ORDER
R.V. Easwar, Judicial Member
1. The assessee is a public limited company. In this appeal we are concerned with the assessment year 1985-86 for which the previous year ended on 31-5-1984.
2. In the first ground the assessee challenges the disallowance of Rs. 3.68 crores which represents the assessee’s liability in respect of pension payable in future years to the employees who retired during the relevant previous year under the Voluntary Retirement Scheme (VRS for short). In order to reduce the costs and to improve the profitability and overall health of the company the management and non-management staff were offered the VRS by the company. A scheme was formulated and as per the scheme it would remain open from 30-3-1984 to 11-5 1984. The employee who accepts the VRS has to communicate his willingness in writing to the company in the prescribed form. Once an application is filed the same cannot be withdrawn. The management has got the right to accept or reject the application and such action has to be communicated to the employee by 21-5-1984 and in case, the company accepts the application, the effective date of retirement of the employee will be 30-5-1984. From the date of retirement the employee concerned will cease to be in service and will no more be eligible for the pay and the allowances when he was in service. Under the scheme, an employee whose application under the VRS is accepted will be paid monthly pension at 50% of the salary for the month of April 1984 in respect of the lesser of the following two periods from the month of June 1984 :
(a) 1/2 the employee’s service with the company.
(b) Till the employee reaches the age of sixty.
The assessee shall pay the usual benefits to the employee such as gratuity, provident fund, encashment of privilege leave, etc. As per Clause 5 of the Scheme, in the event of death of the concerned employee before completion of the stipulated pension period, the company will continue to pay the pension to the employees’ nominees for the unexpired period. Clause 9 provided that notwithstanding anything contained in the scheme the management reserves the right to withhold or stop the monthly pension if it is satisfied that any employee who has taken retirement under VRS has acted in a manner prejudicial to the interest of the assessee.
3. The VRS is identical for both management as well as non-management staff. In accordance with the aforesaid Scheme, 430 members of the staff opted for voluntary retirement during the year. The assessee’s liability for pension to these 430 persons was actuarially determined at Rs. 3.68 crores and the same was claimed as a deduction as liability arising during the previous year. The claim was disallowed in the assessment on two grounds. The first ground was that the liability was not entered in the books of account and was not made a charge against the profits of the year concerned. The same has been claimed only in the income-tax return. The second ground was that the liability can be allowed only on payment basis since as per Clause 9 of the VRS Scheme the assessee can stop or withhold payment of pension and, therefore, there was no certainty as to the company’s liability. On appeal, the disallowance was confirmed. The CIT(A) was of the view that there is no definite liability or obligation arising in the previous year since there were clauses in the scheme enabling the assessee to discontinue the payment at any time in future.
4. The assessee is in further appeal before us. It is submitted on behalf of the assessee that the liability was definite and certain, that 430 members of the staff had actually retired under the VRS during the year, that the present discounted value of the liability to pay pension is a proper charge on the profits of the year and that the absence of entries in the books of account is not relevant for the purpose of deciding the correctness of the claim. It is further argued that the contingency mentioned in Clause 9 of the scheme is insignificant and cannot, therefore, wipe out the liability and that at any rate it is taken care of by the actuarial valuation and, therefore, there is no justification for disallowing the assessee’s claim.
5. The learned D.R. submitted that the liability to pay pension did not arise in the year of account. He further submits that the liability represents a contractual liability and, therefore, proper entries in the books of account are necessary to validate the claim. According to the learned D.R., Clause 9 of the scheme clearly shows that the liability itself is contingent and, therefore, the claim cannot be allowed.
6. On a consideration of the rival contentions we are of the view that the disallowance cannot be upheld. Having regard to the terms of the VRS and the fact that under the Scheme 430 members of the staff have actually retired during the year, we are of the view that the liability to pay pension in future years is not a contingent liability but is a real, definite and ascertained liability. Clause 9 of the scheme which empowers the assessee-company to stop payment of pension if it is found that the employee acts in a manner prejudicial to the assessee does not detract from the nature of the liability. That clause does not make the liability contingent upon any particular event. Under the said clause it is only the payment which is contingent upon the continued good behaviour of the employee. But that does not mean that the liability itself is contingent. In the present case the existence of the scheme is not disputed. That 430 members of the staff took retirement under the scheme and actually retired during the relevant previous year is also not disputed. The moment they retired the assessee-company became liable to pay pension under the VRS as agreed upon. The liability was actuarially estimated. As pointed out by the learned representative for the assessee the existence of Clause 9 was also duly taken note of by the actuary while estimating the liability. We find from the actuary’s report, that at para 2.4 he has considered the impact of the clause and has deducted a sum of Rs. 45,484 while estimating the liability. Thus even assuming that there is an element of contingency in making the payment, though not in ascertaining whether there was a liability to pay or not, the same has been taken care of and the objection of the departmental authorities on that ground should fail. As regards the liability itself, it has been held by the Supreme Court in the case of Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66 that expenditure which is deductible for income-tax purposes is one which is towards the liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not an expenditure. In the present case it cannot be disputed that as on 31-5-1984 the assessee was under liability to pay pension in future for the stipulated period in respect of 430 members of the staff who retired under the VRS. The liability is certain and definite. The claim, therefore, comes under the first category of cases mentioned by the Supreme Court in the decision cited supra. The Supreme Court in the said decision also held, after a reference to the famous English case of Southern Railway of Peru Ltd. v. Owen (Inspector of Taxes) [1957] 32 ITR 737 (HL), that the recurring liability in respect of pension, which is compressed into a lump payment, should itself be a legal obligation and that, if contingent, the present value of the future payments should be fairly estimable. These observations appearing at page 77 of the report lend support to the view that even if the liability is treated as contingent it is allowable so long as the present value of the future payments can be estimated on a scientific basis. The assessee’s case is “a fortiorary” since we have seen that the liability to pay pension is definite and certain. In the case of CIT v. Gemini Cashew Sales Corporation [1967] 65 ITR 643, the Supreme Court again held that “the present value on commercial valuation of money to become due in future, under a definite obligation, will be a permissible outgoing or deduction in computing the taxable profits of a trader, even if in certain conditions the obligation may cease to exist because of forfeiture of the right” (at page 649)
[Emphasis supplied].
7. In our opinion, therefore, the departmental authorities fell into an error rejecting the assessee’s claim as a contingent liability.
8. The other objection based on the absence of book entries cannot also be accepted. It should make no difference in principle, whether the liability is a statutory liability or a contractual liability. The existence of the VRS as well as the fact that 430 members of the staff actually retired during the year of account have not been disputed. On these facts, if the liability itself is definite and certain, the fact that there was no entry in the books of account as regards the liability, in our opinion, is not very relevant for the purpose of deciding the validity of the claim. At best it may be bad accounting but as held by the Madras High Court in the case of K.S. Narayanaswami Iyer v. CIT [1956] 29 ITR 515 at page 521 bad accounting cannot nullify the general principles concerning the computation of the profits and gains which are part of the substantive law. Reference may also be made in this connection to the Bombay High Court decision in the case of CIT v. Nagri Mills Co. Ltd. [1958] 33 ITR 681. As held by the Supreme Court in the case of CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 at page 148, for the purpose of the Income-tax Act a mere book keeping entry cannot decide the question whether a particular receipt is taxable or whether a particular claim is allowable as a deduction, whatever may be the method of accounting adopted. Therefore, the objection of the learned D.R. that since the liability represented a contractual liability the absence of book entries are fatal to the claim cannot be accepted.
9. For the aforesaid reasons we delete the disallowance of the liability of Rs. 3.68 crores in respect of pension payable in future under the VRS.
10. Ground No. 2 is directed against the assessment of Rs. 52,33,740 under Section 41(2) of the Act. During the year the assessee disposed of one of their undertakings, namely, Rallis Chemicals Factory. The consideration received was Rs. 2.95 crores. While preparing the income-tax return, the assessee contended that the amount was received as a slump price for the sale of the entire undertaking and not for any particular asset. It was, therefore, contended that Section 41(2) had no application. Reliance was placed on the CBDT’s Circular No. 62 dated 16-8-1971 in the case of nationalisation of banks.
11. The Assessing Officer examined the agreement disposing of the undertaking and found that the assessee had valued the land and business premises including certain machinery at Rs. 78 lakhs separately. From this he inferred that the sale was not a “slump sale” and the profits Under Section 41(2) were computed on the following basis :
Sale proceeds Rs. 2,95,00,000
less: Legal expenses Rs. 1,45,215
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Rs. 2,93,54,785
Less : Value of current
assets Rs. 1,41,27,035
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Rs. 1,52,27,750
Less : Written down value
of assets Rs. 99,92,000
Balance profit Under
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Section 41 (2) Rs. 52,35,750
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12. On appeal, the CIT(A) did not accept the assessee's contention that the sale was a slump sale. He, therefore, upheld the assessment of the profits Under Section 41(2). He, however, directed the Assessing Officer to consider the assessee's claim that the excess received over and above the cost of the undertaking was taxable as capital gains.
13. The assessee is in further appeal before us questioning the applicability of Section 41(2) of the Act to what it contends to be a “slump transaction”. The judgment of the Supreme Court in the case of CIT v. Mugneeram Bangur & Co. (Land Department) [1965] 57 ITR 299 is cited in support of the contention. It is claimed that there was no itemised sale but the sale was of the entire undertaking which was the Rallis Chemical Factory. Inasmuch as what was sold was the entire undertaking together with its assets and liabilities for a slump price and no price was fixed item-by-item in respect of the different assets belonging to the undertaking, no part of the surplus could be assessed Under Section 41 (2) of the Act. The learned D.R. pointed out that there was an apportionment of a part of the sale consideration towards the immovable assets and, therefore, it cannot be stated that there was a slump sale not attracting the provisions of Section 41(2). It was, therefore, contended that the assessment of the profits which represent the depreciation on the machinery allowed earlier should be upheld.
14. We have carefully considered the rival contentions. We have also gone through the agreement dated 1-3-1984 for the sale of the undertaking as well as the conveyance deed of the same date for the sale of the premises in the undertaking which are compiled in the paper book. The perusal of the agreement shows that the assessee is engaged in the business of manufacture of pesticides, engineering goods, Pharmaceuticals, chemicals and fertilizers, etc. It was carrying on the business of manufacture of Sulphuric Acid, Single Superphosphate, Sodium Silicofluride, Sodium Hydrosulphite and NPK in its undertaking known as Rallis Chemical Factory situated at U.P. The factory comprises of several pieces of land together with the factory buildings and other buildings comprising of service units thereon as well as certain items of plant and machinery, fixed and unfixed. The agreement narrates at Clause 5 thereof that the assessee had agreed to sell and the purchaser M/s. Jaysree Tea & Industries Ltd. had agreed to buy the undertaking of Rallis Chemical Factory as a going concern inclusive of the land, buildings and embedded plant and machinery including unfixed plant and machinery and other movables and current assets of the said undertaking in addition to the incidental benefits attached to the business such as licences, quotas, permits, etc., at a slump price of Rs. 2.95 crores. The land, buildings and embedded plant and machinery were conveyed separately by a registered conveyance deed dated 1-3-1984. Clause 6 of the agreement affirms that the slump price of Rs. 2.95 crores represents the total value of the undertaking inclusive of the immovables, movables, current assets and other rights and benefits attached to the chemical factory. There is no mention in this agreement regarding the fixation of the consideration of Rs. 78 lakhs for the premises and the other immovables. The conveyance deed, however, records the fact (clause 3) that the premises are being conveyed for an aggregate price of Rs. 78 lakhs. It is meant to be conveyed that the conveyance is in respect of the land, buildings and embedded plant and machinery. As per Clause II of the conveyance deed it was stipulated that the price payable was Rs. 78 lakhs and that the vendor and the purchaser will bear the stamp duty equally. In the schedule to the conveyance deed there is a detailed description of the land, buildings and the embedded plant and machinery.
15. On the aforesaid facts the only question is whether it can be said that there was an item-by-item sale of the plant and machinery or that there was an item-by-item fixation of the sale price so as to attract the provisions of Section 41(2). The learned CIT(A) has held that the judgment of the Gujarat High Court in the case of Jayantilal Bhogilal Desai v. CIT [1981] 130 ITR 655 was applicable. We have gone through this judgment carefully and we find that the facts are slightly different. In that case, there were three agreements. The first agreement was dated 30-6-1966 and it was in respect of machinery, goodwill, stock, furniture, etc., of the business which was sold to a firm. The second agreement was dated 1-7-1966 and it was styled as sale deed in respect of sale of movable properties. This agreement narrated the salient features of the earlier agreement and also recorded the fact that the possession of the goods sold was handed over to the purchasers on 30-6-1966. In a further deed dated 4-12-1966 it was clarified that the consideration of Rs. 3.25 lakhs fixed in respect of the movables represented the consideration for machinery, tools, etc., of the assessee’s business. It was clarified further that the goodwill was sold for Rs. 25,000 and the stock was sold for Rs. 1,11,111. It was thus stated that the total sale price of Rs. 4,61,111 for which the business was sold was in respect of the machinery, tools, goodwill, stock, etc. Thus from the three documents executed in the Gujarat case it was possible for the High Court to infer that there was an item-by-item sale of the assets and that separate heads of items were earmarked as forming part of the whole transaction at different prices agreed to between the parties. It was, therefore, held that the provisions of Section 41(2) were applicable. This decision has been erroneously applied by the CIT(A) to the facts of the present case. In the present case, there is no agreement in respect of the movables as such. The first document in point of time was the conveyance deed since a reference to the same is found in the agreement dated 1-3-1984 which is for the sale of the entire undertaking of the chemical factory. From Clauses 5 & 6 of the agreement, which have already been adverted to by us, it is clear that the entire undertaking was sold for a consolidated price of Rs. 2.95 crores without any break up or an earmarking of a particular price in respect of a particular asset whether movable or immovable, as happened in the Gujarat case. The immovable property which comprises of parcels of land, buildings and embedded plant and machinery could not be sold without a registered conveyance deed since they were admittedly above Rs. 100 and under the Transfer of Property Act, 1882 no valid title could be passed to the purchaser without a registered conveyance. That is the reason why the parties had to necessarily execute and register a separate document in respect of the immovables. For purposes of stamp duty a value had to be necessarily put on the immovables and this was fixed at Rs. 78 lakhs. It is significant to note that in the schedule to the registered conveyance deed where a detailed description of the items that were the subject of transfer was given, no consideration has been earmarked against each item, which goes to show that even the immovables were treated as one block for the purposes of registration and stamp duty. Reading both the documents together we are left with the impression that the entire undertaking of the Rallis Chemical Factory has been sold and not each and every item comprising the undertaking. There has been no earmarking of the sale consideration in an itemised manner and there has not been an item-by-item sale of the assets. The provisions of Section 41(2) are, therefore, not attracted.
16. The later decision of the Gujarat High Court in the case of Artex Mfg. Co. v. CIT [1981] 131 ITR 559 is applicable to the facts of the present case. This decision has been rendered on 28th August, 1980 and there is no reference in this decision to the earlier judgment of the same Bench in the case of Jayantilal Bhogilal Desai (supra) relied on by the CIT(A) which goes to indicate that the earlier judgment was considered not relevant since the facts were different.
17. For the aforesaid reasons we direct the Assessing Officer to exclude from the assessment the profits assessed Under Section 41(2) of the Act. It may be clarified that the assessee has no objection to pay the capital gains tax Under Section 45 of the Act in respect of the slump sale.
18 to 24. [These paras are not reproduced here as they involve-minor issues.]