Karnataka H.C : The retrenchment compensation claimed by the assesses for payment towards workmen in the closed business of hotel can be adjusted towards the franchise business of kids camp being run by the assessee

High Court Of Karnataka

CIT, Bangalore vs. Black Pearl Hotels (P.) Ltd.

Assessment Year : 2001-02

Section : 37(1)

V.G. Sabhahit And Ravi Malimath, JJ.

IT Appeal No. 516 Of 2006

July 13, 2011


Ravi Malimath, J. – This appeal is by the revenue being aggrieved by the order of the Tribunal which held that the losses from the hotel business be set off towards the franchise business of the assessee.

2. The assessee was earlier running a hotel in Brigade Road, Bangalore. The business of the restaurant was closed and the employees of the restaurant were retrenched. Thereafter, the assessee has been using the premises for various purposes like giving hall on rent and taking franchise business. During the year under consideration, the assessee had given the premises of franchise business to Kids Kemp. In terms of the contract, the period was three years and the assessee was to get a profit of 25% on sales on all the products subject to the assessee running the business and incurring relevant expenses. On verification of the accounts, it was noticed that the assessee has debited a sum of Rs. 17,82,678/- under the head salary and wages. Accordingly, the details of the same was called for by the Assessing Officer and it was found that the assessee has paid a sum of Rs. 14,50,660/- as compensation under the various heads to the erstwhile workers of the restaurant business. The assessee contended that the expenditure could be debited to the profit and loss account since the business of the restaurant was closed long back and that there was a memorandum of settlement reached before the Deputy Labour Commissioner, Bangalore. In terms of the agreement, he had to make payment towards bonus, gratuity, leave salary, 11 days wages, compensation under Section 25FFF and compensation under Section 25F arriving at a total compensation of sum of Rs. 14,50,000/-. Accordingly, deduction of retrenchment compensation to the extent of Rs. 14,50,060/- was claimed. The Assessing Officer accepted the plea of the assessee for deductions only towards bonus, gratuity and 11 days wages. However, deductions claimed towards compensation under Sections 25F and 25FFF were disallowed. Aggrieved by the same, the assessee preferred an appeal to the Commissioner of Income Tax, (Appeals), who dismissed the appeal. The assessee, thereafter, preferred an appeal before the Tribunal. The Tribunal by relying on the earlier decisions as well as the statutory provisions of Sections 25F and 25FFF held that since the assessee is having the same business, he is entitled to deduction of Rs. 10,12,651/-. Aggrieved by the same, the revenue has filed the present appeal.

3. This appeal was admitted to consider the following substantial question of law:

“Whether the Tribunal was right in holding that the retrenchment compensation claimed by the assesses for payment towards workmen in the closed business of hotel can be adjusted towards the franchise business of kids camp being run by the assessee?”

4. The identical question of law came up for consideration in the case of B.R. Ltd. v. V.P. Gupta, CIT [1978] 113 ITR 647, wherein the Hon’ble Supreme Court held that the decisive test is unity of control and not the nature of the two lines of business. It was further held at Paras 13 and 14 as follows :

“13. These circumstances are not by themselves sufficient to establish that the business of import which the appellant was doing is not the same business as that of export. The decisive test, as held by this Court in Produce Exchange Corporation (supra) is unity of control and not the nature of the two lines of business. The CIT also fell into the error of supposing that, apart from the fact that the two activities must form an integral part of the entire business, the “main consideration which has to prevail is” whether, “notwithstanding the fact that the assessee may close one activity, it does not interfere in the carrying on of the other activity”. The fact that one business cannot conveniently be carried on after the closure of the other may furnish a strong indication that the two businesses constitute the same business. But the decision of this Court in Prithvi Insurance Co. (supra) shows that no decisive inference can be drawn from the fact that after the closure of one business, another may or may not conveniently be carried on. The CIT also overlooked that in the revision applications filed by the appellant, it was expressly stated that it was true that “there was a common control and common management of the same Board of Directors” of the business of import and export. Thus, the unity of control and the other circumstances adverted to above show that there was dovetailing or interlacing between the business of import and the business of export carried on by the assessee and that they constitute the same business.

14. For these reasons, we set aside the orders passed by the CIT and hold that the appellant is entitled to set off the unabsorbed loss of the assessment year 1953-54 against the profits of the assessment years 1954-55, 1955-56 and 1956-57. The appellant will get its costs of the appeals in one set from the respondent.”

5. In the present case, both the businesses had a common management, common business organization, common administration and a common place of business. Moreover the liability of compensation arising out of Sections 25F and 25FFF is mandatory in law and therefore, any compensation that is paid under statute would necessarily be treated as an expenditure that could be deducted.

6. In view of the substantial questions of law having been answered in the aforesaid judgment in B.R. Ltd.’s case (supra) in favour of the assessee and against the revenue, the substantial of question law in this appeal is answered in favour of the assessee and against the revenue. Accordingly, the appeal is dismissed.

[Citation : 347 ITR 374]

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