Sri Ajay v. Anand (Amicus Curiae

IN THE HIGH COURT OF KERALA AT ERNAKULAMPRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON TUESDAY ,THE 12TH DAY OF FEBRUARY 2019 / 23RD MAGHA, 1940 ITA.No. 171 of 2011 AGAINST THE ORDER/JUDGMENT IN ITA 410/2008 ofI.T.A.TRIBUNAL,COCHIN BENCH DATED 14-03-2011 APPELLANT/S: THE COMMISSIONER OF INCOME TAX-1COCHIN BY ADVS.SRI.P.K.R.MENON,SENIOR COUNSEL, GOI(TAXES)SRI.JOSE JOSEPH SC FOR INCOME TAX RESPONDENT/S: M/S. TCM LTD, KALAMASSERY P B NO. 19, KALAMASSERY 683 104. OTHER PRESENT: SRI AJAY V. ANAND (AMICUS CURIAE) THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 12.02.2019, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: J U D G M E N T Vinod Chandran, J. The appeal is filed by the revenue and isconfined to the question as to whether theretrenchment compensation paid on the closure ofthe assessee's manufacturing unit in Kalamasserywould be revenue expenditure or not. The AssessingOfficer held that it is capital expenditure findingthat the expenditure was incurred for the closureof the business and sale of the factory andpremises. It was also found that the assessee didnot make any payment of retrenchment compensationduring the previous year relevant to the assessmentyear 2004-05. 2. The first appellate authority however,allowed the claim of the assessee, but, directed itto be granted as per Section 35DDA of the Income ITA No. 171 of 2011 ::3:: Tax Act, 1961. The Tribunal allowed the claim of the assessee finding it to be a revenueexpenditure, since the assessee had two other unitswhich were continued. The reason for closure ofKalamassery Unit was the heavy losses incurredand for purpose of continued running of the othertwo units. It was the business expediency whichforced the assessee to close its unit atKalamassery. 3. The learned Senior Counsel, Governmentof India (Taxes) would argue that there was nodetermination of facts as found in K.RavindranathanNair v. Commissioner of Income Tax [(2001) 247ITR178 (SC)]. It is also found by the AssessingOfficer that the retrenchment compensation was notpaid in the relevant previous year. Since noneappears for the appellant, we appointed Sri. Ajay VAnand as Amicus Curiae. Sri Ajay would contendthat the assessee has been running three units, all ::4:: manufacturing chemicals. The Tribunal hasspecifically referred to the same in its order andhas found unity of management in whichcircumstances, there is no question of a furtherfinding on inter-lacing and inter-connection of thethree units. The learned Amicus Curiae would relyon the judgment of the High Court of Calcutta in2005(272) ITR 193 (Cal)[Jayasree Tea and IndustriesLtd. v. Commissioner of Income Tax]. 4. We do not think that the finding of theAssessingOfficerthattheretrenchmentcompensation was not paid in the relevant year hasany significance. Admittedly, the assessee wascarrying on the business under the mercantilesystem and there was an agreement entered into with the union of workmen for payment of theretrenchment compensation for which provision wasalso made in the relevant previous year. Theretrenchment compensation was necessitated for ITA No. 171 of 2011 ::5:: reason of the closure of business and the employees being send out of employment. Admittedly, theamounts agreed to be paid as retrenchmentcompensation was in excess of the statutorystipulation. This was also due to the workershaving protested against the sale of the assets ofthe assessee which alone could result in closure ofthe business unit as also generate funds for thepurpose of paying retrenchment compensation. the union of workmen for payment of theretrenchment compensation for which provision wasalso made in the relevant previous year. Theretrenchment compensation was necessitated for ITA No. 171 of 2011 ::5:: reason of the closure of business and the employees being send out of employment. Admittedly, theamounts agreed to be paid as retrenchmentcompensation was in excess of the statutorystipulation. This was also due to the workershaving protested against the sale of the assets ofthe assessee which alone could result in closure ofthe business unit as also generate funds for thepurpose of paying retrenchment compensation. 5. We notice that the Tribunal has examinedthe facts and found that the units at Mettur,Tuticorin and Kalamassery were all dealing inchemicals and the Kalamassery Unit was the largestunit which however, was incurring huge loss. It washence the assessee decided to close down theKalamassery Unit so as to facilitate the profitablecarrying on of the other two units, situated inMettur and Tuticorin. The retrenchment compensationprovided for was as per the agreement with the ITA No. 171 of 2011 ::6:: labour unions entered into in the relevant previousyear and as such it becomes an ascertained liabilityaccruing in the relevant previous year. The paymentmade in the subsequent years was only for reason ofgeneration of funds by sale of assets beingoccasioned later to the relevant previous year. 6. K.Ravindranathan Nairwas a case inwhich the assessee had ten units carrying on cashewprocessing which constituted a single business. Dueto huge loss accruing,a lock out of four units andlater closure of the same was effected, by reasonof which there was payment of retrenchmentcompensation. Again the question arose as towhether the retrenchment compensation could beclaimed as a deduction under Section 37 of theIncome Tax Act. The Tribunal found on the basis ofthe facts placed before it that only one set ofaccounts were maintained for all the ten units.There was in existence one central financing ITA No. 171 of 2011 ::7:: system. All the units were financed by banks whichaccounts were operated from the Head Office andcashew was purchased for processing, by the HeadOffice for all the units together. It is on thesefacts that it was found that there is unity ofmanagement and control. 7. In Jayashree Tea Industries Ltd., the Tribunal though found that the assessee had anumber of units spread over in various states ofthe Country, it was held that mere satisfaction oftest of unity of control, would not by itselfsuffice especially when there were various types ofbusiness carried on by the assessee, which does notconstitute a single indivisible business. TheCalcutta High Court held so in paragraph 29:- “Applying the above test in the context ofthe present case, it appears that thelearned Tribunal had found on the factsthat there was unity of management. After ::8:: having so found it had purported to holdthat inter-lacing, inter-connection andinter-dependence was not proved. Asdiscussed above, the conclusion is notdependent on this test alone. It is thetotality of the facts that will determinethe question. Once control andmanagement is found to be the same theunity is established;inter-connection,inter-lacing and inter-dependence is afait accompli. The conclusion arrived atby the learned Tribunal on the factsestablished does not seem to conform tothe principles of law as discussed above.On the materials disclosed, it is clearthat the business was one and the same.” 8. In the present case also, we see thatthe Tribunal had found unity of control and ITA No. 171 of 2011 ::9:: ::8:: having so found it had purported to holdthat inter-lacing, inter-connection andinter-dependence was not proved. Asdiscussed above, the conclusion is notdependent on this test alone. It is thetotality of the facts that will determinethe question. Once control andmanagement is found to be the same theunity is established;inter-connection,inter-lacing and inter-dependence is afait accompli. The conclusion arrived atby the learned Tribunal on the factsestablished does not seem to conform tothe principles of law as discussed above.On the materials disclosed, it is clearthat the business was one and the same.” 8. In the present case also, we see thatthe Tribunal had found unity of control and ITA No. 171 of 2011 ::9:: management and it is not as if different lines ofbusinesses were carried on in the three units. Allthe three units were engaged in manufacturing ofchemicals and hence the three units were found tobe carried on under the very same management as asingle business. We are of the opinion that there is nosubstantial question of law arising from the orderof the Tribunal and hence the appeal is rejected.Parties are left to suffer their respective costs. Sd/-K.VINOD CHANDRANJudge Sd/-ASHOK MENONJudge jma APPENDIX PETITIONER'S/S EXHIBITS: ANNEXURE-A COPY OF ASST. ORDER U/S. 143(3), DATED 20/12/2006 FOR THE ASSESSMENT YEAR 2004-05. ANNEXURE-BCOPY OF THE ORDER DATED 12/12/2007 OF THE COMMISSIONER OF INCOME TAX (APPEALS). ANNEXURE-C COPY OF THE ORDER DATED 14/03/2011 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH ITA NO.410/COCH/2008.