2001 PLP 376 (PTD)

By this reference under section 256(1) of the Income Tax Act, 1961, the Income‑tax Appellate Tribunal, Bombay Bench, Mumbai, has referred the following question of law to this Court for opinion at the instance of the Revenue: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the retrenchment compensation paid to the ex‑employees was incurred wholly and exclusively in connection with the sale of the property of the business of the assessee allowable under section 48(i) of the Income Tax Act, 1961?" The material facts giving rise to this reference are as under: The assessee, who was carrying of the business of exhibiting films, closed its business in March, 1972, and the property consisting of land and building was sold. The assessment which was originally made on September 18, 1978, was set aside and fresh assessment was made. The Income‑tax Officer, who was asked to make a fresh assessment, referred the matter for valuation of the property to the Valuation Officer. On the basis of the valuation report the Income‑tax Officer took the value of the property as on January 1, 1954, at Rs.7,31,000 and assessed the capital gains at Rs.11,24,999 In ascertaining the capital gains, the assessee claimed before the Income‑tax Officer that as the assessee had paid Rs.74,687 as retrenchment compensation to the ex‑employees of the assessee, which was a condition precedent to the sale of the, property, he was entitled to deduction of the same m the computation of capital gains. The Income‑tax Officer rejected the above claim of the assessee. The Commissioner of Income‑tax (Appeals) upheld the above order of the Income‑tax Officer. The assessee went in further appeal to the Income‑tax Appellate Tribunal. Before the Tribunal it was contended that the assessee was required to pay retrenchment compensation to its employees before completion of the sale and that being so, it was an expenditure incurred wholly and exclusively in connection with such Transfer. Reliance was placed by the assessee on clause 15 of the sale deed which required the assessee to terminate the services of the employees employed by it in the theatre and also pay and discharge all liabilities or claims of the said employees for gratuity, retrenchment compensation, bonus, etc., if any, and indemnify the assignees against such claims. The Tribunal accepted, the contention of the assessee and held that in view of clause 15 of the agreement which' made it obligatory on the assessee to discharge all its liabilities on account of gratuity, retrenchment compensation, bonus, provident fund, etc the amount of retrenchment compensation paid by the assessee to its employees was expenditure wholly and exclusively incurred in connection with the agreement of sale and hence allowable as a deduction under section 48(i) of Act. Hence, this reference at the instance of the Revenue. We have heard Mr. RN. Desai, learned counsel for the Revenue, who submits that the retrenchment compensation paid by the assessee to its former employees was not in connection with the transfer of the assets by the assessee to the purchasers but it arose out of the decision taken by the assessee to close down its business. The stipulation in the agreement, which makes it obligatory on the part of the assessee to clear all its liabilities to its employees including liabilities on account of gratuity, retrenchment compensation, bonus, provident fund, etc., before effecting the transfer of land and building to the purchaser cannot convert the said expenditure into an expenditure incurred wholly and exclusively for the purpose of transfer. The liability was very much there even if the sale of the property would not have taken place. We have carefully considered the submissions of Mr. Desai. Section 48 of the Act, as it stood at the material time, reads as follows: "

48. Mode of computation and deductions. ‑‑‑The income chargeable under the head 'Capital gains' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:‑‑‑ (i) expenditure incurred wholly and exclusively in connection with such transfer. (ii) the cost of acquisition of the capital asset and the cost of any improvement thereto." This section lays down the mode of computation of capital gains. Two items are allowed as deductions from the full value of the consideration for which the transfer is made for arriving at capital gains. The first item is expenditure incurred wholly and exclusively in connection with such transfer: The second item in the cost of acquisition of the capital asset and the cost of any improvement thereto. In this case, we are concerned only with the first item. The question that arises for consideration is whether the retrenchment compensation paid by the assessee to its former employees can be regarded as an expenditure incurred wholly and exclusively in connection with the transfer of land and building by the assessee to the purchaser. The expenditure incurred wholly and exclusively in connection with the transfer can be expenditure like commission paid to the broker and/or similar other expenditure. The retrenchment compensation paid by the assessee to its employees, in our‑opinion, has no connection whatsoever with the transaction of sale of the land and building. It is connected only with the closure of the business of the assessee in March, 1972. Such an expenditure by no stretch of imagination can be regarded as expenditure incurred wholly and exclusively for the purpose of the transaction of sale of the property. The retrenchment compensation has no connection whatsoever with the transfer of property in question. The stipulation in the agreement merely requires the owner to clear all its liabilities on certain accounts and to keep the transferee indemnified. This stipulation cannot change the character of the retrenchment compensation from a liability arising out of the closure of the business to expenditure incurred wholly and exclusively in connection with the transfer of the asset in question. In view of the above, we are of the clear opinion that the Tribunal was not correct in holding that the retrenchment compensation paid by the assessee to its employees was incurred wholly and exclusively in connection with the sale of property, i.e., the property of the business of the assessee consisting of land and building. The question referred to us is, therefore, answered in the negative, i.e, in favour of the Revenue and against the assessee. Reference is disposed of accordingly with no order as to costs. M.B.A./163/FC Reference disposed.