3 Busness expenditure : S. 37(1) of Income-tax Act, 1961 : Textile business : Closure of one unit : Retrenchment compensation, interest, PF to employees, legal expenses and reimbursement of loss to PF trust on sale of securities is allowable business expenditure.
[CIT v. DCM Ltd., 221 CTR 513 (Del.)]
The assessee was in the business of textile manufacturing. It closed one of its manufacturing units out of four units. It paid Rs.8,71,20,781 by way of retrenchment compensation. It had incurred an expenditure of Rs.1,86,69,703 by way of interest on monies borrowed for the purpose of payment of retrenchment compensation and PF to the employees of the closed unit. It had also incurred an expenditure of Rs.3,57,700 as legal expenses on account of the closure of the unit. The Assessing Officer disallowed the claim for deduction of the these expenses.
On termination of services of the employees of the closed unit when the PF dues were required to be paid, the employees PF trust approached the RPF Commissioner to obtain approval for sale of Government securities, in order to make payment to the employees. The RPF Commissioner granted the permission with a caveat that in the event of any deficiency on sale of securities the burden would have to be borne by the assessee, in order to assure that the employees would get the rate of interest equivalent to the rate paid by the Central Government. The loss so incurred by the employees PF trust was Rs.1,80,20,261 and the same was reimbursed by the assessee to the trust. The assessee’s claim for deduction of the said expenditure was rejected by the Assessing Officer relying on the provisions of S. 14A of the Act. The Tribunal allowed the assessee’s claims.
On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under :
“(i) As found by the Tribunal there was no closure of business since DCM mill unit was only a part of the textile manufacturing operations, which continued even after the closure of the DCM mill unit as the assessee continued in the business of manufacture of textiles in the three remaining units. It is specifically noted that the assessee prepared a consolidated P & L a/c and balance sheet of all its manufacturing units taken together. The control and management of the assessee was centralised in the head office, and also, the fact that all important policy decisions were taken at the head office. The Tribunal came to the conclusion that there was interconnection, interlacing and unity of control and management, common decision-making mechanism and use of common funds in respect of all four units. It repelled the arguments of the Revenue for consideration that the DCM mill unit was a separate business and hence with the closure of the DCM mill unit, the assessee ought not to be allowed deduction of the expenses, based on the fact that in respect of the DCM mill unit the assessee maintained separate books of account and engaged separate workers. In view of the finding of fact returned by the Tribunal, no fault can be found with the reasoning of the Tribunal.
(ii) Expenditure incurred by the assessee company to make up the deficiency arising on sale of securities by the employees PF trust in order to ensure that its employees are paid a rate of interest equivalent to that paid by the Central Government was an expenditure incurred by the assessee towards its employees and, therefore, provisions of S. 14A were not applicable.”