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Issues:
1. Whether the provision for retrenchment compensation/gratuity of Rs. 35,838 represented an accrued liability for the assessment year 1972-73 and was an allowable deduction in computing the business profit of that year? Analysis: The dispute in this case pertains to the assessment year 1972-73, where the assessee made a provision for retrenchment compensation and gratuity of Rs. 35,838, reflecting it as a liability in the balance sheet as of March 31, 1972. The Income-tax Officer rejected the deduction claim, stating that the liability did not accrue during the relevant assessment year. The Appellate Assistant Commissioner (AAC) upheld this decision, emphasizing that the notices issued by the assessee did not create an immediate responsibility to pay compensation, as the services were terminated in the subsequent year. The Tribunal, however, ruled in favor of the assessee, holding that the liability was correctly accounted for under the mercantile system of accounting. Upon further review, the High Court observed that there was no legal obligation for the assessee to pay retrenchment compensation during the relevant assessment year. The notices issued to employees in March 1972 did not create a present liability, as the compensation was payable only upon termination of services, which occurred in the subsequent year. The Court emphasized that an allowable deduction must represent an ascertainable liability in praesenti. Retrenchment compensation, as per Section 25F of the Industrial Disputes Act, is deductible as a business expenditure for an assessee following the mercantile system of accounting in the year the liability is incurred. Since the liability did not exist in the relevant assessment year and was contingent until termination of services, the provision made by the assessee was not allowable. Consequently, the Court ruled in favor of the Revenue, denying the deduction claim by the assessee. In conclusion, the High Court held that the provision for retrenchment compensation and gratuity made by the assessee did not represent an accrued liability for the assessment year 1972-73. As the liability was contingent and not ascertainable in praesenti during the relevant year, the deduction claim was disallowed, affirming the Tribunal's decision in favor of the Revenue.
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