ACIT CC 47, MUMBAI V. THE PHOENIX MILLS LTD, MUMBAI

ITA 4709/MUM/2013

• Counselvise Citation: 470919914 RSA 2013
• Duration Of Justice: 1 year(s) 6 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-01-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 16-12-2014
• Assessment Year: 1999-2000
• Appeal Filed On: 17-06-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASGHAR ZAIN V P
• Keywords: Question of law; Commercial expediency; Revenue expenditure
• Section: 37(1)

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL C , BENCH MUMBAI , BEFORE SHRI R.C.SHARMA , A M & SHRI SANJAY GARG , J M ITA NO. 4709 / MUM/20 1 3 ( ASSESSMENT YEAR : 1999 - 20 00 ) ACIT, CC - 47, MUMBAI VS. M/S THE PHOENIX MILLS LTD., 462, SENAPATI BAPAT MARG, LOWER PAREL, MUMBAI - 400 013 PAN/GIR NO. : A A ACP 3325 J ( APPELLANT ) .. ( RESPONDENT ) /REVENUE BY : SHRI ASGHAR ZAIN VP. /ASSESSEE BY : SHRI VIJAY MEHTA DATE OF HEARING : 16 TH DECEMBER , 201 4 DATE OF PRONOUNCEMENT 16 TH JANUARY, 20 15 O R D E R PER R.C.SHARMA (A.M) : TH IS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF CIT(A) , DATED 28 - 3 - 2013 FOR THE ASSESSMENT YEAR 1999 - 2000 , IN THE MATTER OF ORDER PASSED U/S. 143 ( 3 ) OF THE I.T. ACT , WHEREIN FOLLOWING GROUNDS H AVE BEEN TAKEN BY ASSESSEE : - 1. 'ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID. CIT(A) ERRED DELETING DISALLOWANCE OF GRATUITY AND COMPENSATION OF RS.2,61,36,753/ PAYMENT MADE TO COMMON SUPPORT STAFF OF RS.20,06,098/ AND EXPENSES OF RS. 10,00,000/ IN RESPECT OF PROCESSING UNIT WHICH WAS PERMANENTLY CLOSED DOWN, WITHOUT APPRECIATING THAT THE PROCESSING BUSINESS WAS A SEPARATE BUSINESS NOT RELATED WITH THE OTHER BUSINESS OF THE ASSESSEE.' 2. 'ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE ID. CIT(A) ERRED IN RELYING ON BOMBAY HIGH COURT DECISION IN CASE OF PFFIZER LTD 9233 CIT 521) WHICH IS NOT APPLICABLE TO THE FACTS OF THE INSTANT CASE.' ITA NO. 470 9 / 1 3 2 THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) ON THE ABOVE GROUND BE SET ASIDE AND THAT OF ASSESSING OFFICER BE RESTORED. 2. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. FACTS IN BRIEF ARE THAT THE ASSESSEE COMPANY WAS ENGAGED IN THE BUSINESS OF MANUFACTURING COTTON AND BLENDED YARN AND PROCESSING CLOTH . WHILE COMPLETING THE ASSESSMENT, THE AO DISALLOWED GRATUITY PAYMENTS OF PROCESSING DEPARTMENT AMOUNTING TO RS.2,61,36,753/ - , GRATUITY PAYMENTS TO COMMON STAFF AMOUNTING TO RS.20,06,098/ - , GENERAL CHARGES & OTHER MISCELLANEOUS EXPENSES AMOUNTING TO RS.1 0,00,000 / - AND PRIOR PE RIOD EXPENSES AMOUNTING TO RS.2,84,635/ - . IT WAS STATED IN THE ASSESSMENT ORDER THAT THE ASSESSEE HAD CLAIMED A SUM OF RS.12,50, 72 ,710 / - AS EXPENSES ON ACCOUNT OF GRATUITY AND. ADDITIONAL GRATUITY IN THE YEAR UNDER CONSIDERATION. A.O NOTED THAT OUT OF RS.1 2,50, 72 ,710 / - , AN AMOUNT OF RS.2,61,36,753/ - PERTAINS TO THE PAYMENTS MADE TO THE EMPLOYEES OF PROCESSING HOUSE WHICH W AS CLOSED DOWN BY THE A SSESSEE . A.O HELD THAT THE EXPENDITURE CLAIMED BY THE A SSESSEE FOR PERMANENT ON CLOSURE OF ITS BUSINESS CANNOT BE ALLOWED AS A DEDUCTION IN VIEW OF THE HON'BLE SUPREME COURT'S DECISION IN THE CASE OF GEMINI CASHEW SALES CORPORATION (1967) 65 ITR 643. A.O THEREFOR E,. DISALLOWED A SUM OF RS.2,61 ,36,752 / - STATING THAT THE ASSESSEE HAD CLOSED DOWN ITS PROCESSING ACTIVITY AND THE TERMINATION PAYMENT MADE BY THE A SSESSEE IS NOT ALLOWABLE AS A DEDUCTION. THE AO ALSO DISALLOWED ON ESTIMATE BASIS, 25% OF THE GRATUITY AND COMPENSATION PAYMENTS TO COMMON SUPPORT STAFF AMOUNTING TO RS.20,06,098/ - BY HOLDING THAT .SINCE THE ASSESSE E CLOSED DOWN ITS PROCESSING ACTIVITY PERMANENT LY, IT IS ONLY LOGICAL THAT A P ROPORTION ITA NO. 470 9 / 1 3 3 OF THE TERMINATION EXPENSES INCURRED ON COMMON SUPPORT STAFF WHICH ARE ATTRIBUTABLE TO THE PROCESSING ACTIVITY SHOULD BE DISALLOWED. 2.1 THE A.O FURTHER NOTED IN THE A SSESSMENT ORDER THAT THE ASSESSEE HAS DEBITED OPERATING AND OTHER EXPENSES TO THE PROFIT & LOSS ACCOUNT WHICH INCLUDE GENERAL CHARGES OF RS.21,44,776/- AND OTHER MISCELLANEOUS EXPENSES OF RS.66,07,429/ - . A.O, ON ESTIMATE BASIS, DISALLOWED A SUM OF RS.1 0,00 ,000 / - OUT OF THE ABOVE EXPENSES BY HOLDING THAT SOME OF THE EXPENSES ARE RELATED TO OR ATTRIBUTABLE TO THE PROCESSING ACTIVITY AND SINCE THE PROCESSING ACTIVITY WAS PERMANENTLY CLOSED DOWN, THE EXPENSES RELATED TO THE SAID ACTIVITY CANNOT BE ALLOWED AS A DEDUCTION. 3. BY THE IMPUGNED ORDER, THE CIT(A) DELETED THE DISALLOWANCE OF RS. 2,61,36,752/ - PAID ON ACCOUNT OF GRATUITY AND COMPENSATION BY OBSERVING AS UNDER: - 9.0 THE FACTS OF THE CASE, THE GROUNDS OF APPEAL, THE STAND TAKEN BY THE AO IN THE ASSESSMENT ORDER AND THE SUBMISSIONS MADE BY THE APPELLANT HAVE BEEN CAREFULLY CONSIDERED. IT IS SEEN FROM THE ASSESSMENT ORDER THAT A.O HAS EXAMINED THE ISSUE OF ALLOWABILITY OF GRATUITY AND ADDITIONAL GRATUITY ON THE BASIS OF STATEMENT OF COMPUTATION OF INCOME, PR OFIT & LOSS ACCOUNT AND COST AUDIT REPORT. A.O HAS ARRIVED AT A CONCLUSION THAT THE ADDITIONAL GRATUITY AMOUNTING TO RS.8,57,80,776/ - PAID TO THE EMPLOYEES OF THE APPELLANT WAS IN THE NATURE OF COMPENSATION AND FOR THE REASONS STATED IN THE ASSESSMENT ORDE R, A.O HAS DISALLOWED AN AMOUNT 0 F RS.2,61,36,752/ - , OUT OF THE ADDITIONAL GRATUITY / COMPENSATION OF RS.8,57,80,776/ - . THE DETAILS PERTAINING TO GRATUITY AND COMPENSATION ARE BROUGHT OUT BY THE A.O IN PARA NO.3.L5 OF THE ASSESSMENT ORDER ARE REPRODUCED AS UNDER: DETAILS OF GRATUITY & COMPENSATION: PROCESSING OTHERS TOTAL GRATUITY 75,07,212.15 3,17,84,721.6 3,92,91,933.75 COMPENSATION 1,86,29,540.79 6,71,51,235.46 8,57,80,776.25 TOTAL 2,61,36,752.94 9,89,35,957.06 12,50,72,710 BREAK UP OF PROCESSING HOUSE GRATUITY: GRATUITY COMPENSATION TOTAL BEFORE 31.07.1998 70,55,814.9 1,77,37,045.59 2,47,92,860.49 AFTER 31.07.1998 4,51,397.25 8,92,495.2 13,43,892.45 75,07,212.15 1,86,29,540.79 2,61,36,752.94 ITA NO. 470 9 / 1 3 4 9.1 AS FAR AS THE BOOKS OF ACCOUNTS ARE CONCERNED, THE APPELLANT HAS DEBITED 1/3RD OF THE ADDITIONAL GRATUITY OF RS.8,57,80,776/ - IN THE RELEVANT PREVIOUS YEAR WITH A VIEW TO CLAIM 1/3RD EACH IN THE SUBSEQUENT YEARS. A.O HAS EXAMINED THE BUSINESS CARRIE D ON BY THE APPELLANT AND COLLECTED FURTHER DETAILS FROM THE APPELLANT WITH REGARD TO VARIOUS DIVISIONS OF THE BUSINESS CARRIED ON BY THE APPELLANT. THE BUSINESS TURNOVER OF THE VARIOUS DIVISIONS OF THE APPELLANT IS TABULATED IN PARA 3.9 OF THE ASSESSMENT ORDER WHICH IS AS UNDER: ACCOUNTING YEAR CLOTH SALES YARN SALES PROCESSING CHARGES LF/RENTAL WAREHOUSING OTHERS TOTAL 1997 - 98 1,99,29,373 10,71,73,493 7,79,41,153 5,06,65,101 70,32,532 4,20,87,787 30,48,29,439 1998 - 99 1,88,54,877 4,76,93,090 38,01,328 7,17,23,353 35,01,174 7,62,31,433 22,18,05,255 1999 - 2000 1,69,15,737 4,63,66,679 - 8,89,45,643 68,82,878 7,55,90,559 23,47,01,496 2000 - 2001 1,53,71,583 5,86,61,272 - 7,88,70,548 1,06,46,382 6,78,50,887 23,14,00,672 9.2 FROM THE ABOVE DATA, A.O HAS CON CLUDED THAT THE APPELLANT HAS NOT EARNED ANY INCOME FROM THE PROCESSING UNIT J DEPARTMENT FROM THE A.Y.2000 - 01 ONWARDS. IT IS EVIDENT FROM THE ABOVE DATA THAT THE APPELLANT HAD EARNED CERTAIN INCOME FROM THE PROCESSING UNIT IN THE PREVIOUS YEAR RELEVANT TO THE A.Y.1999 - 2000 WHICH IS THE YEAR OF APPEAL. IN THE ASSESSMENT ORDER, A.O HAS REFERRED TO COST AUDIT REPORT WHEREIN IT WAS STATED THAT THE PROCESSING DEPARTMENT WAS CLOSED DOWN SINCE JULY, 1998. A.O HAS TAKEN A STAND THAT THE ADDITIONAL GRATUITY OR COMP ENSATION PAID DURING THE RELEVANT PREVIOUS YEAR IN RESPECT OF THE PROCESSING DEPARTMENT IS NOT AN ADMISSIBLE REVENUE EXPENDITURE, SINCE THE SAID DIVISION WAS CLOSED DURING THE RELEVANT PREVIOUS YEAR. ACCORDINGLY, A.O HAS ARRIVED AT A SUM OF RS.2,61,36,753/ - AS THE DISALLOWABLE AMOUNT RELATING TO THE PROCESSING DEPARTMENT. FURTHER, A.O HAS HELD THAT OUT OF THE GRATUITY AND ADDITIONAL GRATUITY / COMPENSATION PAID TO THE EMPLOYEES AMOUNTING TO RS.12,50,72,710/ - , AN AMOUNT OF RS.9,69,29,858/ - IS AN ALLOWABLE EX PENDITURE, SINCE THE SAID EXPENDITURE PERTAINED TO THE SPINNING DIVISION OF THE BUSINESS CARRIED ON BY THE APPELLANT. ALTHOUGH A.O HELD THAT THE EXPENSES AMOUNTING TO RS.9,69,29,858/ - ATTRIBUTABLE TO THE SPINNING DIVISION OF THE BUSINESS OF THE APPELLANT I S ALLOWABLE EXPENSES, HE TERMED THE SAID EXPENSES AS VOLUNTARY RETIREMENT EXPENSES. HE FURTHER HELD THAT THE SAID EXPENSES WERE IN THE NATURE OF EXTRAORDINARY ITEMS AND THEREFORE, THE SAID EXPENDITURE IS REQUIRED TO BE ALLOWED @ 1/5 TH OVER A PERIOD OF FIVE YEARS. IN SUPPORT OF THE STAND, A.O HAS REFERRED TO SECTION 35DDA OF THE ACT WHICH WAS ENACTED FOR THE PURPOSE OF ALLOWING VRS EXPENSES @ 1/5 TH OVER A PERIOD OF FIVE YEARS. A.O HAS ALSO OBSERVED THAT SECTION 35DDA OF THE ACT IS APPLICABLE ONLY W.E.F. 01.0 4.2001. HOWEVER, A.O FELT IT APPROPRIATE THAT THE METHODOLOGY AS PROVIDED U/S.35DDA OF THE ACT OUGHT TO BE MADE APPLICABLE TO THE CASE OF THE APPELLANT EVEN PRIOR TO THE ENACTMENT CAME INTO EFFECT. ACCORDINGLY, A.O HAS ALLOWED AN AMOUNT OF RS.9,69,29,858/ - , ALTHOUGH @ 1/5 TH OVER A PERIOD OF FIVE YEARS AND THERE IS NO GROUND OF APPEAL ON THIS ISSUE. CONSEQUENTLY, A.O HAS DISALLOWED AN AMOUNT OF RS.2,61,36,753/- WHICH REPRESENTED G RATUITY AND ADDITIONAL GRATUITY/ COMPENSATION PERTAINING TO PROCESSING UNIT WHIC H WAS CLOSED DOWN IN JULY, 1998. THE MAIN GROUND OF APPEAL PERTAINS TO THE DISALLOWANCE OF RS.2,61,36,753/ - . IN ADDITION, A.O HAS ALSO DISALLOWED 25% OF THE TOTAL PAYMENTS MADE TO SUPPORT STAFF AND ACCORDINGLY A DISALLOWANCE OF RS.20,06,098/ - WAS ARRIVED A T. THE REASONS STATED FOR SUCH A DISALLOWANCE ARE THAT CERTAIN PERCENTAGE OF GRATUITY AND COMPENSATION PAYMENTS PERTAINED TO SUPPORT STAFF OF THE PROCESSING DIVISION OF THE A PP ELLANT. ON A SIMILAR BASIS, A.O HAS ALSO DISALLOWED AN AMOUNT OF RS. 10,00,000/ - OUT OF THE GENERAL CHARGES AND MISCELLANEOUS EXPENSES. THE OTHER REASONS STATED BY THE A.O FOR SUPPORTING THE CASE OF DISALLOWANCES IS THAT THE BUSINESS DIVISIONS OF THE APPELLANT SUCH AS CLOTH ITA NO. 470 9 / 1 3 5 SALES, YARN SALES, PROCESSING, SPINNING AND SUCH OTHER ACTIVIT IES ARE NOT INTERDEPENDENT OR INTERLACING OR INTERCONNECTED IN ANY WAY. 9.3 ON THE OTHER HAND, THE APPELLANT HAS EMPHASIZED THAT IT HAD BEEN CARRYING ON THE TWO MAIN BUSINESSES I.E. TEXTILE BUSINESS AND RENTAL BUSINESS. IT IS SUBMITTED THAT THE APPELLANT HAD NOT CLOSED DOWN THE TEXTILE BUSINESS BUT IT HAD TO DOWNSIZE CERTAIN OPERATIONS OF THE TEXTILE BUSINESS SO AS TO NOT TO INCUR LOSSES IN CERTAIN DIVISIONS. THE APPELLANT IS STATED TO HAVE RECONSTRUCTED ITS BUSINESS ACTIVITIES BY CLOSING DOWN THE PROCESS ING DEPARTMENT, WHICH IS NOTHING BUT A DECISION TAKEN ON CONSIDERATIONS OF COMMERCIAL EXPEDIENCY. IT IS CONTENDED BY THE LD. A.R. OF THE APPELLANT THAT IT IS NOT LOGICAL FOR THE A.O TO BIFURCATE THE TEXTILE BUSINESS INTO OTHER DEPARTMENTS, SINCE THE TEXTIL E BUSINESS ITSELF IS ONE PARTICULAR LINE OF BUSINESS. THE OTHER CONTENTIONS OF THE APPELLANT INCLUDED THAT THE APPELLANT HAD BEEN RUNNING A COMPOSITE TEXTILE MILL WHEREIN THE BUSINESS OF MANUFACTURING OF COTTON AND BLENDED YARN AND PROCESSING OF THE CLOTH BY WAY OF JOB WORK WERE UNDERTAKEN. IT IS SUBMITTED THAT THE APPELLANT OWNED ABOUT SIX RETAIL OUTLETS AS WELL. IT IS CONTENDED THAT ANY PERSON IN THE BUSINESS OF TEXTILE MILLS WOULD VOUCH FOR THE FACT THAT SPINNING AND PROCESSING ACTIVITIES ARE TWO SIDES O F THE SAME COIN. THE ENTIRE BUSINESS WAS CONTROLLED BY THE SAME HEAD OFFICE AND THE FINANCES OF THE COMPANY WAS CENTRALISED. THE LD. A.R. OF THE APPELLANT HAS CONTENDED THAT THERE ARE ENOUGH EVIDENCES TO DEMONSTRATE THAT THERE EXISTS INTERDEPENDENCE AND IN TERLACING OF THE BUSINESS ACTIVITIES AND UNITY OF CONTROL OF THE BUSINESS AS A WHOLE. 9.4 ON A CAREFUL CONSIDERATION OF THE CONTENTIONS OF THE APPELLANT IT IS CLEAR THAT THE APPELLANT HAS BEEN CARRYING ON THE TEXTILE BUSINESS WHICH HAS SEVERAL DIVISIONS. PROCESSING DEPARTMENT WAS ONE SUCH DIVISION. THE APPELLANT HAS TAKEN A DECISION, AS DICTATED BY COMMERCIAL EXPEDIENCY, TO DOWNSIZE ITS BUSINESS OPERATIONS AND EFFECTED THE CLOSURE OF THE PROCESSING UNIT. THE CLOSURE OF ONE OF THE DIVISIONS NAMELY PROCESSI NG DIVISION HAS NOT RESULTED IN THE CLOSURE OF THE BUSINESS OF THE APPELLANT. IN FACT, THE DATA INCORPORATED BY THE A.O IN THE ASSESSMENT ORDER AS WELL AS THE SUBMISSIONS OF THE APPELLANT DURING THE APPEAL PROCEEDINGS DEMONSTRATE THAT THE OTHER DIVISIONS O F THE TEXTILE BUSINESS WERE FUNCTIONING AND THE TEXTILE BUSINESS AS A WHOLE WAS CARRIED ON FOR FEW MORE YEARS SUBSEQUENT TO THE RELEVANT PREVIOUS YEAR. THE FACTUAL MATRIX CLEARLY ESTABLISHES THAT THE APPELLANT HAS CARRIED ON THE BUSINESS DURING THE RELEVAN T PREVIOUS YEAR AND THEREAFTER. WHAT IS RELEVANT AND IMPORTANT IS WHETHER THE ENTIRE BUSINESS IS CLOSED DOWN OR ONLY A DIVISION OF THE BUSINESS IS CLOSED DOWN. ADMITTEDLY THE BUSINESS IS CARRIED ON AND ONLY ONE OF THE UNITS OR DEPARTMENTS NAMELY PROCESSING DIVISION WAS CLOSED DOWN DURING THE RELEVANT' PREVIOUS YEAR. THE .ISSUE OF PAYMENT OF GRATUITY AND ADDITIONAL GRATUITY / COMPENSATION HAS TO BE VIEWED IN THE CONTEXT OF TEXTILE BUSINESS THAT HAD BEEN CARRIED ON BY THE APPELLANT RATHER THAN IN THE CONTEXT OF CLOSURE OF ONE OF THE DIVISIONS NAMELY PROCESSING DIVISION. THE DECISIONS RELIED UPON BY THE APPELLANT ARE AS UNDER: (I) IN THE CASE OF CIT VS. PFIZER LTD. (233 CTR 521), THE HON'BLE BOMBAY HIGH COURT HAS HELD THAT - THE ASSESSEE WHICH ENGAGES IN TH E MANUFACTURE AND SALE OF PHARMACEUTICAL PRODUCTS HAD THREE UNITS AT ANKLESHWAR, THANE AND CHANDIGARH. THE ASSESSEE ENTERED INTO A MEMORANDUM OF UNDERSTANDING WITH ITS TRADE UNION ON NOVEMBER 16, 1998, IN PURSUANCE OF WHICH AN AMOUNT OF RS. 5LAKHS WAS TO B E PAID TO EACH PERMANENT EMPLOYEE UPON THE CLOSURE/ SALE OF THE ANKALESHWAR UNIT. ON MARCH 24, 1999, THE ITA NO. 470 9 / 1 3 6 ASSESSEE ISSUED A NOTICE OF CLOSURE. THEREAFTER, UNDER A SUPPLEMENTARY MEMORANDUM OF UNDERSTANDING OF JULY 12, 1999, FURTHER EX GRATIA OF RS. 2 LAKHS W AS PAID TO EACH PERMANENT EMPLOYEE. THE ANKLESHWAR UNIT WAS CLOSED DOWN WITH EFFECT FROM JULY 31, 1999. THE PAYMENT MADE TO THE EMPLOYEES, INTER ALIA, COMPRISED OF RETRENCHMENT COMPENSATION UNDER SECTION 25F OF THE INDUSTRIAL DISPUTES ACT, 1947 AND PAYMENT S ON ACCOUNT OF PROVIDENT FUND, GRATUITY AND LEAVE ENCASHMENT. THE TRIBUNAL OBSERVED THAT THOUGH THE ASSESSEE CARRIED OUT MANUFACTURING ACTIVITY AT VARIOUS LOCATIONS, ALL OTHER SUPPORT FUNCTIONS SUCH AS PURCHASE, SALES, MARKETING, DISTRIBUTION, FINANCE AND HUMAN RESOURCES WERE CENTRALIZED WITH THE HEAD OFFICE. NONE OF THE MANUFACTURING UNITS FUNCTIONED AS INDEPENDENT PROFIT CENTRES. ALL PURCHASES FOR THE MANUFACTURING UNITS WERE CENTRALIZED AT THE HEAD OFFICE. THE SALES AND MARKETING FUNCTION WAS ALSO CENTR ALIZED. THE WORKING CAPITAL REQUIREMENTS AND CAPITAL COMMITMENTS WITH REGARD TO PLANT OPERATIONS WERE ALSO CENTRALIZED. THE TRIBUNAL HAS ENTERED A FINDING OF FACT THAT THERE WAS INTERDEPENDENCE AND A UNITY OF CONTROL BETWEEN THE THREE UNITS ESTABLISHED BY THE EXISTENCE OF COMMON MANAGEMENT, A COMMON BUSINESS ORGANIZATION, ADMINISTRATION AND FUND. THE CLOSURE OF THE UNIT AT ANKLESHWAR DID NOT INVOLVE THE CLOSURE OF THE BUSINESS. THE RETRENCHMENT COMPENSATION PAID TO THE WORKMEN WAS THEREFORE AN ALLOWABLE DED UCTION WITHIN THE MEANING OF SECTION 37(1) SINCE THERE WAS NO CLOSURE OF THE BUSINESS. IN VIEW OF THE FINDING THAT THERE HAS BEEN NO CLOSURE OF THE BUSINESS AS SUCH, THE PAYMENTS WHICH WERE MADE TO THE WORKMEN, THEREFORE QUALIFY FOR A DEDUCTION UNDER SECTI ON 37. THE VIEW OF THE TRIBUNAL DOES NOT SUFFER FROM ANY ERROR. NO SUBSTANTIAL QUESTION OF LAW WOULD ARISE. THE APPEAL SHALL ACCORDINGLY STAND DISPOSED OF IN THESE TERMS. THERE SHALL BE NO ORDER AS TO COSTS.' (II) IN THE CASE OF CIT VS. D.C.M. LTD. (2009 ) (320 ITR 307), THE HON'BLE DELHI HIGH COURT HAS HELD THAT THE DEDUCTIONS CLAIMED ON ACCOUNT OF RETRENCHMENT COMPENSATION WERE ALLOWABLE SINCE THERE WAS INTERCONNECTION, INTERLACING AND UNITY OF CONTROL AND MANAGEMENT, COMMON DECISION MAKING MECHANISM AND USE OF COMMON FUNDS IN RESPECT OF ALL THE FOUR UNITS. 9.5 THE ABOVE JUDICIAL DECISIONS ARE FOUND TO BE APPLICABLE TO THE FACTS OF THE CASE OF THE APPELLANT. AS HELD BY THE HON'BLE BOMBAY HIGH COURT AND HON'BLE DELHI HIGH COURT CITED ABOVE, THE EXPENSES, BE IT ADDITIONAL GRATUITY OR COMPENSATION, ARE ALLOWABLE EXPENDITURE IN CASE WHERE THE ENTIRE BUSINESS IS NOT CLOSED DOWN. IN VIEW OF THE ABOVE, THE DISALLOWANCE MADE BY THE A.O AMOUNTING TO RS.2,61,36,753/ - WHICH REPRESENTED GRATUITY AND ADDITIONAL GRATU ITY 1 COMPENSATION PERTAINING TO PROCESSING UNIT IS HEREBY DELETED. ALLOWED 4. ESTIMATED DISALLOWANCE OF RS.10 LAKHS, GENERAL CHARGES AND MISCELLANEOUS EXPENSES AND PAYMENT MADE TO COMMON SUPPORTING STAFF AMOUNTING TO RS.20,06,098/ - WERE DELETED BY THE CIT(A) AFTER HAVING THE FOLLOWING OBSERVATIONS : - ITA NO. 470 9 / 1 3 7 9.6 IN GROUND NO.2, THE APPELLANT CONTESTED THE DISALLOWANCE OF 25% OF THE GRATUITY AND COMPENSATION PAYMENTS MADE TO COMMON SUPPORT STAFF. IT IS SEEN THAT THE DISALLOWANCE IS MADE ON ESTIMATE BASIS. THE APPELLANT HAS INCURRED AN EXPENDITURE OF RS.80,24,493/ - TOWARDS THE GRATUITY AND COMPENSATION PAYMENTS OF THE COMMON SUPPORT STAFF OF THE ENTIRE BUSINESS OF THE APPELLANT. THE ESTIMATED DISALLOWANCE @ 25% OF THE SAID PAYMENTS WORKED OUT TO RS.20,06,09 8/ - . IN THE ADDITIONAL GROUND NO.1 OF THE APPEAL, THE APPELLANT HAS CONTESTED THAT ONE MORE ESTIMATED DISALLOWANCE WAS MADE BY THE A.O AMOUNTING TO RS.10,00,000/ - . IT IS SEEN THAT A.O MADE AN ADHOC DISALLOWANCE OF RS.10,00,000/ - OUT OF THE GENERAL CHARGES AND MISCELLANEOUS EXPENSES ON THE BASIS OF REASONING THAT SOME OF THE EXPENDITURE INCURRED UNDER THESE HEADS ARE ATTRIBUTABLE TO THE PROCESSING DIVISION. 9.7 BOTH THESE GROUNDS OF APPEAL ARE SUBSIDIARY TO THE MAIN GROUND OF APPEAL WHICH IS DECIDED IN THE FOREGOING PARAGRAPHS. THE APPELLANT HAS NOT CLOSED DOWN THE BUSINESS BUT HAD STOPPED THE OPERATIONS OF THE PROCESSING DIVISION, WHICH IS ONE OF THE DIVISIONS OF THE BUSINESS CARRIED ON BY THE APPELLANT, DURING THE RELEVANT PREVIOUS YEAR ON ACCOUNT OF COMM ERCIAL EXPEDIENCY. AS HELD IN RESPECT OF THE MAIN GROUND OF APPEAL, CLOSURE OF THE ONE OF THE DIVISIONS DOES NOT AMOUNT TO THE CLOSURE OF THE BUSINESS ITSELF. FOR THE REASONS STATED ABOVE, A FINDING HAS BEEN GIVEN THAT THE GRATUITY AND COMPENSATION PAID TO THE EMPLOYEES OF THE PROCESSING UNIT IS ALSO AN ALLOWABLE EXPENDITURE AS MUCH AS THE SAID EXPENDITURE WAS AN ALLOWABLE EXPENDITURE IN RESPECT OF THE OTHER DIVISIONS OF THE BUSINESS WHICH WERE CONTINUED TO BE OPERATED BEYOND THE RELEVANT PREVIOUS YEAR. IN ACCORDANCE WITH THE SAID FINDING, THE DISALLOWANCE MADE BY THE A.O WITH REGARD TO THE PAYMENTS TO COMMON SUPPORT STAFF AND GENERAL CHARGES & OTHER MISCELLANEOUS EXPENSES AMO UNTING TO RS.20,06,098/ - AND RS. 10,00,000/ - RESPECTIVELY ARE HEREBY DELETED. 5. A GAINST THE ABOVE ORDER OF CIT(A), THE REVENUE IS IN FURTHER APPEAL BEFORE US. 6. IT WAS CONTENDED BY THE LEARNED DR THAT EXPENDITURE WAS CLAIMED BY THE ASSESSEE FOR PERMANENT CLOSURE OF ITS PROCESSING ACTIVITY/UNIT , THEREFORE, SAME CANNOT BE ALLOWED. AS PE R LEARNED DR, THE ASSESSEE HAS ALSO TERMINATED COMMON SUPPORTING STAFF ON ACCOUNT OF ITS RESTRUCTURING EXERCISE, THE AO WAS, THEREFORE, JUSTIFIED IN DISALLOWING 25% OF GRATUITY AND COMPENSATION PAYMENT TO COMMON SUPPORTING STAFF AMOUNTING TO RS. 20,06,098/ - AND RS. 10 LAKHS ON ACCOUNT OF GENERAL CHARGES AND MISCELLANEOUS EXPENSES. ITA NO. 470 9 / 1 3 8 7. ON THE OTHER HAND, LEARNED AR CONTENDED THAT THERE WAS NO CLOSURE OF THE BUSINESS AND ONLY ONE OF THE UNIT OF THE ASSESSEE WAS CLOSED. OUR ATTENTION WAS ALSO INVITED TO THE OBS ERVATION MADE BY THE AO, WHEREIN AT PARA 3.5 THE AO HIMSELF HAS CATEGORICALLY OBSERVED THAT ASSESSEE HAD CARRIED OUT MANUFACTURING OF COTTON AND BLENDED YARN AND PROCESSING CLOTH ON JOB WORK BASIS FOR OUTSIDE PARTIES. OUR ATTENTION WAS ALSO INVITED TO THE PARA 3.6 OF THE AOS ORDER, WHEREIN THE AO HIMSELF HAS RECORDED A FINDING TO THE EFFECT THAT ONLY PROCESSING DEPARTMENT OF THE ASSESSEE COMPANY IS CLOSED SINCE JULY, 1998. OUR ATTENTION WAS ALSO INVITED TO LAST LINE OF PARA 3.8, WHEREIN THE AO HAS STATED T HAT ASSESSEE HAS MADE ELABORATE ARRANGEMENTS TO CLOSE DOWN ITS PROCESSING ACTIVITIES. 8. AS PER LD. AR ASSESSEE COMPANY HAS COMPOSITE TEXTILE MILL WHEREIN THE BUSINESS OF MANUFACTURING OF COTTON AND BLENDED YARN AND PROCESSING OF THE CLOTH. THE ENTIRE BUS INESS WAS CONTROLLED BY THE SAME HEAD OFFICE AND THE FINANCES OF THE COMPANY WAS CENTRALISED. T HERE ARE ENOUGH EVIDENCES TO DEMONSTRATE THAT THERE EXISTS INTERDEPENDENCE AND INTERLACING OF THE BUSINESS ACTIVITIES AND UNITY OF CONTROL OF THE BUSINESS AS A W HOLE. ACCORDINGLY, THE AO WAS NOT JUSTIFIED IN DISALLOWING THE EXPENSES. FURTHER RELIANCE WAS PLACED ON JUDICIAL PRONOUNCEMENTS IN CASE OF CIT VS. R.M.MARUTHAI NAIDU AND SONS, 192 ITR 666 ; CHHABIRANI AGRO INDUSTRIAL ENTERPRISES LTD. VS. CIT, 191 ITR 226 , V EECUMSEES VS. CIT, 220 ITR 185 (SC) AND CIT VS. PFIZER LTD., 330 ITR 62 (BOM) . FURTHER RELIANCE WAS PLACED ON THE FINDINGS RECORDED BY CIT(A) AND THE JUSTIFICATION OF LAW APPLIED BY HIM FOR DELETING THE DISALLOWANCE. ITA NO. 470 9 / 1 3 9 9. WE HAVE CONSIDERED RIVAL CONTENTIONS , CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND ALSO DELIBERATED ON JUDICIAL PRONOUNCEMENTS REFERRED BY LOWER AUTHORITIES IN THEIR RESPECTIVE ORDERS AS WELL AS JUDICIAL PRONOUNCEMENTS CITED AT BAR BY THE LD. AR AND DR IN THE CONTEXT OF FAC TUAL MATRIX OF THE CASE. FROM THE RECORD, WE FOUND THAT ASSESSEE COMPANY WAS CARRYING ON TEXTILE MILL INTERALIA ENGAGED IN THE BUSINESS OF MANUFACTURING OF COTTON AND BLENDED YARN AND PROCESSING CLOTH BY WAY OF JOB WORK (PROCESSING DEPARTMENT). THE ASSESSE E HAS ALSO OWNING SIX RETAIL OUTLETS IN ADDITION TO THE ABOVE COMPOSITE TEXTILE MILL. THE ENTIRE BUSINESS WAS CONTROLLED BY THE SAME HEAD OFFICE AND THE FINANCES OF THE COMPANY WAS CENTRALIZED WHICH SHOWS COMPLETE INTER LACING AND UNITY OF CONTROL AND THUS , THE SPINNING DEPARTMENT AND PROCESSING DEPARTMENT OF THE ASSESSEE CONSTITUTED A SINGLE BUSINESS. DURING THE YEAR ASSESSEE HAS CLOSED ITS PROCESSING DEPARTMENT AND CLAIMED EXPENDITURE ON ACCOUNT OF GRATUITY AND COMPENSATION. THE AO DISALLOWED THE SAME ON THE PLEA THAT THERE IS A CLOSURE OF ASSESSEES BUSINESS, HOWEVER, CLOSING OF PROCESSING DEPARTMENT IS ONLY SMALL PART OF THE TOTAL ACTIVITY CARRIED OUT BY THE ASSESSEE AND THE ASSESSEE HAS NOT CLOSED THE TEXTILE BUSINESS BUT AS A BUSINESS EXPEDIENCY DOWNSI ZED ITS LOSS MAKING OPERATIONS AS A PART OF RESTRUCTURING OF ITS BUSINESS ACTIVITIES. THUS, THE CLOSURE OF PROCESSING DEPARTMENT WAS ON ACCOUNT OF COMMERCIAL EXPEDIENCY. THE ASSESSEE WAS CARRYING OUT BUSINESS ACTIVITY OF MANUFACTURING OF COTTON AND BLENDED YARN AND PROCESSING OF CLOTH BY WAY OF JOB WORK(PROCESSING DEPARTMENT), WHEREIN PROCESSING OF CLOTH WAS BY WAY OF JOB WORK CARRIED OUT. THE PAYMENT OF GRATUITY WAS TO THE EMPLOYEES OF ONE UNIT AS PER THE ITA NO. 470 9 / 1 3 10 ARRANGEMENT WITH THE EMPLOYEES AND AS SUCH WAS AN O BLIGATION OF ASSESSEE. THERE WAS NO CLOSURE OF TEXTILE MILL AND ONLY ONE OF ITS UNIT ENGAGED IN PROCESSING OF CLOTH WAS CLOSED, WHICH DOES NOT AMOUNT TO CLOSURE OF TEXTILE MILL AS A WHOLE. 10. HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. PFIZER LTD. (SUPRA) , HAS HELD THAT WHERE THE ASSESSEE W AS HAVING THREE UNITS AND ONE OF THE UNIT WAS CLOSED, THE CLOSURE OF ONE UNIT DID NOT INVOLVE THE CLOSURE OF BUSINESS . ACCORDINGLY, RETRENCHMENT COMPENSATION PAID TO THE WORKERS WAS HELD TO BE LIABLE FOR DEDUCTION WITHIN THE MEANING OF SECTION 37(1) OF THE ACT SINCE THERE WAS NO CLOSURE OF THE BUSINESS. 11. HONBLE SUPREME COURT IN THE CASE OF VEECUMSEES VS. CIT (SUPRA) , HAS HELD THAT THE ASSESSEE WAS CARRYING ON JEWELLERY BUSINESS COMMENCING EXHIBITION OF CINEMAT OGRAPHIC FILMS AND LOAN WAS TAKEN FOR CONSTRUCTING CINEMA THEATRE . AFTER CLOSURE OF CINEMA BUSINESS, THE INTEREST ON BORROWED CAPITAL IS DEDUCTIBLE U/S.36(1)(III) OF THE ACT. THE HONBLE SUPREME COURT HAS CATEGORICALLY HELD THAT THE FACT THAT THE PARTICULA R PART OF THE BUSINESS FOR WHICH THE LOANS HAD BEEN OBTAINED HAD BEEN TRANSFERRED OR CLOSED DOWN DID NOT ALTER THE FACT THAT THE LOANS HAD, WHEN OBTAINED, BEEN FOR THE PURPOSE OF THE ASSESSEES BUSINESS. APART FROM THIS, THE TRIBUNAL FOUND AS A FACT THAT THE BUSINESS CARRIED ON BY THE ASSESSEE AS JEWELER AND IN RUNNING THE CINEMA THEATRE, ETC., WAS COMPOSITE. IN VIEW OF THIS FINDING ALSO, THE ASSESSEE WAS ENTITLED TO THE DEDUCTION OF THE INTEREST PAID ON THE LOANS IN QUESTION UNDER SECTION 36(1)(III) OF TH E ACT. ITA NO. 470 9 / 1 3 11 12. THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. R.M.MARUTHAI NAIDU & SONS (SUPRA) , HAS OBSERVED AS UNDER : - THE QUESTION WHETHER TWO OR MORE LINES OF A BUSINESS MAY BE REGARDED AS THE SAME BUSINESS OR DIFFERENT BUSINESSES DEPENDS NOT UPON THE SPECIAL METHODS PRESCRIBED BY THE INCOME - TAX ACT FOR COMPUTATION OF THE TAXABLE INCOME, BUT UPON THE NATURE OF THE BUSINESSES, THE NATURE OF THEIR CO - ORGANISATION, MANAGEMENT, SOURCE OF THE CAPITAL FUND UTILISED, METHOD OF BOOK - KEEPING AND A HOST OF OTHER RELATED CIRCUMSTANCES WHICH STAMP THEM AS THE SAME OR DISTINCT AND THE TEST IS WHETHER THERE WAS ANY INTERCONNECTION, ANY INTERLACING, ANY INTERDEPENDENCE AND ANY UNITY AT ALL EMBRACING THE TWO BUSINESSES. THE EXISTENCE OF COMMON MANAGEMENT, COMMON B USINESS ORGANISATION, COMMON ADMINISTRATION, COMMON FUND AND A COMMON PLACE OF BUSINESS FURNISHES SUCH INTERCONNECTION, INTERLACING, INTERDEPENDENCE AND UNITY. IF ONE BUSINESS CANNOT CONVENIENTLY BE CARRIED ON AFTER THE CLOSURE OF THE OTHER, THERE WOULD BE A STRONG INDICATION THAT THE TWO BUSINESSES CONSTITUTE THE SAME BUSINESS, BUT NO DECISIVE INFERENCE MAY BE DRAWN FROM THE FACT THAT, AFTER THE CLOSURE OF ONE BUSINESS, THE OTHER MAY CONVENIENTLY BE CARRIED ON. 13. IN THE CASE OF CHHABIRANI AGRO INDUSTRI AL ENTERPRISES LTD. (SUPRA) , THE HONBLE PATNA HIGH COURT HAS HELD THAT THE COMPANY ESTABLISHED WITH THE OBJECTS OF MANUFACTURING VANASPATI AND DEALING IN COAL AND WAS HAVING COMMON MANAGEMENT, COMMON BOOKS OF ACCOUNT AND COMMON PLACE OF BUSINESS, MANUFACT URE OF VANASPATI AND DEALING IN COAL CONSTITUTED A SINGLE BUSINESS. ACCORDINGLY, IT WAS HELD THAT THE OFFICE EXPENSES RELATING TO MANUFACTURE OF VANASPATI DEDUCTIBLE FROM PROFITS FROM COAL BUSINESS. 14. APPLYING THE PROPOSITION OF LAW LAID DOWN IN THE ABO VE JUDICIAL PRONOUNCEMENTS TO THE FACTS OF THE CASE, A IR RESISTIBLE CONCLUSION THAT CAN BE DRAWN IS THAT ASSESSEE HAS NOT CLOSED DOWN HIS BUSINESS AS A WHOLE BUT HAD STOPPED THE PROCESSING DIVISION, WHICH IS ONLY ONE OF THE DIVISION OF THE TEXTILE BUSINESS CARRIED ON BY THE ASSESSEE. THE CLOSURE OF THE PROCESSING DIVISION WAS DONE ON COMMERCIAL EXPEDIENCY. A PERUSAL OF THE ITA NO. 470 9 / 1 3 12 VARIOUS DOCUMENTS PLACED ON RECORD ALSO MAKES IT CLEAR THAT THERE WAS INTERCONNECTION, INTERLACING AND UNITY OF CONTROL AND MANAGEMENT, COMMON DECISION MAKING MECHANISM AND USE OF COMMON FUNDS IN RESPECT OF ENTIRE TEXTILE BUSINESS OF THE ASSESSEE. THE ASSESSEE HAS TAKEN A DECISION O N COMMERCIAL EXPEDIENCY TO DOWNSIZE ITS OPERATION AND EFFECTED THE CLOSURE OF PROCESSING UNIT WHICH HAS NOT R ESULTED INTO CLOSURE OF THE TEXTILE BUSINESS OF THE ASSESSEE AS A WHOLE. THE DETAILED FINDINGS RECORDED BY THE CIT(A) AT PARA 9 HAVE NOT BEEN CONTROVERTED BY THE DEPARTMENT BY BRINING ANY POSITIVE MATERIAL ON RECORD. THE CASE OF GEMINI CASHEW SALES CORPORA TION, 65 ITR 643 AS APPLIED BY THE AO IS DISTINGUISHABLE ON FACTS, INSOFAR AS BUSINESS OF THE ERSTWHILE PARTNERSHIP WAS DISSOLVED BY DEATH OF ONE OF THE TWO PARTNERS . THE PARTNERSHIP FIRM WAS DISSOLVED, IT WAS HELD BY THE HONBLE COURT THAT RETRENCHMENT CO MPENSATION WAS NOT ALLOWABLE IN THE YEAR OF DISSOLUTION OF PARTNERSHIP FIRM, WHEREAS THE FACTS IN THE INSTANT CASE CLEARLY DISTINGUISHABLE WHEREIN TEXTILE BUSINESS OF ASSESSEE WAS CONTINUED. THE FINDINGS RECORDED BY CIT(A) ARE AS PER MATERIAL ON RECORD, W HICH HAVE NOT BEEN CONTROVERTED BY LD DR BY BRINGING ANY POSITIVE MATERIAL ON RECORD. ACCORDINGLY, WE DO NOT FIND ANY REASON TO INTERFERE IN THE FINDINGS RECORDED BY THE CIT(A), WHICH RESULTED INTO DELETION OF ADDITION MADE BY THE AO. 15 . IN THE RESULT, A PPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 16/01 / 201 5 . 16/01 / 2014 SD/ - SD/ - ( ) ( SANJAY GARG ) ( ) ( R.C.SHARM A ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 16/01 /2014 /PKM , PS ITA NO. 470 9 / 1 3 13 COPY OF THE ORDER FORWARDED TO : / BY ORDER, ( ASSTT. REGISTRAR) / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A), MUMBAI. 4. / CIT 5. / DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//