1999 (2) TMI 47 - HC - Income Tax

Summary

Issues:
1. Allowance of gratuity claim for pre-nationalisation period by the Income-tax Appellate Tribunal.
2. Justification of the gratuity claim in light of compensation for takeover of sick mills.

Analysis:

Issue 1:
The assessee, a government-owned corporation, claimed a deduction of Rs. 94,36,506 for gratuity paid to employees of sick textile mills taken over by it. The Assessing Officer denied the claim, stating that a significant portion of the gratuity for the pre-nationalisation period was not met from the income of the assessment year. The Commissioner of Income-tax (Appeals) upheld this decision. However, the Tribunal accepted the assessee's explanation that the gratuity liability was estimated at Rs. 5,48,86,706 and provisions were made during the takeover. The Tribunal allowed the deduction based on actual payments made, emphasizing that a provision is an appropriation for a known liability, even if not quantified, as per the Supreme Court's judgment in Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585.

Issue 2:
The Tribunal found that the corporation had paid Rs. 1,43,05,352 to employees during the relevant year, including Rs. 94,36,506 for the pre-nationalisation period. The amount was debited from the provision for gratuity created during the nationalisation of sick units. The Tribunal concluded that the corporation had taken over the liability of sick units, making approved provisions for gratuity. The Tribunal justified the deduction, stating that the provision was not created to meet future gratuity liabilities but was used to pay employees during the assessment year. Referring to the Supreme Court's observations in Shree Sajjan Mills' case, the Tribunal held that the provision made at the time of nationalisation, used for gratuity payments, did not contravene section 40A of the Act. The Tribunal's decision to allow the deduction was upheld, emphasizing that the gratuity amount was an appropriation for an existing liability.

In conclusion, the High Court agreed with the Tribunal's decision, stating that the amount in question was deductible, irrespective of the compensation for the takeover of sick mills considering the provisions of the law. The judgment favored the assessee, affirming the Tribunal's decision to allow the gratuity claim for the pre-nationalisation period.