M/S W.T. SUREN AND CO. LTD versus COMMISSIONER OF INCOME TAX, BOMBAY

Citation: [1998] 1 S.C.R. 1069 · Decided: 23-02-1998 · Supreme Court of India · Bench: SUJATA V. MANOHAR · Disposal: Appeal(s) allowed

Judgment (excerpt)

+ 
MIS W.T. SUREN AND CO. LTD. 
A 
COMMISSIONER OF INCOME TAX, BOMBAY 
FEBRUARY 23, 1998 
[SUJATA V. MANOHAR AND D.P. WADHWA, JJ.] 
B 
Income Tax Act, 1922 : Section J0(2)(xv). 
Income Tax--AY 1960-61-Business Expenditure-Gratuity-Payment 
of-By assessee to the transferee-company on tranifer of a part of its business- C 
Deductability of-A.ssessee, a private limited company, stopped and traniferred 
the activities of its distribution unit to the transferee-However, other business 
of assessee continued-Assessee terminated sen1ices of the employees of that 
distribution unit-Transferee offered these employees similar employment 
with continuity of sen1ice and assured payment of gratuity due to them under 
it together with that accrued to them on the date of their termination if the D 
amount thereof was higher than that calculated under the transferee's 
scheme- -Assessee paid gratuity to those who did not join the transferee-
company-Ho11'ever, the assessee, not of its own accord but at the instance 
and on behalf of the employees who joined the transferee, paid to the 
transferee-company the amount of gratuity due to such employees-Transferee 
put the amount in trust in a separate account exclusively for paying the same E 
to such employees with the further gratuity due on account of service rendered 
with the transferee-Held: In the circumstances of the case, the amount of 
gratuity paid by the assessee to the transferee-company is an expenditure 
wholly laid out or expended for the purpose of business and thus an 
allowable expenditure-Income Tax Act, 1961, S.37(1). 
F 
The appellant-assessee, a private limited company, stopped the activities 
of its distribution unit which business was taken over the transferee-company. 
However, the other business of the assessee continued. The employees working 
in the said distribution unit became surplus resulting in termination of their 
services. The transferee-company offered these employees similar G 
employment with continuity of service and right to receive gratuity due 
under it together with that accrued to them on the date of their termination 
.l 
if the amount thereof was higher then that calculated under the scheme of 
the transferee-company. The assessee paid gratuity directly to those 
employees who did not join the tran~feree-company. However, the assessee, 
not of its own accord but at the instance and on behalf of the employees who H 
1069 
1070 
SUPREME COURT REPORTS 
[1998] l S.C.R. 
A ,joined the tramferee-company, paid to the transfercc-com1iany the amount 
due to these employees. Transferee-company put this amount in trust in a 
se1iarate account exclusively for paying the gratuity to these employee with 
further gratuity due on account of sen•ice rendered in the transferee-
com1iany. 
B 
In its income tax return for the assessment year 1960-61 the assessee 
claimed the amount of gratuity paid to the transferee-company as deduction 
under Section 10(2)(xv) of the Income Tax Act, 1922. The h1come Tax Officer 
disallowed the claim of deduction. The Appellate Assistant Commissioner 
upheld the view of the Income Tax Officer. The Income Tax Appellate Tribunal 
C allowed the appeal filed by the assessee. The High Comi allowed the appeal 
field by the respondent-Revenue. Hence this appeal. 
Allowing the appeal, this Court 
HELD : 1. In the present case, the amount of gratuity which was paid 
to the transferee-company on behalf of the employees was not on account 
D of tran~fer of the distribution unit of the assessee but on account of stopping 
of that business and the employees working in that unit becoming surplus 
resulting in termination of their sen•ices. Other business of the assessee 
continued. Payment of gratuity amount to the transferee-company was not 
made by the assessee of its own but at the instance of and on behalf of the 
E employees whose services though terminated in the assessee-company were 
taken over by the transferee-company with the promise of continuity of 
service in the transferee-company. As far as the assessee is concerned, it 
was bound to make payment of gratuity to the employees whose sen·ices were 
terminated, and in fact, the employees who did not join the transferee-
company were directly were paid gratuity. Instead of those employees getting 
F the gratuity amount directly, got that amount paid to the transferee-company 
who put that account in trust in a separate account for the exclusive use of 
the transferred employees 

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