Commissioner of Agricultural Income Tax vs Palamattom Plantations (P.) Ltd.

Balakrishna Eradi, C.J.—The Kerela Agricultural Income Tax Appellate Tribunal (hereinafter called " the Tribunal"), has referred to this court u/s 60 of the Kerala Agricultural Income Tax Act, 1950, for short, the Act, the following question of law as arising out of its order dated August 31, 1977, in A.I.T.A. No. 99 of 1976 :

" Is the Tribunal justified on the facts and circumstances of the case, in holding that Rs. 3,144 paid as gratuity accrued before the acquisition of the property, as an allowable deduction u/s 5(j) of the Agrl. Income Tax Act ? "

The reference has been made at the instance of the Commissioner of Agricultural Income Tax.

The assessee is a company owning a rubber plantation. For the assessment year 1973-74, the company had returned a net loss of Rs. 15,922. In arriving at the said figure of loss, the company had claimed a deduction of certain expenditure incurred by it for the payment of gratuity amounting to Rs. 31,144 to certain workers who had been employed in an estate by name Kuttampuzha Estate prior to the allotment of the said estate in favour of the assessee-company as a result of a bifurcation of another company by name Alanickal Company. The parent company, namely, Alanickal Company, was bifurcated with effect from November 1, 1971, pursuant to a compromise arrived at before the company judge of this court. The assessee-company--Palamattom Plantations (P.) Ltd.--was a new company formed as a part of the said process of bifurcation. Under the settlement reached before the company judge, the entirety of Kuttampuzha estate and 9 acres from another estate called Alanickal estate were allotted to the assessee-company. The remainder of Alanickal estate was retained by the Alanickal Company. The transferee-companies agreed to pay the gratuity due to the employees allotted to each company on the termination of the services of the employees brought about prior to the effectuation of the said settlement. It was in pursuance of the said term of the compromise that the assessee-company paid gratuity amounting to Rs. 31,144 to the employees who were working in the Kuttampuzha Estate. The Agrl. ITO held that the said payment could not be regarded as revenue expenditure incurred by the assessee but was, on the other hand, a capital charge taken over as part of the transaction of the transfer of assets. The AAC before whom the assessee carried the matter in appeal agreed with the aforesaid view taken by the assessing authority. But on second appeal filed by the assessee before the Tribunal, the Tribunal held that since the payment of gratuity had been effected pursuant to the provisions of a statute that had come into force in 1960, Section 5(j) of the Act got attracted and the claim for deduction put forward by the assessee had to be allowed. It is the correctness of the said view taken by the Tribunal that calls for examination in this reference.

It is undoubtedly the law that payments made by way of gratuity to workmen employed in plantations pursuant to the statutory obligation cast on the employer in that regard will be a deductible item of revenue expenditure u/s 5(j) of the Act. But in the case before us the deduction claimed is in respect of payments made by way of gratuity to workmen whose services had been terminated prior to the take over of the Kuttampuzha Estate by the assessee pursuant to the allotment referred to above. The said payment was made as a part of the arrangement of transfer which in substance was to the effect that while allotting the Kuttampuzha Estate to the assessee, the assessee was also to take over the liability for payment of the gratuity due to the workmen employed therein under the transferor. The transfer of the Kuttampuzha Estate to the assessee was not as a running concern. In such circumstances, the liability for the payment of gratuity accepted by the assessee as a part of the arrangement of transfer can be regarded only as a capital charge and no deduction could be claimed in respect thereof u/s 5(j) of the Act. The contrary view taken by the Tribunal cannot, therefore, be sustained in law. Accordingly, we answer the question referred in the negative, that is, against the assessee and in favour of the department. The parties will bear their respective costs.

A copy of this judgment under the seal of the court and the signature of the Registrar will be forwarded to the Tribunal as required by law.