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Issues Involved:
1. Whether the sum of Rs. 5,600 credited to the "gratuity reserve account" can be considered an ascertained liability for gratuity under the Industrial Disputes Act. 2. Whether this sum qualifies as a permissible deduction under Section 10(2)(xv) of the Indian Income-tax Act. 3. The nature and timing of the employer's liability for retrenchment compensation under Section 25F of the Industrial Disputes Act. 4. Whether the provision for a future liability can be considered "expenditure" under the Indian Income-tax Act. Issue-wise Detailed Analysis: 1. Ascertained Liability for Gratuity: The assessee, a registered firm of four partners, credited Rs. 5,600 to a "gratuity reserve account" for the year ending April 12, 1956. This amount represented approximately fifteen days' wages for all its employees. The stated objective was to meet a potential future liability under Section 25F of the Industrial Disputes Act, in case of retrenchment. The Tribunal initially ruled in favor of the assessee, considering this an ascertained liability. However, the High Court noted that the mere credit to a reserve account did not establish that the amount was specifically segregated for meeting this statutory liability. The High Court emphasized that the liability was contingent and not ascertained at the time of crediting the amount. 2. Permissible Deduction under Section 10(2)(xv): The assessee claimed the Rs. 5,600 as a permissible deduction under Section 10(2)(xv) of the Indian Income-tax Act. The Income-tax Officer and the Appellate Assistant Commissioner disallowed this claim, arguing that the provision for a future contingent liability does not qualify as "expenditure." The High Court upheld this view, stating that the provision for anticipated or contingent liabilities does not fall within the permissible deductions under Section 10(2)(xv). The Court cited established legal principles that only an ascertained liability justifies an entry in accounts maintained on a mercantile basis. 3. Employer's Liability for Retrenchment Compensation: Section 25F of the Industrial Disputes Act mandates compensation equivalent to fifteen days' average pay for every completed year of service for retrenched employees. The High Court noted that this provision is a condition precedent for retrenchment, making non-compliance render the retrenchment invalid. However, the Court clarified that the employer's liability at a given moment is contingent upon future business exigencies, making it uncertain and hypothetical. The Court distinguished between an actual liability and a contingent one, emphasizing that the latter does not justify a deduction. 4. Provision as "Expenditure": The High Court examined whether the provision for a future liability can be considered "expenditure" under the Indian Income-tax Act. The Court referred to the Supreme Court's definition of "expenditure" as money "paid out or away," implying something irretrievably gone. In this case, the amount credited to the "gratuity reserve fund" was not earmarked for specific employees and remained under the assessee's control. Therefore, it did not qualify as "expenditure." The Court concluded that the mere credit entry to a reserve account does not constitute "expenditure" within the meaning of the Act. Conclusion: The High Court ruled in favor of the department, stating that the Rs. 5,600 credited to the "gratuity reserve account" does not qualify as an ascertained liability or permissible deduction under the Indian Income-tax Act. The provision for a future contingent liability does not constitute "expenditure." The reference was answered in the negative, and the assessee was ordered to pay the department's costs.
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