M/S W.T. SUREN AND CO. LTD vs. COMMISSIONER OF INCOME TAX, BOMBAY

CIVIL APPEAL No. 479/1985Supreme Court[1998] 1 S.C.R. 106923 February 1998Bench: 2 JudgesAuthor: SUJATA V. MANOHAR, D.P. WADHWA MIS W.T. SUREN AND CO. LTD. A COMMISSIONER OF21 pages
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What were the facts?

The assessee, a private limited company, stopped the activities of its distribution unit and transferred this business to a transferee-company, Rallis India Ltd. The employees of the distribution unit became surplus, leading to the termination of their services. Rallis India Ltd. offered these employees similar employment with continuity of service and assured them payment of gratuity due under its scheme, including any amount accrued up to the termination date if it was higher than that calculated under the assessee's scheme. The assessee paid gratuity directly to employees who did not join Rallis India Ltd. For those who joined, the assessee, at their instance and on their behalf, paid the gratuity amount due to them to Rallis India Ltd. Rallis India Ltd. placed these funds in trust in a separate account for the exclusive benefit of these employees, to cover their gratuity for service with the assessee and future service with Rallis India Ltd. The assessment year in question is 1960-61. The Income Tax Officer and Appellate Assistant Commissioner disallowed the deduction for gratuity paid to Rallis India Ltd., but the Income Tax Appellate Tribunal allowed it. The High Court, however, ruled in favour of the Revenue.

What did the Supreme Court hold?

The Supreme Court held that the payment of gratuity by the assessee to Rallis India Ltd. was an expenditure wholly laid out or expended for the purpose of the assessee's business and was therefore an allowable deduction. The Court reasoned that the payment was not on account of the transfer of the distribution unit itself, but rather due to the cessation of that business and the resulting surplus of employees whose services were terminated. The payment was made at the instance and on behalf of the employees who joined Rallis India Ltd., and the assessee was bound to pay gratuity upon termination of services. The fact that the payment was routed through Rallis India Ltd., which held it in trust for the employees, did not alter the nature of the expenditure from the assessee's perspective. The Court emphasized that the gratuity payment was made as per the assessee's scheme and was not an ex-gratia or isolated payment. It was an obligation in praesenti arising from the termination of services. The Tribunal's finding that the assessee was a going concern with only one department closed was also considered relevant. The Court overruled decisions in CIT v. W. T Suren & Co. Ltd. (1982) 138 ITR 91 (Bom), Stanes Motors (South India) Ltd. v. CIT (1975) 100 ITR 788 (Mad), and CIT v. Salem Bank Ltd. (1979) 109 ITR 224 (Mad), while approving decisions in CIT v. Standard Furniture Co. Ltd. (1979) 116 ITR 751 (Ker), CIT v. Sarada Binding Works (1985) 152 ITR 520 (Mad), and CIT v. Salem Megnesite Pvt. Ltd. (1991) 189 ITR 154 (Bom). The question was answered in the affirmative in favour of the assessee.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the payment of gratuity in the sum of Rs. 4,08,622/- made by the assessee to Rallis India Ltd. was an allowable deduction under Section 10(2)(xv) of the Income Tax Act, 1922 (corresponding to Section 37(1) of the Income Tax Act, 1961)? Assessee's Contention: The assessee argued that the payment of gratuity was an expenditure wholly laid out or expended for the purpose of its business. It was an obligation arising from the termination of services due to the cessation of a business activity, and the payment was made at the instance and on behalf of the employees who continued their service with the transferee-company. Revenue's Contention: The revenue contended that the payment was not an allowable business expenditure. The High Court, in its judgment, noted that the payment was not on account of the transfer of the business unit but due to the stopping of that business and employees becoming surplus. The High Court's decision was in favour of the revenue, implying a disagreement with the assessee's claim for deduction.

Which sections of the Income-tax Act were involved?

Section 10(2)(xv),Section 37(1)

AI-generated summary — verify with the full judgment below

+ MIS W.T. SUREN AND CO. LTD. A COMMISSIONER OF INCOME TAX, BOMBAY FEBRUARY 23, 1998 [SUJATA V. MANOHAR AND D.P. WADHWA, JJ.] B Income Tax Act, 1922 : Section J0(2)(xv).

Income Tax--AY 1960-61-Business Expenditure-Gratuity-Payment of-By assessee to the transferee-company on tranifer of a part of its business- C Deductability of-A.ssessee, a private limited company, stopped and traniferred the activities of its distribution unit to the transferee-However, other business of assessee continued-Assessee terminated sen1ices of the employees of that distribution unit-Transferee offered these employees similar employment with continuity of sen1ice and assured payment of gratuity due to them under it together with that accrued to them on the date of their termination if the D amount thereof was higher than that calculated under the transferee's scheme- -Assessee paid gratuity to those who did not join the transferee- company-Ho11'ever, the assessee, not of its own accord but at the instance and on behalf of the employees who joined the transferee, paid to the transferee-company the amount of gratuity due to such employees-Transferee put the amount in trust in a separate

The order continues below.

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