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S.C. Tiwari, Accountant Member

1. This appeal filed by the assessee-company is directed against the order under section 263 passed by the Commissioner of Income-tax (Central-I), Calcutta. In this case, the assessment order was passed under section 143(3) on 26th November, 1990 and the Assessing Officer allowed in the assessment of total income a sum of Rs. 18,40,250 as payment of closure compensation. As the learned CIT held the view that this sum debited to the Profit and Loss Account towards provision of compensation was not allowable as deduction against the other income of the assessee, he initiated proceedings under section 263. During the course of proceedings before him, it was contended by the assessee that the expenditure was incurred in relation to closure of one of the factories of the assessee-company which was running at a loss. The business of the assessee-company was still in existence and, therefore, the expenditure was on account of genuine needs. It was emphasised that for prevention of loss being incurred by the assessee at Allahabad unit, the company was compelled to retrench its workers and, therefore, compensation was payable out of commercial expediency. The assessee placed reliance on the decisions in the cases of Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261/1 Taxman 485 (SC), CIT v. Assam Oil Co. Ltd. [1985] 154 ITR 647/23 Taxman 113 (Cal.) and CIT v. P.I. Simon [1991] 187 ITR 302/55 Taxman 224 (Ker.). The learned CIT held that the expenditure was for the purpose of closure of assessee's manufacturing unit at Allahabad and not for the purpose of carrying on business of this unit. Hence, the expenditure could not be regarded as business expenditure. The facts of the case of Sassoon J. David & Co. (P.) Ltd. (supra) related to compensation paid to an employee on termination of his appointment. It was not a case of closure compensation. The expenditure in the case of Assam Oil Co. Ltd. (supra) related to payment of compensation on rationalisation of manpower requirements. Again it was not the case of closure compensation. The facts of P.I. Simon's case (supra) were altogether different. As against this, the learned CIT found that the ratio of the decision of the Hon'ble Calcutta High Court in the case of Binani Printers (P.) Ltd. v. CIT [1983] 143 ITR 338/13 Taxman 215 is rather applicable to the facts of the assessee-company. The learned CIT, therefore, came to the conclusion that the decision of the Assessing Officer in allowing deduction of Rs. 18,40,250 on account of closure compensation was erroneous and prejudicial to the interests of the revenue. This claim of the assessee-company should have been rejected by the Assessing Officer. He, therefore, directed the Assessing Officer to modify the assessment order by disallowing this claim of the assessee.

2. During the course of hearing before us, the learned counsel of the assessee referred to Annual Report of the assessee-company for the previous year ended 31st March, 1987. It was pointed out that the business of the assessee-company comprised of numerous activities apart from carrying on the business of Tea Estates. The assessee-company was also engaged in the business of Plywood, Chemical & Fertilisers, Tyres & Rubber Products and Shipping business. All these numerous activities were being carried on by the assessee-company as a single business under common management and control. As such, there was considerable inter-connection amongst the various business units of the assessee located at different parts of the country. All these units constitute part of the same business. During this accounting year, the assessee was compelled to close its Cycle Tyre & Tube manufacturing activity which was being carried on under the name and style of Jay Shree Tyres & Rubber Products, Allahabad with effect from 2nd November, 1986. All that the assessee did was to close manufacturing activity at Allahabad but the assessee's business as a whole was continued and, therefore, cannot be said that there was any closure or discontinuance of business. As the Allahabad Unit was run by the assessee as part of one and the same business, the liability incurred for compensation on closure of this Unit was rightly claimed as deduction by the assessee. The assessee placed reliance on the Supreme Court decisions in the cases of CIT v. Prithvi Insurance Co. Ltd. [1967] 63 ITR 632, B.R. Ltd. v. V.P. Gupta, CIT [1978] 113 ITR 647, Produce Exchange Corpn. Ltd. v. CIT [1970] 77 ITR 739 and Hooghly Trust (P.) Ltd. v. CIT [1969] 73 ITR 685. Relying on the ratio of these decisions, the learned counsel of the assessee argued that closure of manufacturing unit at Allahabad was only closure of one of the units of the same business while the other units continued to be in business.

7. We have carefully considered the contentions and submissions of the parties and perused the records. On perusal of the assessment order, we see that the Assessing Officer has computed the total income of the assessee under the heads of 21 different units of the assessee's business as separate Profit and Loss Accounts of all these 21 units had been prepared and furnished by the assessee. In the concluding part of the assessment, the Assessing Officer has aggregated the income/loss thus computed in respect of each unit separately. On perusal of the assessment order, it is also noticed by us that there are no observations or remarks or mention of the assessee's claim of deduction of Rs. 18,40,250 on account of closure compensation at Allahabad unit.

14. During the course of hearing before us, the learned counsel of the assessee argued that it could not even be said that the assessee's Allahabad unit was closed down, when the liability of closure compensation was incurred. During the year only manufacturing unit was closed down, but the assessee continued to carry on the business as the unit had considerable stock-in-trade. During the year ended 31st March, 1987, large amounts of sales were made by the assessee during the period subsequent to the closure of manufacturing unit with effect from 2nd November, 1986. Even certain sales were carried out during the subsequent year ended 31st March, 1987. The learned counsel of the assessee, therefore, argued that it could not be said that the assessee's business at Allahabad was discontinued even though there was closure of the manufacturing unit. It is noticed by us that a similar argument has been considered by the Madhya Pradesh High Court in the case of Perfect Pottery Co. Ltd. v. CIT [1987] 166 ITR 196. In that case, the assessee had closed down its manufacturing business and no manufacturing business was carried on during the relevant previous year. The only business carried on during the previous year was the sale of manufactured goods which had been manufactured prior to the closure of manufacturing business. The assessee incurred certain expenditure on account of repairs of machinery and overtime wages. The Hon'ble High Court held that the only business carried on by the assessee was the sale of manufactured goods manufactured prior to the closure of its business and repairs to the machinery having been carried out after the closure of the business it had no nexus with the business carried on by the assessee. In this case, after closure of manufacturing unit with effect from 2nd November, 1986, all that the assessee had done is to carry out sale of goods already manufactured. The liability of closure compensation as claimed by the assessee cannot be said to have the necessary nexus with the sale of manufactured goods which was the only activity carried out by the assessee after closure of manufacturing unit.