Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Whether provision made by assessee-firm towards retrenchment compensation was an allowable deduction - Held, no Facts For the assessment years 1973-74 to 1975-76 the assessee-firm claimed deduction in respect of the provision made for retrenchment compensation. The ITO disallowed the assessee's claim. On second appeal, the Tribunal upheld the disallowance on the ground that there was no ascertained liability and the possibility of such a liability arising may or may not happen and there was no method of evaluating or quantifying such liability and that the unilateral action on the part of the assessee in making a provision would enable it to use the funds for any of its purposes. On reference : Held The retrenchment in a business establishment may or may not take place and in that sense, it would be a doubtful uncertain future event. The liability to pay retrenchment compensation in the doubtful and uncertain future event of such retrenchment taking place is only in the nature of a wholly contingent liability not resting on any definite obligation on the part of the employer when the business is run. Any provision, therefore, made to cover such a doubtful contingent liability, which may or may not arise at all, could not be treated as a definite obligation and as a permissible outgoing or deduction. Moreover, there was also no satisfactory method of evaluating or quantifying the value of that liability in any particular year of account and could not, therefore, appropriately form the subject-matter of a claim for deduction. The assessee was, therefore, not entitled to deduction of provision made towards retrenchment compensation. Cases referred to Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC), CIT v. Gemini Cashew Sales Corpn. [1967] 65 ITR 643 (SC),CIT v. Rajkumar Mills Ltd. [1971] 80 ITR 244 (Bom.), CIT v. Indian Metal Metallurgical Corpn. [1964] 51 ITR 240 (Mad.), CIT v.Otis Elevator Co. (India) Ltd. [1977] 107 ITR 241 (Bom.), Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 (SC), Indian Hume Pipe Co. Ltd. v. The Workmen AIR 1960 SC 251 and Dalmia…

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