High Court Of Madras
Sree Akilandeswari Mills (P) Ltd. vs. DCIT
Section 37(1)
Asst. Years 1988-89, 1989-90
N.V. Balasubramanian & Mrs. R. Banumathi, JJ.
Tax Case (Appeal) Nos. 57 & 58 of 2002
28th January, 2005
Counsel Appeared
P.P.S. Janardhana Raja for Subbaraya Iyer, for the Assessee : K. Subramaniam, for the Revenue
JUDGMENT
N.V. balasubramanian, J. :
These appeals arise out of the order of the Tribunal in ITA Nos. 1092/Mds/1991 and 2402/Mds/1991, dt. 14th Aug., 2001, in respect of the two asst. yrs. 1988-89 and 1989-90 of the assessee.
2. The point that arises in both the appeals is common regarding the claim of the assessee for deduction of certain amounts of payments of gratuity to the workers whose services were taken over by the assessee for the period of service rendered by them to the transferor-company in a take over bid. The appellant (hereinafter referred to as “the assessee”) is Sree Akilandeswari Mills (P) Ltd. and it is a wholly owned subsidiary company of Sree Rajendra Mills Limited. On 25th March, 1983, an agreement was entered into between Sree Rajendra Mills Limited and the assessee, which is a subsidiary of Sree Rajendra Mills Limited, by which the textile unit at Salem called “A” unit belonging to Sree Rajendra Mills was transferred to the assessee. The agreement provided, inter alia, for continuity of service of workmen who were employed in the textile unit of Sree Rajendra Mills at Salem taken over by the assessee-company and the agreement also protected the conditions of service of workmen taken over by the assessee. Sree Rajendra Mills Limited delivered possession of the scheduled properties to the assessee-company on 22nd Nov., 1982, and the employees of Sree Rajendra Mills working in “A” unit were transferred to the assessee-company with the benefit of continuity of service. In the assessment proceedings for the asst. yr. 1988-89, the assessee-company claimed a deduction of a sum of Rs. 7,96,121 as gratuity payment to workers who had retired during the previous year. The AO held that the gratuity payments made to the employees who were employed in the service of the assessee-company for less than five years from the date of take over of the “A” unit of Sree Rajendra Mills Limited were not eligible for deduction, and so also, the assessee-company was not entitled to claim deduction of the proportionate payment of gratuity paid to the employees with reference to their period of service rendered to the transferor-company. The AO, in other words, held that the liability towards the payment of gratuity relating to the years of service rendered by the employees in Sree Rajendra Mills Limited prior to take over by the assessee was not allowable as business expenditure in the hands of the assessee and he held that the assessee would be entitled to claim only a deduction of a sum of Rs. 1,22,226 and disallowed the balance sum of Rs. 6,73,895 and completed the assessment for the asst. yr. 1988-89. The assessee carried the matter on appeal before the appellate authority and the CIT(A) held that the liability of the assessee towards gratuity paid to the employees for their services rendered to their previous employer, namely, Sree Rajendra Mills
Limited, would be capital expenditure and not allowable in computing the income of the assessee. He upheld the disallowance made by the AO for the asst. yr. 1988-89.
As regards the asst. yr. 1989-90, the assessee claimed deduction of a total sum of Rs. 4,08,378 as gratuity paid to 17 employees, who retired during the previous year. The AO, following his earlier order, held that the liability of the assessee to the workmen for the gratuity subsequent to the period after take over of the unit of Sree Rajendra Mills Limited would be allowable as business expenditure, but the payment of gratuity relating to the period of service prior to the transfer of the unit was not allowable. He held that the assessee was entitled to claim deduction of a sum of Rs. 71,848 and allowed the same and disallowed the balance sum of Rs. 3,36,530 and completed the assessment. The CIT(A), on appeal, by the assessee held that the assessee was entitled to claim full deduction following an earlier order of the CIT(A) for the asst. yr. 1988-89. Hence, the Revenue preferred an appeal before the Tribunal. The appeal preferred by the Revenue and the appeal preferred by the assessee were heard together and the Tribunal held that the CIT(A) was justified in holding that the liability of the assessee towards gratuity payment for the employees for the services rendered by them for the period prior to the take over of the unit would be capital expenditure and was not an allowable expenditure in the hands of the assessee. The Tribunal dismissed the appeal preferred by the assessee for the asst. yr. 1988-89 and allowed the appeal preferred by the Revenue for the asst. yr. 1989-90. It is against the common order by the Tribunal, the assessee has preferred the two appeals.
3. The appeals were admitted and the following question of law was framed for consideration : “Whether, on the facts and circumstances of the case, the Tribunal was right in confirming the disallowance of gratuity paid to the retiring employees ?”
4. Heard Mr. P.P.S. Janardhana Raja, learned counsel for the appellant, and Mr. K. Subramaniam, learned senior standing counsel for the Revenue.
5. Mr. Janardhana Raja, learned counsel for the assessee, submitted that services of the workmen employed in the textile unit of the predecessor company were continued with the assessee with no break in service and the existing service conditions of the workmen were also protected. The assessee, when the liability to pay gratuity to the workmen arose at the time of superannuation or death, has discharged the liability to its employees and no distinction can be made between service rendered prior to the take over and the services rendered by the employees after the take over of the unit by the assessee. Learned counsel also submitted that the holding company, Sree Rajendra Mills Limited has not claimed any deduction towards its gratuity liability in its assessment. Learned counsel further submitted that the Tribunal had proceeded on an erroneous assumption that the amount paid towards gratuity was part of the sale consideration paid by the assessee to Sree Rajendra Mills Limited. He also referred to the schedules to the agreement and submitted that there is nothing in the agreement, either expressly or impliedly, to indicate that the amounts paid to the employees formed part of the sale consideration paid to Sree Rajendra Mills Limited and hence, the Tribunal was not correct in holding that it is not allowable as a business deduction. Learned counsel strongly relied on the decision of this Court in CIT vs. Fenner (India) Ltd. (1998) 148 CTR (Mad) 506 : (2000) 241 ITR 645 (Mad) (one of us was a party) and submitted that when the amalgamated company took over the employees of the amalgamating company, the gratuity paid to the employees, who were taken over, was held to be deductible expenditure and he submitted that the ratio of the decision of this Court in CIT vs. Fenner (India) Ltd. (supra) would squarely apply to the facts of the case. Learned counsel also relied on a decision of this Court in CIT vs. Pandian Roadways Corporation Ltd. (1991) 187 ITR 121 (Mad) wherein the claim of gratuity paid to the employees, who were taken over by the transport corporation, was held to be an allowable expenditure. Learned counsel, therefore, submitted that on the basis of the decisions of this Court, the Tribunal was not correct in holding the amount paid to the employees towards gratuity is not an allowable expenditure. Learned counsel also submitted that the CIT(A) allowed the claim of the assessee for the asst. yr. 1987-88 which was confirmed by the Tribunal, and the order of the Tribunal for the earlier year has been accepted by the Revenue and therefore, the amounts claimed for both the assessment years in question are not capital expenditure, but allowable as business expenditure.
6. Mr. K. Subramaniam, learned senior standing counsel appearing for the Revenue, on the other hand, submitted that the amount paid by the assessee to the employees for the service rendered prior to the take over of the textile unit by the assessee is a capital expenditure and he referred to the terms of the agreement and submitted that the amounts paid to the employees for the period prior to the take over formed part of the sale consideration and hence, it is capital in nature. Learned counsel relied on the following decisions in support of his submissions : (i) Associated Printers (Madras) (P) Ltd. vs. CIT (1961) 43 ITR 281 (Mad); (ii) Dashmesh Transport Co. (P) Ltd. vs. CIT (1980) 125 ITR 681 (P&H); (iii) CIT vs. Datta Tin Works (P) Ltd. (1988) 68 CTR (Ker) 29 : (1988) 172 ITR 667 (Ker); (iv) Puspa Perfumery Products (P) Ltd. vs. CIT (1992) 194 ITR 248 (Cal); (v) Hotel Broadway Complex vs. CIT (1992) 102 CTR (Kar) 309 : (1992) 198 ITR 361 (Kar); (vi) CIT vs. Plasmac Machine Mfg. Co. Ltd. (1993) 201 ITR 650 (Bom); (vii) CIT vs. Hyderabad Race Club (2001) 168 CTR (AP) 476 : (2001) 249 ITR 391 (AP); (viii) CIT vs. Hooghly Mills Co. Ltd. (2003) 185 CTR (Cal) 86 : (2004) 266 ITR 257 (Cal).
7. We carefully considered the submissions of learned counsel for the assessee and learned counsel for the Revenue. As far as the gratuity liability is concerned, the obligation to pay gratuity on the part of the assessee to all its employees for the service rendered in a particular year is a definite and ascertainable liability on the basis of actuarial valuation. In Metal Box Co. of India Ltd. vs. Their Workmen (1969) 73 ITR 53 (SC), the Supreme Court considered the question whether, while working out the net profit by a trader, can he provide from his gross receipts, his liability to pay certain sum for every additional year of service towards gratuity, which he received from his employees and the Supreme Court held as hereunder : “… In our view, an estimated liability under gratuity schemes such as the ones before us, even if it amounts to a contingent liability and is not a debt under the WT Act, if properly ascertainable and its present value is fairly discounted is deductible from the gross receipts while preparing the P&L a/c. It is recognised in trading circles and we find no rule or direction in the Bonus Act which prohibits such a practice.”
8. We hold that the liability to pay gratuity to the workmen of the transferor-company on the date of transfer of the unit is a known and an ascertained liability on the date of transfer and is ascertainable on the basis of acturial valuation.
9. The next question that arises is whether the expenditure is an allowable business expenditure or capital expenditure. It is fairly settled that if an ascertained liability of the predecessor on the date of transfer was taken over by the successor in business, and later it was discharged, the expenditure incurred would be capital in nature. This Court, in Associated Printers (Madras) (P) Ltd. vs. CIT (supra) has dealt with a case where a running business was taken over by the transferee and the transferee discharged its liability to pay bonus under the award and it was held, on the facts of the case, that the payment of bonus was an expenditure incurred for business purpose as the liability accrued after the date of transfer of the business. This Court, while so holding, held that if the transferor’s liability was an ascertained one on the date of transfer and it was an accrued liability on the date of transfer which was taken into account in reckoning the payment of consideration, the liability discharged later by the transferee would be capital in nature. In the aforesaid decision, this Court held as hereunder : “… Under normal circumstances, the payment of bonus to the employees would be a trading expense, and it would not be an expenditure of a capital nature. If the liability to pay the bonus had been that of the transferor as an accrued liability, and that liability was transferred to the transferee under the terms of the contract of the transfer, that is, if the liability so transferred was one of the factors taken into account to fix the price payable by the transferee, then the amount expended in discharge of the liability so transferred would have been part of the price paid by the transferee for the acquisition of the business. Whether the accrued liability that was so transferred was a liability to an employee, or any other trade liability, can make no difference in principle.”
10. The Punjab & Haryana High Court in Dashmesh Transport Co. (P) Ltd. vs. CIT (supra), while considering the case of discharge of liability of the transferor-company taken over by the transferee, held as follows : “… Although the terms and conditions of the transfer had not been proved on the record but it is evident from art. 18 of the articles of association of the assessee-company that it had taken over all the assets and liabilities of the transferor-company. The conclusion is, therefore, irresistible that the liabilities of the said company form part of the consideration for the acquisition of group ‘A’ transport of the transferor-company. The Tribunal, therefore, rightly came to the conclusion that the expenditure of Rs. 2,77,360 representing the liability of Khalsa Nirbhai Transport Company (P) Ltd. and discharged by the assessee, was in the nature of capital expenditure …” The Kerala High Court in CIT vs. Datta Tin Works (P) Ltd. (supra) and the Calcutta High Court in Puspa Perfumery Products (P) Ltd. vs. CIT (supra) and the Karnataka High Court in Hotel Broadway Complex vs. CIT (supra) and the Bombay High Court in CIT vs. Plasmac Machine Mfg. Co. Ltd. (supra) and the Andhra Pradesh High Court in CIT vs. Hyderabad Race Club (supra) have all taken the view that if the liability of the predecessor was taken over by the successor, then it would form part of the purchase consideration and the expenditure incurred subsequently by the transferee to discharge that liability would be capital in nature and the assessee is not entitled to claim deduction. The Calcutta High Court in CIT vs. Hooghly Mills Co. Ltd. (supra), while considering the case of liability of gratuity taken over by the assessee from the transferor when the business was taken over as a going concern, held that the gratuity liability till the date of transfer taken over by the assessee would be capital in nature and it would form part of the sale consideration and it has to be added to the cost of acquisition of the assets transferred. The Calcutta High Court held as under : “In terms of s. 4(1) of the Payment of Gratuity Act, the liability of the employer to pay gratuity to its employees accrues as soon as the concerned employee completes five years’ continuous service, from the date the service is reckoned to be continuous, though payable on superannuation or retirement or resignation or death or disablement due to accident or disease. Sub-s. (2) prescribes fifteen days’ wages based on the rate of wages last drawn by the employee for every completed year of service or part thereof in excess of six months. Thus, with the continuation of employment, the gratuity continues to accrue on account of the respective employee. The right to receive gratuity is a right vested in the employee on completion of five years continuous service receivable from the date from which continuous service is reckoned. The employees, whose service was continuing after the transfer of the undertaking, were entitled to claim gratuity from the transferor on account of cessation of employment under him. But for their continuation under the assessee, it was not payable till the occurrence of any of the conditions mentioned in s. 4(1)(a), (b) and (c) of the Payment of Gratuity Act. The payment of gratuity to these employees till the date of transfer was deferred by reason of the terms of the agreement and the liability accrued till that date and payable by the transferor was taken over by the assessee. Thus, this liability became part of the consideration paid for the assets transferred and is liable to be added to the consideration mentioned in the agreement. It cannot be construed otherwise. This is to be treated as capital expenditure.”
13. The next question that arises is whether the Tribunal was correct in holding that the liability to pay gratuity was part of the consideration. We have perused the memorandum of transfer dt. 25th March, 1983. It is seen from the agreement that on the date of transfer, the holding company Sree Rajendra Mills Limited transferred the “A” unit with all the assets and liabilities for a consideration of Rs. 10 lakhs. Mr. K. Subramaniam, learned senior standing counsel for the Revenue, pointed out the total value of the assets and the total liability taken over and submitted that the gratuity liability of the transferor-company, Sree Rajendra Mills Limited on the date of transfer was also part of the sale consideration. We find force in the submission of Mr. K. Subramaniam, learned senior standing counsel for the Revenue, as it cannot be said that the gratuity liability of the transferor-company towards its employees till the date of the transfer was not a known liability. It is not possible to accept the submission that the assessee was not aware or was oblivious of the gratuity liability of the transferor-company towards all its employees taken over by the assessee, and the liability was not one of the factors reckoned in fixing the price payable by the assessee.
The liability to pay gratuity to the employees of the transferor till the date of transfer is a known liability and it is an ascertained liability. Since the assessee had the requisite knowledge of the gratuity liability of the transferor- company to its employees of the unit transferred on the date of transfer, that liability would not have been ignored by the assessee as a prudent businessman in the computation of the amount payable by it to the transferor- company for the transfer of the unit by the transferor-company. The Karnataka High Court in Hotel Broadway Complex vs. CIT (supra) was considering a similar question and held as follows : “The existence of arrears of property tax should be presumed to be known to the assessee when it was constituted, because any prudent person who transacts any dealing in relation to an immovable property is expected to verify the tax liability in relation to the said property; arrears of property tax attach themselves as a burden on the property by operation of law. The nature of property tax is quite different from other taxes like sales-tax or income-tax; property tax due to a municipal body is reflected in the municipal property registers. It is not possible to hold that the partners who joined Ananthasivan should be assumed to be ignorant about property tax arrears. If knowledge of the tax arrears is attributed to them, then, necessarily the said liability would go into the computation of the firm’s capital. The assessee cannot take advantage of the fact that these were not reflected in the books of the previous firm, since a prudent businessman is expected to probe into the tax liabilities attached to a business premises. In these circumstances, the payments made towards property tax arrears cannot be held to be in the nature of non-capital expenditure at all.”
We hold that the Tribunal was correct in holding that only after adjusting the liability towards gratuity, the sale consideration of Rs. 10 lakhs was arrived at. We therefore hold that the assessee by virtue of the deed of transfer had taken over the liability of the transferor-company towards its gratuity liability of the employees of the transferor-company on the date of transfer and it was an ascertained liability on the basis of actuarial valuation and the liability which formed part of the sale consideration was discharged later by actual payment by the assessee to the employees in subsequent years and it is a capital expenditure.
Mr. P.P.S. Janardhana Raja, learned counsel for the assessee, heavily relied upon the decision of this Court in CIT vs. Fenner (India) Ltd. (supra). It was a case of amalgamation of companies and there was a stipulation that the amalgamated company would continue the employees of the amalgamating company and the gratuity paid to the employees of the amalgamated company by the amalgamating company was held to be revenue expenditure. We are of the view that this decision does not help the assessee as in that case, the question whether the amount expended was a capital expenditure or not was not the subject-matter of consideration and the only argument that was advanced was that if the amount is allowed in the hands of the amalgamated company, then it would amount to double deduction as the amalgamating company would have had the benefit of deduction of the same liability. This Court rejected the said contention, but it had no occasion to go into the question whether it was a capital expenditure or not as that issue was not posed before this Court and the Court was also not called upon to consider that question. The other decision relied upon by learned counsel for the assessee is the decision in CIT vs. Pandian Roadways Corporation Ltd. (supra). In that case also, the question whether it was a capital expenditure was not the subject-matter of consideration and hence, that decision also does not aid the assessee in any manner. The reliance placed by learned counsel for the assessee on the decision in CIT vs. National Textile Corporation (1999) 153 CTR (MP) 330 : (1999) 239 ITR 176 (MP) also does not assist the assessee as the Madhya Pradesh High Court considered s. 40A(7) of the IT Act and the question whether it was a capital expenditure or not was not the subject-matter of consideration.
Learned counsel for the assessee submitted that the claim of the assessee was upheld by the Tribunal for the earlier asst. yr. 1987-88 and hence, the Tribunal should not have taken a different view for the subsequent asst. yrs. 1988-89 and 1989-90. We are of the view that there is no question of res judicata, and further the Tribunal itself has found that when the order was passed for the asst. yr. 1987-88, it had no occasion to go through the agreement under which the transfer took place. On the other hand, the agreement, was placed before the Tribunal during the course of hearing of the appeals before the Tribunal and the Tribunal, after going through the terms of the agreement, held that the amount paid was capital expenditure. Hence, we do not find any infirmity on the part of the Tribunal in taking a different view from its earlier view taken for the asst. yr. 1987-88 and on that account, the order of the Tribunal which is the subject-matter of appeal is not liable to be set aside.
We, therefore, hold that the Tribunal was correct in law in holding that the gratuity paid to the retiring employees for the period of service rendered to the transferor-company is a capital expenditure and was right in upholding the disallowance. The question of law framed by this Court is answered against the assessee and in favour of the Revenue.
Consequently, the appeals stand dismissed. The Revenue is entitled to costs of Rs. 500 in respect of each of the appeals.
[Citation : 274 ITR 1]
