Commissioner of Income Tax-1, Cochin v. M/S. TCM Ltd.

# **IN THE HIGH COURT OF KERALA AT ERNAKULAM** # **PRESENT** ## **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 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 14-03-2011** ## **APPELLANT/S:** **THE COMMISSIONER OF INCOME TAX-1 COCHIN** **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:** ITA No. 171 of 2011 **==> picture [20 x 9] intentionally omitted <==** **==> picture [127 x 10] intentionally omitted <==** **Vinod Chandran, J.** **The appeal is filed by the revenue and is confined to the question as to whether the retrenchment compensation paid on the closure of the assessee's manufacturing unit in Kalamassery would be revenue expenditure or not. The Assessing Officer held that it is capital expenditure finding that the expenditure was incurred for the closure of the business and sale of the factory and premises. It was also found that the assessee did not make any payment of retrenchment compensation during the previous year relevant to the assessment year 2004-05.** **2. The first appellate authority however, allowed the claim of the assessee, but, directed it to be granted as per Section 35DDA of the Income** ITA No. 171 of 2011 **==> picture [20 x 9] intentionally omitted <==** **Tax Act, 1961. The Tribunal allowed the claim of the assessee finding it to be a revenue expenditure, since the assessee had two other units which were continued. The reason for closure of Kalamassery Unit was the heavy losses incurred and for purpose of continued running of the other two units. It was the business expediency which forced the assessee to close its unit at Kalamassery.** **3. The learned Senior Counsel, Government of India (Taxes) would argue that there was no determination of facts as found in** _**K.Ravindranathan Nair v. Commissioner of Income Tax [(2001) 247 ITR178 (SC)]**_ **. It is also found by the Assessing Officer that the retrenchment compensation was not paid in the relevant previous year. Since none appears for the appellant, we appointed Sri. Ajay V Anand as** _**Amicus Curiae**_ **. Sri Ajay would contend that the assessee has been running three units, all** ITA No. 171 of 2011 ::4:: **manufacturing chemicals. The Tribunal has specifically referred to the same in its order and has found unity of management in which circumstances, there is no question of a further finding on inter-lacing and inter-connection of the three units. The learned** _**Amicus Curiae**_ **would rely on the judgment of the High Court of Calcutta in** _**2005(272) ITR 193 (Cal)[Jayasree Tea and Industries Ltd. v. Commissioner of Income Tax]**_ **.** **4. We do not think that the finding of the Assessing Officer that the retrenchment compensation was not paid in the relevant year has any significance. Admittedly, the assessee was carrying on the business under the mercantile system and there was an agreement entered into with** **the union of workmen for payment of the retrenchment compensation for which provision was also made in the relevant previous year. The retrenchment compensation was necessitated for** ITA No. 171 of 2011 **==> picture [20 x 9] intentionally omitted <==** **reason of the closure of business and the employees being send out of employment. Admittedly, the amounts agreed to be paid as retrenchment compensation was in excess of the statutory stipulation. This was also due to the workers having protested against the sale of the assets of the assessee which alone could result in closure of the business unit as also generate funds for the purpose of paying retrenchment compensation.** **5. We notice that the Tribunal has examined the facts and found that the units at Mettur, Tuticorin and Kalamassery were all dealing in chemicals and the Kalamassery Unit was the largest unit which however, was incurring huge loss. It was hence the assessee decided to close down the Kalamassery Unit so as to facilitate the profitable carrying on of the other two units, situated in Mettur and Tuticorin. The retrenchment compensation provided for was as per the agreement with the** ITA No. 171 of 2011 ::6:: **labour unions entered into in the relevant previous year and as such it becomes an ascertained liability accruing in the relevant previous year. The payment made in the subsequent years was only for reason of generation of funds by sale of assets being occasioned later to the relevant previous year.** **6.** _**K.Ravindranathan Nair**_ **was a case in which the assessee had ten units carrying on cashew processing which constituted a single business. Due to huge loss accruing,a lock out of four units and later closure of the same was effected, by reason of which there was payment of retrenchment compensation. Again the question arose as to whether the retrenchment compensation could be claimed as a deduction under Section 37 of the Income Tax Act. The Tribunal found on the basis of the facts placed before it that only one set of accounts were maintained for all the ten units. There was in existence one central financing** ITA No. 171 of 2011 **==> picture [20 x 9] intentionally omitted <==** **system. All the units were financed by banks which accounts were operated from the Head Office and cashew was purchased for processing, by the Head Office for all the units together. It is on these facts that it was found that there is unity of management and control.** **7. In** _**Jayashree Tea Industries Ltd.**_ **, the Tribunal though found that the assessee had a number of units spread over in various states of the Country, it was held that mere satisfaction of test of unity of control, would not by itself suffice especially when there were various types of business carried on by the assessee, which does not constitute a single indivisible business. The Calcutta High Court held so in paragraph 29:-** **“Applying the above test in the context of the present case, it appears that the learned Tribunal had found on the facts that there was unity of management. After** ITA No. 171 of 2011 ::8:: **having so found it had purported to hold that inter-lacing, inter-connection and inter-dependence was not proved. As discussed above, the conclusion is not dependent on this test alone. It is the totality of the facts that will determine the question. Once control and management is found to be the same the unity is established;inter-connection, inter-lacing and inter-dependence is a** _**fait accompli**_ **. The conclusion arrived at by the learned Tribunal on the facts established does not seem to conform to the principles of law as discussed above. On the materials disclosed, it is clear that the business was one and the same.”** **8. In the present case also, we see that the Tribunal had found unity of control and** ITA No. 171 of 2011 ::9:: **management and it is not as if different lines of businesses were carried on in the three units. All the three units were engaged in manufacturing of chemicals and hence the three units were found to be carried on under the very same management as a single business.** **We are of the opinion that there is no substantial question of law arising from the order of the Tribunal and hence the appeal is rejected. Parties are left to suffer their respective costs.** **Sd/K.VINOD CHANDRAN Judge** **Sd/ASHOK MENON Judge** jma ITA No. 171 of 2011 ::10:: ## **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-B COPY 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.**