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February 2012

Business expenditure: Capital or revenue: A.Y. 2003-04: Assessee stopped manufacturing and continued trading: Severance cost paid to employees is revenue expenditure.

By K. B. Bhujle
Advocate
Reading Time 1 mins
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[CIT v. KJS India P. Ltd., 340 ITR 380 (Del.)]

The assessee-company was manufacturing soft drinks. In the A.Y. 2003-04, the assessee-company stopped manufacturing soft drinks as it was found to be non-profitable. Many employees who were directly in the manufacturing activity were laid off and severance cost of these employees of Rs. 93,91,706 was paid. The assessee’s claim for deduction of this amount was disallowed by the Assessing Officer holding that it is capital in nature. The Tribunal found that apart from manufacturing soft drinks, the assessee was also trading in soft drinks. The Tribunal held that suspension of one of the activities did not amount to closure of business and allowed the assessee’s claim.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“Since the assessee had been doing other business activity also, namely, ‘trading’, it could not be said that the assessee had closed its business with the suspension of manufacturing soft drinks. The expenditure was deductible.”

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