Law: Income Tax Act, 1961

Section: 48,256

Income-tax----Capital gains---Computation of---Closure of business of assessee and sale of land and building---Payment of retrenchment compensation to ex-­employees---Not expenditure wholly and exclusively for purpose of transaction of sale---Not deductible---Indian Income Tax Act, 1961, S.48. The assessee, which was carrying on the business of exhibiting films, closed its business in March, 1972, and the property consisting of land and building was sold. In ascertaining the capital gains, the assessee claimed before the Income-tax Officer that as the assessee had paid Rs.74,687 as retrenchment compensation to the ex-employees of the assessee, which was a condition precedent to the sale of the property, it was entitled to deduction of the same in the computation of capital gains. The Income-tax Officer rejected the above claim of the assessee. The Tribunal allowed it. On a reference: Held, that the retrenchment compensation paid by the assessee to its employees had no connection whatsoever with the transaction of sale of the land and building. It was connected only with the closure of the business of the assessee in March, 1972. Such an expenditure could not be regarded as expenditure incurred wholly and exclusively for the purpose of the transaction of sale of the property. The stipulation in the agreement merely required the owner to clear all its liabilities on certain accounts and to keep the transferee indemnified. This stipulation could not change the character of the retrenchment compensation from a liability arising out of the closure of the business to expenditure incurred wholly and exclusively in connection with the transfer of the asset in question. The order of the Tribunal was wrong. JUDGMENT By this reference under section 256(1) of the Income Tax Act, 1961, the Income-tax Appellate Tribunal, Bombay Bench, Mumbai, has referred the following question of law to this Court for opinion at the instance of the Revenue: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the retrenchment compensation paid to the ex-employees was incurred wholly and exclusively in connection with the sale of the property of…

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