Law:

Section:

section 37(1) of the income-tax act, 1961-business expenditure-assessee-non-resident company carrying on business in prospecting and extracting petroleum transferred a part of its business to a new resident company as a result of which manpower requirement of assessee was substantially reduced-under a voluntary severance scheme, several employees resigned from their service and were paid compensation-whether assessee could claim deduction of such compensation paid to employees under section 37(1)-held, yes Facts The assessee, a non-resident company, carrying on business in prospecting and extracting petroleum from various fields, was granted licence by the Government for prospecting in new areas which were to be later transferred to a new resident company. After incorporation of the new company the services of the employees of the assessee, who were working in the new areas were transferred to the new company. After the transfer of the new areas to the resident company, the assessee's business stood restricted and manpower requirement of the assessee was substantially reduced. A voluntary severance scheme was introduced under which personnel who resigned from service were to be paid compensation. During the relevant year the assessee paid a large sum by way of compensation to some of its employees who joined the scheme and resigned from service. The assessee claimed deduction of this amount from its gross income for the relevant year on the ground that the said amount represented expenses incurred for commercial expediency. The ITO rejected the claim of the assessee holding that the discharge of selected employees resulted in an enduring benefit to the assessee and the expenditure was, thus, capital in nature. On appeal, the AAC as well as the Tribunal allowed the claim of the assessee. On reference : Held It has been held by the Supreme Court in Indian Cable Co. Ltd. v. Their Workmen AIR 1972 SC 2195 that the payment of compensation to induce the workmen to retire prematurely is an item of expenditure incurred by the company on the ground of commercial expediency in order to facilitate carrying on of the business and it is an expenditure allowable under…

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