2004 (8) TMI 72 - HC - Income Tax

Deduction of gratuity - liability for gratuity Whether, the Tribunal having found that the assessee-company had failed to claim the liability for gratuity for the past year was justified in law in holding that it was not debarred from claiming the liability of earlier years in the AY 1972-73? Held , no Whether when the provisions of section 36(1)(v), the provisions as contained in Part C of Schedule IV and the rules relating thereto were not complied with, the Tribunal was in law justified in allowing the claim of gratuity of Rs. 16,45,092 in the AY 1972-73? Held, no - Whether Tribunal was in holding that the liability of gratuity amounting to Rs. 16,45,092 relating to past years accrued in the accounting year relevant to the AY 1972-73 and was, therefore, an allowable deduction for that assessment year? Held, no - Further it is held that the interest on late payment of income-tax/advance tax or self-assessment tax or any other direct tax cannot be allowed as a deduction.

Issues Involved:

1. Allowability of gratuity liability of Rs. 16,45,092 for past years as a deduction in the assessment year 1972-73.
2. Justification of the Tribunal's decision that the liability of Rs. 16,45,092 arose for the first time in the assessment year 1972-73.
3. Tribunal's justification in allowing the claim of gratuity for earlier years in the assessment year 1972-73.
4. Compliance with section 36(1)(v) and Part C of Schedule IV of the Income-tax Act, 1961 for the gratuity claim of Rs. 16,45,092.
5. Compliance with section 36(1)(v) and Part C of Schedule IV of the Income-tax Act, 1961 for the gratuity claim of Rs. 12,45,428.
6. Allowability of interest paid to the Income-tax Department as a deduction.

Issue-wise Detailed Analysis:

1. Allowability of Gratuity Liability of Rs. 16,45,092:
The Tribunal allowed the assessee's claim for Rs. 16,45,092 based on the Gauhati High Court decision in CIT v. Nathmal Tolaram. However, the court found that the liability for this amount accrued in earlier years under the Dr. Sampurnanand Award and not in the assessment year 1972-73. The liability for gratuity was a liability in praesenti, but since it related to earlier years, it could not be allowed as a deduction in the assessment year 1972-73.

2. Justification of the Tribunal's Decision on Liability Arising in 1972-73:
The court held that the liability of Rs. 16,45,092 did not arise for the first time in the assessment year 1972-73. The Dr. Sampurnanand Award, which created the liability, had been in force during the previous assessment years and was extended annually by the State Government. Therefore, the liability accrued in earlier years and not in the assessment year 1972-73.

3. Tribunal's Justification in Allowing Gratuity for Earlier Years:
The court found that the Tribunal was not justified in allowing the claim for gratuity of earlier years in the assessment year 1972-73. The liability for those years had already accrued and could not be claimed again in the assessment year 1972-73.

4. Compliance with Section 36(1)(v) for Rs. 16,45,092:
The court noted that the provisions of section 36(1)(v) and Part C of Schedule IV of the Income-tax Act were not complied with. The assessee had not created an approved gratuity fund under an irrevocable trust. Therefore, the Tribunal was not justified in allowing the claim of Rs. 16,45,092 for the assessment year 1972-73.

5. Compliance with Section 36(1)(v) for Rs. 12,45,428:
The court held that the amount of Rs. 12,45,428, being the gratuity liability for the accounting year under consideration, was allowable as a deduction. This liability was ascertained on actuarial calculation and was a liability in praesenti. Therefore, it was a permissible business expenditure under section 37 of the Act, even if the conditions of section 36(1)(v) were not complied with.

6. Allowability of Interest Paid to the Income-tax Department:
The court held that interest on late payment of income-tax is not an allowable deduction. Such interest is not laid out for the purpose of carrying on business and does not qualify as a business expense under section 37 of the Act. The court referred to various judgments, including Saurashtra Cement and Chemical Industries Ltd. v. CIT, to support this conclusion.

Conclusion:
The court answered questions 1 to 3 and 6 in the negative, in favor of the Revenue and against the assessee. Question 5 was answered in the affirmative, in favor of the assessee and against the Revenue. Question 4 was also answered in the negative, in favor of the Revenue and against the assessee, noting that the amount of Rs. 16,45,092 was not allowable in the assessment year 1972-73. The parties were directed to bear their own costs.

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