Law: Income Tax Act, 1961

Section: 66,88(1)

[Indian Income Tax Act, 1961].......Sections 66, 88(1) (Now 80G)- Business expenditure--New company taking over business of assessee-company-Employees token over by new company on same terms and conditions without break in service-Assessee-company paying over gratuity reserve attributable to employees transferred to new company-Na .payment to any employee-Payment whether business expenditure-Held no. During the assessment year 1963-64 a new company was formed to take over the retreading division of the assessee-company. The new subsidiary company took over all the employees of the assessee-company working in the said division. At the time of formation of the new company gratuity payable to the transferred employees was calculated on the basis of the rules of the assessee-company to be Rs. 56,275. This amount was transferred to the new company from the pension and gratuity reserve of the assessee-company. The claim of the assessee that the amount "was paid in discharge of its liability for gratuity to the employees transferred to the new company and, hence, an allowable deduction under Section 37 of the Income fax Act. 1961, was negatived by the officer in the view that no payment having been made to any employee the amount had merely changed hands from the assessee-company to the new company and, hence, it amounted only to a transfer and not an expenditure. The Appellate Assistant Commissioner also confirmed the disallowance. The Tribunal, however, allowed the claim in the view that the amount had "been paid in discharge of the assessees obligation to its workmen and payment to the new company on behalf of the employees. On a reference to the High Court at the instance of the department : Held that: (1) The assessee was not under a definite and present obligation to pay any gratuity in respect of the transferred employees : (2) The payment is not made to the new company on behalf of the employees nor did the new company receive it on their behalf as the employees were taken in the new company on the same terms and conditions ; (3) No obligation in respect of the employees arose on transfer because the new company took over the employees without any break in…

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