1983 PTD 166 (PLP)

"25‑F. No workman employed in any industry who has been in con?tinuous service for not less than one year under an employer shall be retrenched by that employer until‑‑ (a) the workman has been given one month's notice in writing indicating the reasons for retrenchment and the period of notice has expired, or the workmen has been paid in lieu of such notice, wages for the period of the notice Provided that no such notice shall be necessary if the retrenchment is under an agreement which specifies a date for the termination of service. (b) the workman has been paid, at the time of retrenchment, compensa?tion which shall be equivalent to fifteen days' average pay for every completed year of continuous service or any part thereof in excess of six months ; and (c) notice in the prescribed manner is served on the appropriate Government of such authority as may be specified by the appropriate Government by notification in the Official Gazette. 25‑FF. Where the ownership or management of an undertaking is transferred, whether by agreement or by operation of law, from the employer in relation to that undertaking to a new employer, every workman who has been in continuous service for not less than one year in thin undertaking immediately before such transfer shall be entitled to notice and compensation in accordance with the provisions of section 25‑F, as if the workman had been retrenched Provided that nothing in this section shall apply to a workman in any case where there has been a change of empl‑3yers by reason of the transfer, if‑ (a) the service of the workman has not been interrupted by such transfer ; (b) the terms and conditions of service applicable to the workman after such transfer are not in any way less favourable to the workman than those applicable to him immediately before the transfer ; and (c) the new employer is, under the terms of such transfer or otherwise, legally liable to pay to the workman, in the event of his retrenchment, compensation on the basis that his service has been continuous and has not been interrupted by the transfer." Mr. Awasthy stated that the transfer of the undertaking did not include workmen and there was no obligation on the Haryana State Electricity Board to absorb them. Mr. Awasthy is correct in this assertion as there is no provision in the 1910 Act for the taking over of the workman by the trans?feree. It is again not disputed by the revenue that the workmen working in the industrial undertaking were not taken over by the State Electricity Board after its transfer. The services of the workmen, working in tire under?taking, under the assessee before its transfer, were interrupted as they were not taken over by the State Electricity Board. The affected parties can assess the results which flow from the impact of a statute. The interruption of the service of the workman immediately on transfer may have been known to the assessee even prior to the actual transfer of the undertaking. Proviso to section 25‑FF of the Industrial Disputes Act thus does not apply to the case because of the interruption of the service of the workmen. By the fiction created by section 25‑FF of the Industrial Disputes Act, the termi?nation of the services of the workmen because of the transfer fell within the ambit of the definition of "retrenchment" as given in section 2(oo) of the Industrial Disputes Act. The words in section 25‑FF "immediately before such transfer" have been suggested by Mr. Awasthy to mean a little before the actual transfer of the industrial undertaking. In his view these words do not Postulate any prior time much less a period of one month of more. When a notice is to be issued in accordance with the provisions of section 25‑F of the Industrial Disputes Act, it cannot be any notice short of one month. If one month's notice is to be given at the actual time of transfer or a few minutes or a few hours before that, then, in our view, it will be only an ex?ercise in futility. It will lead to the swelling of the expenses of the trans?feror adding to his loss on the transfer of the undertaking. Section 25‑FF is a provision incorporated for the mutual benefit of the employers and the workmen. If the termination of the workmen. had come about by the actual transfer, there being no obligation for the transferee to absorb them, the retrenchment compensation becomes payable because of such termina?tion and it had to be paid by the transferor, that is the assessee, because of the provisions of section 25‑FF. If the assessee had paid cash retrenchment compensation to the workmen at 11.55 p.m. on 23rd of April, 1965, being certain of the transfer of the industrial undertaking, then, considering the words "immediately before such transfer", in the way suggested by Mr. Awasthy, it would have been ail right and it could claim it as an allow?able deduction a: it was in the course of its business. If that can be so why cannot the assessee take the other recourse provided by law in the same provision, that is, given one month's notice for retrenchment when he is equally certain of the time and date of transfer, which is by operation of law? Although the reference to the history and object of the introduction of sections 25‑F and 25‑FF in the Industrial Disputes Act need not be gone into, a brief reference to it seems unavoidable at this stage. The rights created by section 25‑F are based on humane public policy as a safety against involuntary unemployment which may cause dislocation to trade and industry and economic insecurity. The object of section 25‑F of the Industrial Dis?putes Act was that an employer could relieve himself of the economic dead weight of surplus labour and at the same time the employee should not be thrown or: the road for no fault of his. While giving option in given cases to the employer to shake off such economic dead weight it assured the employee and his family of some partial protection to tide over the hard period of unemployment. Section 25‑FF was introduced to safeguard the rights of workmen, who because of the transfer of an undertaking could not be em?ployed by the transferee. Section 25‑F of the Industrial Disputes Act prescribes that in all cases of transfer agreement or by the operation of law which do not fail under the proviso, on a transfer of the ownership or management of an industrial undertaking, a workman, who has been in continuous service of not less than one year in that undertaking immediately before the transfer, shall be entitled to notice and compensation in accordance with the provisions of section 25‑F. This is because the sanction equates such a termination of service with retrenchment as defined in section 2(oo) of this Act. It matters little who initiates the proceedings towards the termination. If the employer, who has a prior notice of the date and time of the transfer of the industrial undertaking, which is definitely fixed, takes steps to issue retrenchment notice in accordance with law governing the industrial relations resulting in the creating of a liability regarding which deductions can be claimed under the Income‑tax Act, then it can reap the benefit of that. The transferor of the undertaking, when the control of management still vests in it, can create that liability, which though based on legal fiction, is real and effective and can take steps to minimise his losses by issuing retrenchment notices as provided by section 25‑FF of the Industrial Disputes Act. ?? The language of the principal clause of section 25‑FF makes it clear that if the right of the retrenchment compensation accrues to the workman, then it must be a right to receive compensation from the employer, who was its (undertak?ing's) owner up till the date and time of transfer. The only thing to be guarded against is that the retrenchment should not he by way of punishment, but in anticipation of a transfer. In view of this matter, we are of the opinion that section 25‑FF of the Industrial Disputes Act, which governs the industry gives a right to the transferor to take a pry‑emptive action to minimise his expenses by giving an advance retrenchment notice to the workmen synchronising with the time of the transfer. The foundations of the arguments addressed on behalf of the revenue, as noticed earlier, are based on Gemini Cashew Sales Corporation's case. In that case, the facts were? "Two persons, Walter and Ramasubramony, carried on business in cashewnuts as partners in the name and style of Messrs Gemini Cashew Sales Corporation. The partnership was dissolved on the death of Ramasubramony on August 24, 1957, and the business was taken over and continued by Walter on his own account. The services of the employees were not interrupted and there was no alteration in the terms of employment of the employees of the establishment". In Gemini's case because of provisions of section 25‑Fr no right to the workmen accrued to receive retrenchment compensation. It was observed by the Supreme Court in that case (p. 647) "In the view we take, that the allowance claimed is not a proper outgoing, or allowance in computing the profits of the assessee, we do not express any opinion on the question whether the workmen of the undertaking became entitled to retrenchment compensation on the transfer of the undertaking to Walter." The Supreme Court did not in that case advert to decide the, question of entitlement of the workmen to receive compensation. The fact of Gemini's case were not similar to the one in hand.' In this case, because of known certainly of the non‑absorption of the workmen by the transferee of the undertaking, that is, the Haryana State Electricity Board, the workmen had become entitled to receive retrenchment compensation. It was further observed in Gemini's case (p. 647) "Liability to pay retrenchment compensation arises under section 25‑FF when there is a transfer of the ownership or management of an under?taking it arise on the transfer of the undertaking and not before. Transfer of ownership or management of an undertaking in law operates except in the conditions set out in the proviso, as retrench?ment of the workmen. But until there is a transfer of the undertaking resulting in determination of employment, the workmen do not become entitled to retrenchment compensation. So long as the owner?ship of the business continues with the employer, the right of the workmen to claim compensation remains contingent. A workman may, before the transfer of ownership of the business, himself terminate the employment: he may die or he may become superan?nuated : in none of these cases the owner of the business is under any obligation to pay retrenchment compensation to the workman. The obligation to pay compensation becomes definite only when there is re?trenchment by the employer, or when the ownership or management of the undertaking is, except in the cases contemplated by the proviso, transferred to a new employer, and not till then (emphasis supplied.) The right, therefore, arises from determination of employment, or from transfer the undertaking it has no existence before these events take place." The question posed by the Supreme Court for answer in Gemini's case was noted at p. 649 "The question that falls to be determined is whether the liability which arises on transfer of the business is to be regarded as a permissible outgoing in the account of the business which is transferred." The question quoted above was decided by the Supreme Court on the facts of that case without expressing any opinion whether the workmen had become entitled to retrenchment compensation on the transfer of the under?taking to Walter. The case was covered by the proviso to section 25‑FF. The facts of Gemini's case are different from the facts of the case in hand. The transfer of the undertaking due to the sudden death of Ramasubramony was unforeseen and the service of the workmen were not interrupted and also there was no alteration in the terms of the employment. In Gemini's case, the awareness of the liability came after the death of Ramasubramony. In the case in hand, by the operation of law, that is the 1910 Act, the transfer of the industrial undertaking had become definite and certain and a date had been fixed for the transfer. The management of the assessee as well as the workmen were cognizant of the certainty of the fateful event, that is, the transfer. They were also cognizant of the absence of the obligation on the part of the transferee because of the provisions of 1910 Act not to absorb the services of the workmen. The transfer being a certainty, the right of the workmen to receive compensation could not be said to remain contingent any longer. The employer in such a case, can determine the services of the workmen through a notice. Similar intention is also reflected from the observations in Gemini's case "The obligation to pay compensation becomes definite only when there is retrenchment by the employer, or when the ownership or manage?ment of the undertaking is, except in the cases contemplated by the proviso, transferred to a new employer and not till then. The right, therefore, arises from determination of employment, or from transfer of the undertaking it has no existence before these events take place." After considering the facts and the observation of the Supreme Court in Gemini's case, in detail, we feel that the facts on which the judgment came to delivered were different. The liability arose suddenly because of the un?foreseen event, that is, the death of Ramasubramony and the liability had arisen after the transfer of the undertaking in favour of Walter. In that case, no right had arisen to the workmen to receive retrenchment compensa?tion while in the case in hand, on the basis of the facts noticed in the earlier part of the judgment, the termination of the workmen no longer had remained contingent, but become definite sad the assessee had invoked the provisions of the Industrial Disputes Act, which had been enacted through amendments as beneficial provisions after noticing the impact of certain judgments of the Supreme Court. Mr. Awasthy, in our view cannot draw any support from this case and the majority of the members of the Tribunal, in our view, were not correct to interpret this judgment in the way in which they have done. The other case on which Mr. Awasthy has very heavily reclined is the judgment of this Court in Modi .Electric Supply Company's case. The facts in Modi Electric Supply Company's case, to some extent, were similar to the one hand. That company also worked under a licence issued under the 1910 Act, which had expired on the midnight of 7th and 8th of June, 1963. on that date, the industrial undertaking was taken over by the Punjab State Electricity Board. The Modi Electric Supply Company issued notices to its workmen under section 25‑FFF of the Industrial Disputes Act, in accordance with section 25‑F of the same Act, It claimed Rs. 39,341 which it had paid to its workmen as retrenchment compensation as an allowable deduction. The Tribunal, at the instance of the Modi Electric Supply Co., referred the following question to this Court "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 39,341 representing retrenchment compensation was not an allowable deduction either under section 28(1) or under section 37 of the Income‑tax Act, 1961 ?" In that case, it was observed (p. 406) "What reasons prompt an employer to retrench all or any of its employees are very much germane to the exercise of that power both in the context of the Industrial Disputes Act, as also in the context of the, provision of section 41(2) of the I. T. Act. The reason in both cases is to be one which is dictated by the business interest, i.e., it is the desire not to carry on the business that has to prompt the employer to take the drastic step of retrenching any or all of its employees. Where such is not the case, the employer may not succeed in retrenching any of its employees. If that would be the case there would be no question of payment of retrenchment compensation and consequently of deduction of that amount under section 41(2) of the I. T. Act. Surely, retrenchment of all the employees of a concern cannot be fur the reason of carrying on of the business. The reason for taking such a step would be the closure of the business. That being the case, any expenditure incurred by the assessee‑company by way of retrenchment compen?sation would not be expenditure laid out for the purpose of the business. Any expenditure by way of retrenchment compensation on account of the closure of the business would be an expenditure envisaged by section 25‑FFF of the Industrial Disputes Act, the payment whereof is concurrent with the closure of the business, and the same cannot be considered a payment during the course of business. I was a party to the judgment in Modi Electric Supply Company's case (I. T. R. No. J 1 of 1974) and had the impression that this company had taken the plea before the I. T. authorities that it was a case of closure of business under section 25‑FFF. I got the paper book of Modi Electric Supply Company's case put up. In the order of the Tribunal at p. 27 of the paper book, the observations appear as "It also contended that the retrenchment compensation under section 25‑FFF of the Industrial Disputes Act, 1947, was a revenue expense, the same having been incurred during the course of carrying on of the business. The company filed a letter dated 3rd of September, 1966 where it submitted as under : "

3. Re: Retrenchment compensation : Liability of the company in respect of retrenchment compensation accrued under the Industrial Disputes Act, 1947. Our electricity undertaking was closed down on 7th June, 1962, consequent upon the expiry of our electric supply licence. We did not transfer the services of any employee of the undertaking to the Punjab State Electricity Board who took over the undertaking. We had given notice of retrenchment under section 25‑F of the Industrial Disputes Act, to each and every employee of the company." Again at p. 29 of the paper book, from the order of the Tribunal, it is to be found "As far as the claim for retrenchment compensation was concerned, it was pleaded by the assessee‑company that the services of the employees had been terminated because of the notice of the company dated, play, 6 1968, and the compensation was payable under sec?tion 25‑FF of the Industrial Disputes Act, 1947." It is thus clear from the records of this case (Modi Electric Supply Co.) that it bad taken the plea of section 25‑FFF, which deals with the closure of the business of the said industrial undertaking and not section 25‑FF. Section 25‑FF of the Industrial Disputes Act, specifically deals with the transfer of the industrial undertaking. Closure of the undertaking and transfer of the undertaking are two different things. In the case of closure, the business ceases to run and in the case of transfer, it continues in the bands of the transferee. The Supreme Court in Workmen of Uttar Pradesh State Electricity Board v. Upper Ganges Valley Electric Supply Company (1966 L L J 730) ruled that the taking rover of the Upper Ganges Valley Electricity Supply Company by the Utter Pradesh State Electricity Board on the expiry of the licence did not entail the closure of the undertaking as the undertaking never closed down. In Modi Electric Supply Company's case, the case set up was‑ of closure of the undertaking under section 25‑FFF of the Industrial Disputes Act while in the case in hand it is section 25‑FF of the Industrial Disputes Act, which is being taken advantage of. It was on these premises that in Modi Electric Supply Company's care, these observation were made "Any expenditure by way of retrenchment compensation on account of the closure of the business would be an expenditure envisaged by section 25‑FFF of the Industrial Disputes Act, the payment whereof is concurrent with the closure of the business, and the same cannot be considered a payment during the course of business." These observations are the governing theme of the judgment. The inference drawn by the Bench in Modi Electric Supply Company's ‑case was based on these premises and it was decided on the basis of section 25‑FFF, that is, closure of business. It is manifest from the extensive reproduction from the paper book of the Modi Electric Supply Company's case that the case was decided on a different footing, on the basis of different pleas raised in a different context. The case being distinguishable on the pleas raised cannot be advantageously relied upon by Mr. Awasthy as a precedent for this Bench. Mr. Awasthy argued that as long as the owner of the industrial undertaking or the business has the furtherance of business in view, he can spend the amount, but when ‑he sees the dead end of his business, the expenditure incurred, as in this case, no longer remains revenue expenditure but becomes capital expenditure. "Purpose of the business", as this term is used in section 37 of the Act, has a wide import. The purpose of business is to be assigned a meaning according to the circumstances of each case and this is not capable of being assigned a limited meaning. At least one thing, to our mind, is certain in this context, that the things done to cut down the losses, when the business is still running are for the purpose of the. business. The provisions of sections. 25‑F and 25‑FF of the Industrial Dispute Act, which are for the mutual benefit of the employer and ‑the workmen, are to be liberally construed. There provisions give a right to the employer to take steps to avert the loss even if the steps result in the maximising of the expenses. If such a step under section 25‑FF of the Industrial Disputes Act. is taken, as in this case, during the continuation of the business but before the actual transfer, when the assessee is still the owner of the industrial undertaking, under the operation of law, then the amount expanded by way of retrenchment compensation will be covered by section 37 of the Act. It cannot be disputed that the assessee has a right to minimise the incidence of the tax by legitimate means. The steps taken by the assessee in this case in anticipation of the transfer, the date of which wax definite, can at the most be paid to achieve these objects. The Industrial Disputes Act gives him this right in the wake of the transfer of his undertaking by operation of law in determining the serves of the workmen by issuing termination notices under the provisions of the Industrial Disputes Act, the assessee created a liability, which, in a legitimate way, is recognised by law. He can claim its exclusion from big taxable income as outgoing and is covered by section 37 of the Act. This question is accordingly answered in favour of the assesses. The last item of Rs. 3,62,390 ‑covered by Income‑tax Case No. 21 of 1977 is covered by the judgment in Fazilka Electric Supply Co. Ltd. v. C. I. T. ((1962) 46 I T R 127 (S C)). It was rightly decided by the Tribunal and no reference was required to be made for this item. For the foregoing reasons, the references are accordingly answered. No order as to costs. References answered accordingly.