Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1974-75 - Assessee company passed resolution for winding up of company and during relevant assessment year it retrenched its employees and paid them retrenchment compensation - Whether since compensation was not paid for purpose of carrying on business of company but only because business was being closed down, it was not admissible deduction under section 37 - Held yes FACTS On 15-9-1973, the company passed a resolution for winding up the company and during the previous year relevant to the assessment year 1974-75, the company retrenched its employees and paid them retrenchment compensation. The assessee claimed the amount of retrenchment compensation as an admissible deduction and the ITO allowed that claim. However, the Commissioner under section 263 held that the compensation was not made in the course of carrying on the business or to keep it going, but only because the business was closed down and, therefore, it was not an admissible deduction under section 37. The Tribunal agreed with the view of the Commissioner. On reference : HELD Under section 37(1), any expenditure laid out or expended wholly and exclusively for purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'. In the instant case, the amount had been paid by the assessee by way of retrenchment compensation under section 25FFF of the Industrial disputes Act. That liability arose on the closure of the undertaking, whatever was the cause for such closure. The notice for the meeting on 15-9-1973 as well as the explanatory note appended thereto, when considered in the light of the resolutions passed, to voluntarily wind up the company and to appoint liquidators, clearly established that a decision had been taken to wind up the company dictated by reasons of economy, financial stringency and dwindling business. The notices issued to the workmen showed that the decision had been taken to wind up the business of the company and that the employees would be retrenched from the service of the company one…

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