THE COMMISSIONER OF INCOME TAX, COCHIN vs. LATE SHRI.C.T.VARGHESE

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR.JUSTICE ASHOK MENON MONDAY, THE 22ND DAY OF OCTOBER 2018 / 30TH ASWINA, 1940 I.T.A.No.22 of 2010 AGAINST THE ORDER IN I.T.A.NO.1147/COCH/2005 DATED 22.06.2009 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN [ASSESSMENT YEAR 2001-02] APPELLANT/APPELLANT: THE COMMISSIONER OF INCOME TAX, COCHIN. BY SRI.JOSE JOSEPH, STANDING COUNSEL FOR GOI (TAXES) RESPONDENT/RESPONDENT: LATE SHRI.C.T.VARGHESE, L/H.SMT.MERCY VARGHESE & 4 OTHERS, CHITTILAPILLY CORPORATION, M.G.ROAD, KOCHI-35. OTHER PRESENT: SRI P.K.R. MENON, SENIOR COUNSEL FOR GOI (TAXES) THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 22.10.2018, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: JUDGMENT Vinod Chandran,J. The Revenue is in appeal from an order of the Tribunal, which affirmed the order of the first appellate authority.

I.T.A.No.22 of 2010 - 2 - 2. The questions of law raised are re-framed as follows: (i) Was the Tribunal right in law in upholding the deletion of disallowance of Retrenchment Compensation (Rs.4,97,500), Renovation expenses (Rs.5,33,590), Repairs and maintenance (Rs.4,57,314), Advertisement expenses (Rs.5,64,582) and Sales promotion expenses (Rs.5,48,540) since the assessee sold away his proprietory business concern to the firm; when actually the business was carried on by the firm? (ii) Had not the Tribunal erred in not appreciating the fact that the retrenchment compensation was disallowed on the basis of the decision of Supreme Court in Gemini Cashew Sales Corporation - 65 ITR 643 (SC)? 3. The assessee had claimed expenses under Section 37 of the Income Tax Act, 1961 [for brevity “IT Act”] on five specific heads - retrenchment compensation, renovation expenses, repairs and maintenance expenses, advertisement expenses and sales promotion expenses. The assessee had retail business in Home Appliances, which were sold to a partnership firm in which also the assessee was a partner. The assessee claimed the aforesaid expenses in the return of income for the year 2001-02, the sale having been occasioned in the previous year, i.e. On 14.07.2000. The first appellate authority allowed the expenses, which was affirmed by the Tribunal.

I.T.A.No.22 of 2010 - 3 - 4. What assumes significance is the date on which the assessee had stopped his business by reason of the sale effected to the partnership firm, i.e., 14.07.2000. The retrenchment compensation is said to have been paid between 16.08.2000 to 28.08.2000, after the transfer of the establishment. The Assessing Officer [for brevity “A.O”] relied on the decision in Commissioner of Income

- Tax, Kerala v. Gemini Cashew Sales Corporation [(1967) LXV ITR 643 (SC)]; wherein, on dissolution of a partnership firm, in which there were two partners, by reason of death of one of the partners, the firm claimed expenses for retrenchment compensation. The Hon'ble Supreme Court found that there as no reason for retrenchment compensation to be paid, since there was continuance of the firm by the surviving partner. Section 25FF of the Industrial Disputes Act, 1947 [for brevity “ID Act”] was specifically referred to and found that there was a right conferred on the employee for retrenchment compensation in the event of transfer of an undertaking. The proviso however, absolved the employer - the transferor or transferee - from the liability if the service of the workman has been continued uninterruptedly. 5. In the present case, the assessee had taken a contention that the assessee had continued the business. In fact, it was the partnership which had continued the

I.T.A.No.22 of 2010 - 4 - business. In such circumstance, there can be no claim of retrenchment compensation by the assessee who had sold the establishments and business was also continued by the transferee firm. 6. With respect to renovation expenses and repairs and maintenance, the Assessing Officer found that since the business itself was sold, there was no reason for incurring such expenses. The assessee had taken a specific contention that the renovation was done with a view to sell the business to the partnership firm. The Assessing Officer took the view that if the renovation was done after the decision to sell the business was taken, then necessarily it is not an expenditure incurred for the business of the assessee. We do not think such a view can be taken especially since the assessee had a case that he expended the amounts for the purpose of sale, in which sale he had also declared long term capital gains coming to Rs.75 lakhs. In such circumstances, the renovation expenses and expenses for repairs and maintenance have to be allowed as an expenditure under Section 37. 7. What is remaining is advertisement expenses and sales promotion expenses; which were also carried out prior to the same and after the sale. The dis-allowance has been made by the A.O only to that portion expended after the sale,

I.T.A.No.22 of 2010 - 5 - which also we find to be proper. The order of the A.O on that count is liable to be restored. 8. Insofar as the retrenchment compensation is concerned the order of the A.O is restored. As far as renovation and repairs and maintenance, the dis-allowance made by the A.O is bad in law and the order of the Tribunal is upheld. On the question of advertisement expenses and sales promotion, the question is answered in favour of the Revenue and against the assessee and the order of the Assessing Officer is restored which declined the advertisement expenses and sales promotion expenses after the date of sale. Ordered accordingly. Parties are left to suffer their respective costs. Sd/- K.VINOD CHANDRAN JUDGE Sd/- ASHOK MENON JUDGE

I.T.A.No.22 of 2010 - 6 - APPENDIX PETITIONER'S/S ANNEXURES: ANNEXURE-A COPY OF ASSESSMENT ORDER U/S.143(3) DATED 20.01.2004 OF THE ASSESSMENT YEAR 2001-02. ANNEXURE-B COPY OF THE ORDER DATED 12.08.2005 OF THE COMMISSIONER OF INCOME TAX (APPEALS). ANNEXURE-C CERTIFIED COPY OF THE ORDER DATED 22.06.2009 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH IN I.T.A.NO.1147/COCH/2005. RESPONDENT'S/S EXHIBITS: NIL Vku/- [ true copy ]