Commissioner of Income Tax vs Sri Venkateswara Bank Ltd.

Sethuraman, J.—In this reference u/s 256(1) of the I.T. Act, 1961, the following question has been referred :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in allowing the sum of Rs. 26,032 as an admissible

deduction u/s 36(1)(ii) or u/s 37(1) of the Income Tax Act, 1961 ?

The assessee is a public limited company carrying on banking operations. On 29th December, 1967, it entered into an agreement to transfer a

substantial part of its business to the Indian Overseas Bank Ltd. At the time of the transfer, the assessee paid a sum of Rs. 26,032 as "" gratuity"" to

its employees and claimed the same as deduction in the computation of its income. The ITO disallowed the claim for deduction on the ground that

the amount paid to the employees, though termed as "" gratuity "", is in effect "" retrenchment compensation "" paid to the employees of the assessee

and since the assessee had ceased its business activities even after effecting a transfer on 29th December, 1967, the amount claimed could not be

allowed as deduction. The assessee appealed to the AAC who disagreed with the finding of the ITO and held that a sum of Rs. 8,110 relating to

the ex-secretary was liable to be allowed as deduction and confirmed the disallowance of the balance of Rs. 17,922. The assessee appealed to the

Appellate Tribunal against the disallowance and the Tribunal by its order dated the 17th April, 1974, directed the allowance of the entire amount

as a deduction u/s 37(1) if not u/s 36(1)(ii). The revenue has filed the reference questioning the correctness of the Tribunal''s conclusion on this

aspect.

Though in the question as framed as well as in the order of the Tribunal the sum in dispute has been referred to as Rs. 26,032, it is clear that this

cannot be the correct amount as a sum of Rs. 8,110 has already been allowed by the AAC out of this sum and there was no appeal by the ITO

against the said allowance. Therefore, the only point that could have been in dispute before the Tribunal, and that could be the subject of reference

before us, is only regarding the sum of Rs. 17,922.

In the question, reference has been made to Section 36(1)(ii). Section 36(1), to the extent relevant, runs as follows :

(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income

referred to in Section 28 :.....

(ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or

dividend if it had not been paid as bonus or commission......

The ITO has referred to the amount as "" retrenchment compensation "" while the assessee claimed it as "" gratuity "". In either case, it would not be

a sum referred to in Section 36(1)(ii). The amount could not, therefore, have been allowed as deduction under that provision.

We have, therefore, to consider the question of the allowability of this sum u/s 37(1) of the Act. The learned counsel for the CIT contended that

this amount has been paid as a result of the closure of the business and that as such it would not be an expenditure in carrying on the business

which alone is allowable deduction u/s 37. We have, therefore, to consider the question whether the business in the present case has been closed.

It has already been stated that on 29th December, 1967, there was an agreement between the assessee-company and the Indian Overseas

Bank. Under the agreement, the transferee-bank, that is, the Indian Overseas Bank did not undertake any liability on behalf of the transferor-bank,

that is, the assessee here, in respect of the past services of the employees. The liability, arising out of the past services rendered by the employees

had to be settled and discharged by the assessee before it could effect transfer of a substantial portion of its business to the Indian Overseas Bank

Ltd. In pursuance of Clause 9 of the agreement the assessee passed a special"" resolution on 28th August, 1968, sanctioning payment of gratuity to

all its employees, gratuity being calculated at 15 days'' salary for every completed year of service or any part thereof in excess of six months. The

payment of gratuity to the ex-secretary was allowed as a deduction by the AAC only on this basis. From the facts narrated above it is clear that

the amount that has been paid is only gratuity and not retrenchment compensation.

The AAC has gone into the question as to whether the assessee stopped its business or continued it after entering into the agreement with the

Indian Overseas Bank on 29th December, 1967. He has pointed out that for the next assessment year 1969-70, the assessee has been assessed

on a business income of Rs. 26,630. He has pointed out in para. 6 of his order that though a very large part of the assets and liabilities of the

assessee was transferred on 29th December, 1967, to the Indian Overseas Bank Ltd., the assessee''s business did not cease, and that the

assessee continued to be a banking company under the banking law. He has specifically found that the licence issued to the assessee as a banking

company had not been cancelled nor has it been permitted to wind up its affairs by the issue of a requisite certificate by the Reserve Bank, On

these facts, he came to the conclusion that only a part of the business had been transferred and that the remaining part of the business continued.

When the matter came up before the Tribunal, the Tribunal accepted this finding of the AAC and proceeded to consider the allowability of the

amount in question only on the basis of this finding. The result is that the finding of the AAC which has not been disturbed by the Tribunal is that the

assessee continued to carry on its business. The point now to be considered is whether the payment of gratuity with reference to its employees

who were found to be surplus at the time of the transfer of a part of the business is an allowable deduction u/s 37(1). A payment made in the

course of carrying on its business as gratuity cannot be equated to a terminal payment on the closure of the business so as to be disallowed. There

was no closure on the facts. Therefore, such a claim cannot also be equated to a payment made at the time of the transfer of the undertaking of the

assessee as in the cases cited. It is not necessary, therefore, to go into the decisions in Commissioner of Income Tax, Kerala Vs. Gemini Cashew

Sales Corporation, Quilon, and Commissioner of Income Tax Vs. Pathinen Grama Arya Vysya Bank Ltd., . Those are cases where there had

been a cessation of the business or a transfer of the undertaking as such. On the facts found, the assessee will be eligible for the allowance u/s

37(1). The several clauses u/s 36 do not apply here. The question is, therefore, answered in the affirmative as far as allow-ability u/s 37 is

concerned and in favour of the assessee. The assessee will be entitled to its costs. Counsel''s fee Rs. 500.