Law: Income Tax Act, 1961

Section: 37(1)

Income-tax------Business expenditure---Gratuity---Difference between retrenchment compensation and gratuity---Part of business of - assessee, a subsidiary company closed and transferred to holding company---Same employees of subsidiary company continuing employment with holding company as per agreement---Gratuity for such employees paid to holding company ,- -Assessee had an obligation to pay gratuity---Amount paid was expenditure wholly laid out for purposes of business---Deductible---Indian Income-tax Act, 1922, S.10(2)(xv)---Indian. Industrial Disputes Act, 1947. S.25-FF---Indian Income Tax Act, 1961, S.37(1)---[CIT v. W.T. Suren & Co. Ltd. (1982) 138 ICR 91 reversed]. Retrenchment compensation is not the same thing as gratuity. The Industrial Disputes Act, 1947, specifies the circumstances under which a workman is entitled to compensation. The right to retrenchment compensation arises when the employer terminates the employment or the undertaking of the employer is transferred and in the latter case only if the case does not fall under the proviso to section 25-FF of the Industrial Disputes Act, 1947. Those provisions cannot certainly be applied in the case of payment of gratuity. Gratuity is payable on the termination of the employment of the employee on any account except dismissal and calculated on the basis of the number of years of service and at the rate prescribed in the scheme. The assessee, a private limited company, was a wholly owned subsidiary of R. One of its activities was the distribution of the products of T which was also another wholly owned subsidiary of R. With effect from May 1, 1959, the assessee closed its unit for distribution of the products of T which business was taken over by R. On April- 22, 1959, the assessee wrote letters to the employees working in the unit dealing with the distribution stating that arrangements had been made for the business conducted by the assessee to be taken over by R, and that the transfer would take effect from May 1, 1959. By this letter, the employees were further informed that arrangements had also been made whereby all the employees of the assessee of the distribution unit would be offered…

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