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Whether payment of closure compensation would be an admissible deduction :

30. If after closure, any amount is paid, in that event, such amount is paid for the purpose of closure of the business not for the purpose of running the business. But in case it is found that the business had closed down a particular part of it or a unit and the rest of the part is continuing or the other units are functional and the business is carried on, in that event, if closure compensation is paid to the employees in business expediency bona fide for the purpose of preventing loss and earning profit, in that event, the same would be eligible as admissible deduction under section 37. The test is whether the expenditure was incurred for the carrying on of the business. It was so held in CIT v. Gemini Cashew Sales Corporation (1967) 65 ITR 643 (SC) cited by Mr. Shome. In the said case, it was held that the liability to pay retrenchment compensation under section 25FF of the Industrial Disputes Act arose for the first time after the closure of the business; it did not arise so long as the business continued. In other words, there cannot be any liability to pay retrenchment compensation if the business continues. But in the case at hand the facts are distinguishable from those involved in Gemini Cashew Sales Corporation (1967) 65 ITR 643 (SC). Inasmuch as here in this case the retrenchment liability was not paid after the closure of the business but before the closure was permitted by the authority. The permission to close down the business was denied by the appropriate authority which was confirmed by the judicial authority. Therefore, there was no closure of the business but the amount was spent to get rid of the employees in order to ensure prevention of loss and earning profit. By reason of such payment the manufacturing part of the unit ceased to function while the trading part of the unit continued even for the subsequent years. These facts are not in dispute. It is not in dispute that this unit was running at a loss. In order to make the other lines of business or units or the business as a whole viable, the assessee attempted to reduce the working force which the assessee had done by easing out some of its employees through such payment termed as closure compensation. As soon as the closure was denied by the appropriate authority, the compensation cannot be termed as closure compensation but a payment made to make the business viable. In fact, the expenditure was incurred for the purpose of carrying on the business and this payment was made when the business was being carried on and was ultimately continued. The expenditure was not a contingent one and as such the ratio decided in Gemini Cashew Sales Corporation (1967) 65 ITR 643 (SC) does not apply in the facts and circumstances of the present case.