By TIOL News Service

NEW DELHI, MAY 22, 2018: THE ISSUE BEFORE THE TRIBUNAL IS - Whether compensation paid to retrenched workers upon closure of one manufacturing unit, as a safeguard against future losses of other units, is an allowable business expenditure u/s 37. YES IS THE ANSWER.

Facts of the case:

The assessee company engaged in the manufacture of auto components, had returned loses for the relevant AY. During the AY, the assessee closed down one of its seven manufacturing units due to heavy financial loses. The management notified the workers regarding closure w.e.f. 31st March, 2010. The closure was approved by the Board of Directors and and an agreement was executed between worker’s union and assessee for retrenchment of its employees on account of closure. On assessment, the AO observed that the assessee had claimed deduction u/s 37 on account of retrenchment compensation u/s 37 to the extent of Rs.57,25,789/-. However, the AO disallowed the said amount of retrenchment compensation.

Tribunal held that,

++ the assessee explained that it has closed down its Aurangabad unit due to heavy losses suffered by the assessee. This loss of Rs.4.34 crores was declared by the assessee in its return, and after making addition as well, the net taxable loss have been determined at Rs.3.77 crores. Therefore, the contention of the assessee is correct that in order to save future losses, Aurangabad unit was closed down by the assessee. The closure is approved by the Board of Directors and there was an agreement executed between the worker’s union and the assessee for retrenchment of its employees on account of closure of the Aurangabad factory. These facts have not been rebutted by the Revenue. Therefore, it is clear that amount in question have been paid by assessee on account of retrenchment compensation on closure of the Aurangabad unit of the assessee. The amount is thus paid for business purposes only and as such, it was an allowable deduction u/s 37.

(See 2018-TIOL-739-ITAT-DEL)