla and it could not be said that they represented an independent and separate business.
In dealing with the separate items forming the compensation package, the learned counsel invited attention to page 14 of the compilation which gave details under the heads "gratuity", "notice pay", "compensation pay" and lastly "leave encashment". It was his submission that the payment of gratuity and leave encashment did not arise by virtue of retrenchment and these were otherwise allowable in view of the decision of the Hon'ble Supreme Court in the case of W.T. Suren & Co. Ltd. v. CIT (1998) 2 DTC 200 (SC) : (1998) 230 ITR 643 (SC).
Further clarifying, the learned counsel referred to page 645 of the report, (230 ITR), supra, contending that gratuity was being claimed under section 37(1) and insofar as leave encashment was concerned, he clarified that this was to be paid in accordance with the terms of employment and this in fact meant that this was a contractual payment.
Reliance was placed on the decision of the Hon'ble Karnataka High Court in the case of CIT v. Bharat Earth Movers Ltd. (1995) 211 ITR 515 (Karn) at pages 518. As regards notice pay, the learned counsel stated that this also was a statutory liability. The further submissions of the learned counsel were to the effect that in a case where a number of units were working, then even if one of them was closed down, the aforesaid amounts became payable in the light of the specific provisions of the Industrial Disputes Act, 1947. Accordingly to him, the closure of three units resulted in the retrenchment of some of the staff members the net result being to arrest the continuous losses and reduce the wage bill and this, therefore, represented expenditure for purposes of business and, therefore, allowable under section 37(1). In support of the earlier arguments as also the aforesaid, the learned counsel placed reliance on the following decisions :B.R. Ltd. v. V.P. Gupta, CIT (iv) CIT v. P.I. Simpon (1991) 56 Taxman 224 (Ker) (considering) (1978) 113 ITR 647 (SC)) The further submission of the learned counsel was in respect of the nature of these receipts in the hands of the employees and his submission was that these were to be treated as exempt from tax under section 10(10B) but he did not carry this argument further as, according to him, it was not relevant and all that was claimed was the payment of retrenchment compensation to the retrenched workers of the three units and which according to him was a statutory liability on the part of the corporation. In concluding, he urged that the claim be allowed.
The learned Departmental Representative, on the other hand, strongly supported the orders passed by the tax authorities. According to him, the expenditure in question was capital in nature. The learned Departmental Representative further stated with reference to page 14 of the assessee's paper-book that the separate items were not considered either by the assessing officer or by the Commissioner (Appeals) and submissions of the learned counsel on each of these individual items be ignored by the Bench and the issue be decided on the basis of the facts and arguments available on record before the tax authorities. By referring to the relevant sections of the Industrial Disputes Act, 1947, namely, sections 25F and 25FF, the learned Departmental Representative urged that the claim vis-a-vis the facts of the assessee's case was not tenable and, therefore, required to be rejected. He also referred to section 2(j) of the same Act for the same proposition. In seeking to distinguish the decisions relied upon by the learned counsel for the appellant, the learned Departmental Representative placed reliance on the following decisions :Novopan India Ltd. v. Collector of Central Excise & Customs, Hyderabad (v) CIT v. Central Art Press (1991) 189 ITR 618 (Mad) (copy not filed and thus not considered; and According to the learned Departmental Representative, each case had to be considered on its own facts and for this proposition he placed reliance on the decision of the Hon'ble Supreme Court in the case of CIT v. Sun Engineering Works (P.). Ltd. (1992) 198 ITR 297 (SC).
The further submission was to the effect that the various units in the assessee's case were not interconnected as they carried on different unconnected activities.
In reply the learned counsel for the assessee at the outset referred to page 14 of his compilation contending that the details given therein were already available with the assessing officer and nothing new was placed on the record. As regards the decisions relied upon by the learned Departmental Representative, the learned counsel stated that these were distinguishable as they related to complete closure of business and not closure in part. The controversy, according to the learned counsel, was whether the total expenditure was allowable or not and it was in this connection that different face of the controversy could be raised at any stage of the proceedings.
We have examined the rival submissions and have also perused the orders passed by the tax authorities.
The decisions cited at the Bar have also been duly considered. It is apparent that the tax authorities have taken a view that the expenditure laid out for closing down a business cannot be covered under section 37 of the Income Tax Act. As against this the assessee's contention is that it is not the entire business which is closed down but only three units out of five which have been closed down because of labour trouble and continuous financial losses. Both the parties have cited decisions in favour of their respective point of view.
Taking up the decisions relied upon by the learned counsel for the appellant, one of Hon'ble Madras High Court, CIT v. Diesel Engineer's case, supra and the other of Hon'ble Kerala High Court reported in CIT v. P.I. Simpon Case supra, the respective assessees were carrying on more than one business activity, for instance, in the case of the assessee before the Hon'ble Kerala High Court, he was dealing in oil and oil-seeds as also running a commission agency for these goods but was also running an oil mill in a different locality in the same town.
The oil mill was closed down requiring payment of retrenchment compensation to some employees. The assessing officer allowed deduction under section 37(1) but the Commissioner withdrew the deduction by passing an order under section 263 on the ground that the oil mill was maintaining separate accounts and that the assessee had entered into an agreement with the workers, under which compensation was paid stating that he would take back the workers if for any reason the oil mill was restarted. On appeal the Tribunal allowed the deduction under section 37(1) and the Hon'ble Kerala High Court confirmed the view taken by the Tribunal considering the fact that maintenance of separate accounts would not be a ground to hold that the oil mill was a separate business and further the Tribunal had found as a fact that the oil mill did not have any independent bank account. The Hon'ble High Court also took into account the finding of the Tribunal that the finances were centralised and the requirements of the oil mill were met by drawings of the head office and this showed a complete interlacing and unity of control. Even in the case before their Lordships of the Hon'ble Madras High Court, supra, the issue was decided in favour of the assessee on the same reasoning taking into account the finding of the Tribunal that the manufacturing activity as also the trading activity of the assessee constituted a single business. It may not be out of place to mention that in deciding the issue their Lordships of the Hon'ble Madras High Court applied the judgment of the Hon'ble Supreme Court in the case reported in W.T. Suren & Co. Ltd. (supra), which has been referred to at length by the learned counsel during the course of the hearing of the present appeal. It is also noticed by us from a reading of the aforesaid decision of the Hon'ble Supreme Court that their Lordships have distinguished the decision of the same court in CIT v. Gemini Cashew Sales Corporation, (1967) 65 ITR 643 (SC) which has been applied by the Hon'ble Calcutta High Court in the case. Binani Printers (P) Ltd. v. CIT, supra, a decision relied upon by the learned Departmental Representative in support of the revenue 's case. In the decision B.R.Ltd., v. V.P. Gupta, CIT (supra), the question was once again of common management and common control of businesses as in that case the assessee had closed down its import business in one year and commenced export business in the next year. The issue before the court was whether the loss in import business could be set off against the profit in export business. Their Lordships of the Hon'ble Supreme Court took the view that the loss was allowable in view of common management and common control of the various businesses carried on by the same assessee.
At this stage we would refer to the arguments of the parties with reference to page 14 of the paper-book filed by the assessee's counsel.
As already stated by us, the learned counsel advanced arguments with reference to each of the items such as gratuity, notice pay, compensation and leave encashment and which the learned Departmental Representative opposed on the ground that a separate break-up had not been given before the tax authorities or in fact argued. A perusal of letter dated 6-7-1992 addressed by the assessee to the assessing officer placed at page 2 to 4 of the compilation shows that the assessee enclosed along with the said letter "the bifurcation of the retrenchment benefits paid to the employees". We therefore, reject the submissions of the learned Departmental Representative in this respect.
A reference at this stage to the decision of the Hon'ble Supreme Court, supra, i.e. W.T. Suren & Co. Ltd. is relevant since their Lordships drew a distinction between retrenchment compensation and gratuity and with reference to section 25FF of the Industrial Disputes Act, 1947 held after referring to the entire case law on the subject that gratuity to employees of subsidiary company continuing their employment with holding company as per agreement was an allowable deduction. The learned counsel by referring to the aforesaid judgment has canvassed that gratuity amount of Rs. 3,65,893 out of the total payment claimed is otherwise allowable. Even in respect of the other three items, i.e., notice pay, compensation and leave encashment, the learned counsel had advanced arguments on merits citing the decisions thereof.
Dealing with the decisions relied upon by the learned Departmental Representative, the one of the Hon'ble Madhya Pradesh High Court in the case of Perfect Pottery Co. Ltd. v. CIT (supra) is not at all applicable since that pertains to an entirely different issue and in fact this was pointed out to the learned Departmental Representative during the course of the hearing itself. The decision of the Hon'ble Calcutta High Court in the case of Binani Printers (P) Ltd. v. CIT (supra), has already been discussed by us in the earlier part of the present order and to reiterate, the decision of the Hon'ble Supreme Court in (1967) 65 ITR 643 (SC), supra, was applied and which has been distinguished subsequently in (1998) 2 DTC 200 (SC) : (1998) 230 ITR 643 (SC) (supra). The decision relied upon in (1977) 108 ITR 309 (Mad), (supra), is distinguishable as this pertains to a business which was closed down as a whole and not in part and, therefore, not applicable to the facts of the present case. The learned Departmental Representative also relied on the decision of the Hon'ble Allahabad High Court in the case of CIT v. Swadeshi Cotton Mills Co. (supra) but we do not really understand the relevance of this judgment to the point at issue. It may not be out of place to mention that at one time during the course of the hearing the learned Departmental Representative contended that every decision cited had to be considered on its own facts and for this proposition he placed reliance on the decision of the Hon'ble Supreme Court in the case of CIT v. Sun Engineering Works (P). Ltd. (supra) at p. 320. In deciding the present appeal we have kept in focus the aforesaid decision and discussed in the earlier part of the order each of the decisions cited by the parties considering their applicability or otherwise.
During the course of the hearing the parties referred to the relevant provisions of the Industrial Disputes Act, 1947 i.e., sections 25F and 25FF, in support of their respective viewpoints. According to the learned counsel, the payment of compensation was not only mandatory but also necessary in the interest of the assessee's business as it was necessary to cut down on the continuing losses as also to reduce the wage bill. His statement in the court to the effect that only three units out of five had been closed down and that the entire business was controlled by the head office at Shimla has not been rebutted by the learned Departmental Representative during the course of the hearing.
On this basis we have to record a finding that the five units although carrying on activities which may not be akin to each other constituted the same business there being unity of control, common finances, etc., and the decisions relied upon by the learned counsel for the assessee in support of assessee's case would, therefore, squarely apply and those pressed into service by the learned Departmental Representative would, therefore, become distinguishable. A perusal of the order of the assessing officer would show that he in fact accepts that the liability for payment of compensation was a legal liability under the Industrial Disputes Act, 1947, but not an allowable deduction under section 37 and which view has been confirmed by the Commissioner (Appeals). The learned Departmental Representative sought to add a further twist to the entire case by contending that the payment of compensation was a capital expenditure. We really do not understand as to how such an argument has come forth when none of the tax authorities has kept categorised the payment as capital expenditure.
By reverting once again to the arguments of the learned counsel vis-a-vis reliance on various decisions for each of the items mentioned at page 14 of the compilation, we are of the view that this aspect of the matter was not highlighted earlier and if so done was not considered by any of the tax authorities. A finding is required to be given regarding each of the items claimed at page 14 and whether any of these payments is specifically disallowable under any of the provisions of the Income Tax Act and this once again has to be considered with reference to the case law cited before us by the parties. We have already stated earlier that the decision of the Hon'ble Supreme Court in (1998) 2 DTC 200 (SC) : (1998) 230 ITR 643 (SC) (supra), heavily relied upon by the learned counsel, pertains to payment of gratuity and not compensation. In other words, the relevant provisions of the Industrial Disputes Act, 1947 would also have to be referred to in order to decide whether any part of the payment was over and above the provisions of that Act and if so, what would be the effect of such a payment vis-a-vis the provisions of the Income Tax Act.
Another important fact which is required to be highlighted and which apparently has not been considered by the tax authorities is the note appended by the assessee to the statement of assessable income/loss (see pages 1 of the compilation) which states that a sum of Rs. 6.91 lacs was made available by the Himachal Pradesh Government to the Corporation to pay off the terminal benefits to the workers retrenched.
Even in the letter addressed to the assessing officer on 6-7-1992, this fact has been stated in the last para. In case the funds for making the payment of the retrenchment compensation have been provided by the State Government to the assessee, then it becomes necessary on the part of the department to examine the effect of the same on the assessee's claim for deduction even if the same is found to be tenable on merits as argued by the learned counsel. For this purpose, the matter is required to be sent back to the tax authorities for examination.
To recapitulate and summarise our judgment, on the facts of the case and on the basis of the decisions cited, we are of the view that the assessee has a case on merits under section 37(1) but subject to examination of each of the individual items as per page 14 of the compilation and vis-a-vis the decisions cited and taking into account the relevant provisions of the Income Tax Act and the Industrial Disputes Act, 1947. The department would also be required to consider the effect of the amount paid by the Himachal Pradesh Government to the assessee during the previous year under consideration itself for meeting the liability on account of payment to the workers and whether this would mean the rejection of the claim being off set by the receipt. If ultimately such a view is taken, then the issue before the authorities may become academic in nature.
In the light of aforesaid observations, the issue under consideration is restored back to the file of the assessing officer to be decided on the lines indicated, after giving reasonable opportunity to the assessee.
In the result, the appeal is treated as allowed for statistical purposes.