Orissa High Court
Commissioner Of Income-Tax vs J.C. Budharaj And Co. on 13 January, 1993
Equivalent citations: [1993]204ITR656(ORISSA), (1994)ILLJ589ORI
Author: A. Pasayat
Bench: A. Pasayat
JUDGMENT A. Pasayat, J.
1. At the instance of the Revenue, the following question has been referred to this court for opinion under Section 256(1) of the Income-tax Act, 1961 (in short, "the Act"), by the Income-tax Appellate Tribunal, Cuttack Bench, Cuttack (in short, "the Tribunal") :
"Whether, on the facts and in the circumstances of the case and in view of the stipulation in the deed of partnership and keeping in view the duration of contract, the Tribunal was justified in treating retrenchment compensation of Rs. 1,03,147 as allowable under Section 37 of the Income-tax Act, 1961 ?"
2. For the assessment year 1983-84, J.C. Budharaj and Co. (Raising of chrome ore, Kalarangi 'E' Quarry), a partnership firm (hereinafter referred to as "the assessee") filed its return of income before the Income-tax Officer, Ward A, Bhubaneshwar (in short, "the ITO"). The return was filed on December 30, 1983, disclosing a total loss of Rs. 12,98,443. During the assessment, it was noticed that the assessee had claimed a sum of Rs. 1,03,147 under the head "Compensation expenses". The Income-tax Officer was of the view that the amount was payable to the workers at the closure of the mines and, therefore, was relatable to the closure of business and not to the carrying on of business. The expenses, according to him, were incurred to facilitate the closure of business and, therefore, were not allowable as revenue expenses. The assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals), Orissa (in short, "the CIT (Appeals)"). The said authority noticed that the assessee had entered into an agreement with the Orissa Mining Corporation Limited (in short, "the OMC") on March 11, 1980, for raising of chrome ore in Kalarangi Quarry No. 1. The work order was given on November 14, 1979, but the agreement was signed on March 11, 1980. Thirty months' time from the date of issue of the work order was allowed to complete the work. In other words, the assessee was required to complete the work by August 10, 1982. The assessee continued working in the aforesaid quarry during the assessment years 1981-82 and 1982-83. During the assessment year 1983-84, certain disputes arose between the assessee and OMC relating to the ratio of ore to be supplied by the assessee to OMC. There was protracted correspondence between them. The assessee could not supply the requisite ratio of ore as per agreement and had to close down the work of the mines as no amicable settlement could be arrived at regarding the ratio. The assessee had claimed substantial expenditure by way of removal of over-burden and cutting open of the mines in certain areas, but the OMC did not allow the assessee to proceed with its work in some areas. It did not allow the assessee to continue the work beyond a certain depth. As a result of the restraints put by the OMC, considerable loss was caused to the assessee. Since no amicable settlement could be reached in regard to continuation of the work, the assessee decided to suspend its raising activities in OMC mines at the earliest. Since indefinite retention of the workmen would have entailed further loss, the assessee considered retrenchment of some of its workmen from July 1, 1982, even while the operational activities were still continuing. Notices were served on all concerned as required under the provisions of the Industrial Disputes Act, 1947. In conformity with the provisions of Section 25F of the said Act, the assessee disbursed a sum of Rs. 1.03,147 to various workmen. This amount was claimed as revenue expenditure under Section 37(1) of the Act.
3. The stand of the assessee before the Commissioner of Income-tax (Appeals) was that there was no closure of the business as observed by the Income-tax Officer. Although the contract with OMC was proposed to be suspended even after the payment of retrenchment compensation and beyond August, 1982, some of the operations in the mines continued and the assessee had incurred expenditure for such activities which included ore cutting, loose earth shifting, screening, boulder breaking, haulage, silt removal, etc. For this period, the assessee had also prepared and submitted bills to the OMC for the work done, even though the entire bills submitted including those for the period prior to the retrenchment of workmen were not settled by the OMC, as a result of which the assessee had declared a net loss. The assessee's stand was that the expenditure, having been incurred by the assessee even before the business was discontinued, and that too to meet a liability that was statutorily imposed on it for the purpose of carrying on business, was admissible deduction under Section 37(1). The Commissioner of Income-tax (Appeals) accepted the stand of the assessee and directed the amount in question to be allowed as expenditure. It was observed that there was no discontinuation of business by the assessee when the retrenchment compensation was paid. Having found that the contract with the OMC could no longer be executed as per agreement, the assessee thought it expedient to dispense with the services of those employees who were engaged for that particular work, as their indefinite retention would have meant further loss to the assessee. Therefore, payments in terms of Section 25F were made by the assessee. The Revenue carried the matter in appeal before the Tribunal. The conclusions of the Commissioner of Income-tax (Appeals) were affirmed by the Tribunal. On being moved by an application under Section 256(1) of the Act, the Tribunal referred the question aforeindicated for opinion.
4. Mr. Ray, learned counsel for the Revenue, has urged that there was no quantification of the liability and unless that is done, the claim should not have been allowed. It is submitted that the Commissioner of Income-tax (Appeals) and the Tribunal went wrong in holding that the expenditure was not relatable to closure. Mr. Rath, learned counsel for the assessee, on the other hand, contended that the quantification aspect was not raised by the Revenue at any stage earlier and it is not permissible to raise that question for the first time during hearing of the reference. It is also submitted that the Commissioner of Income-tax (Appeals) and the Tribunal have come to a categorical finding of fact on a consideration of the materials on record that the retrenchment compensation was paid while the business activities of the assessee were continuing, and, therefore, was not relatable to the closure of the business.
5. The determinative factor is the nature of payment made, and whether the same was paid for closure of business or for carrying on business. It is too late in the day not to treat the expenditure, incurred in paying reasonable sums by way of retrenchment compensation or compensation for termination of service, as not business expenditure. Such expenditure does ordinarily fall within the scope of Section 37(1), (See Sassoon ). David and Co. P. Ltd. v. CIT [1979] 118 ITR 261 (SC). Social justice requires that workmen who have rendered continuous service for a reasonably long time in any industry should not be retrenched at the sweet will of the employer without letting him have compensation therefor. Section 25F of the Industrial Disputes Act, 1947, operating with effect from October 24, 1953, provides that, in such a case of retrenchment, the workman shall be entitled to compensation. Payment of accrued liability on such account is an allowable deduction as business expenditure. The position is, however, different where a provision is made in respect of future liability. Section 25F has application to cases of retrenchment during the continuance of business. Section 25FFF was introduced with effect from November 28, 1956, making provision for payment of notice salary and compensation even on closure of the business. The manifest object is to compensate the workman for loss of employment so as to provide him with the wherewithal to subsist until he finds fresh employment. (See Santosh Gupta v. State Bank of Patiala, AIR 1980 SC 1219). So far as retrenchment compensation under Section 25F, is concerned, the same is allowable as business expenditure, in the case of an assessee following the mercantile system of accounting, in the year wherein the liability therefor is incurred. Such liability is incurred in the year wherein actual retrenchment takes place. Till then, it is not a liability in praesenti but only a contingent liability with the result that a provision therefor is not allowable. In the case of an assessee following the cash system of accounting, the allowability of such compensation falls in the year of actual payment. It is not in dispute that the assessee was following the mercantile system of accounting as is evident from the order of assessment. The Commissioner of Income-tax (Appeals) and the Tribunal have recorded a categorical finding that the case at hand is one where notices of termination were issued even while the particular contract was in progress, apart from the fact that the business as a whole was being carried on by the assessee, and not on its closure. The conclusions have been arrived at on an analysis of the fact situation and are essentially conclusions of fact. In the aforesaid premises, we are of the opinion that the Tribunal was justified in treating the retrenchment compensation as allowable expenditure under Section 37 of the Act. Our answer to the question referred to above, is, therefore, in the affirmative in favour of the assessee and against the Revenue. We have not taken note of the submissions made by learned counsel for the Revenue regarding non-quantification of liability because such a question was not considered by any of the authorities and also does not arise out of the order of the Tribunal.
6. The reference is, accordingly, disposed of. No costs.
D.M. Patnaik, J.
7. I agree.