1989 (9) TMI 95 - HC - Income Tax

Summary

Issues:
- Deductibility of provision for gratuity under section 37(1) of the Income-tax Act, 1961.

Analysis:

The judgment delivered by the Bombay High Court revolved around the question of whether a provision for gratuity amounting to Rs. 43,584 was a legitimate deduction under section 37(1) of the Income-tax Act, 1961 for the assessment year 1972-73. The Income-tax Officer disallowed the claim primarily because the gratuity liability for the year in question was deemed to be only Rs. 4,730, with the remaining amount considered as a liability from an earlier period. Additionally, the Officer cited section 36(1)(v) of the Income-tax Act as a basis for disallowing even the Rs. 4,730 amount. However, the Appellate Assistant Commissioner and the Tribunal upheld the assessee's claim, relying on the Central Board of Direct Taxes' Circular No. 47 and the Allahabad High Court decision in Madho Mahesh Sugar Mills (P.) Ltd. v. CIT [1973] 92 ITR 503. The Tribunal rejected the Department's argument that the Circular had been withdrawn post-assessment, as it was withdrawn after the relevant assessment was completed.

The Department, represented by Dr. Balasubramanian, contended that the Circular had been withdrawn and emphasized that the actual liability for gratuity was only Rs. 4,730, not the entire claimed amount. On the other hand, the assessee's counsel, Shri Sathe, argued that the claim was not solely reliant on the Circular but was supported by established legal principles, including the Supreme Court decision in Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 and previous court decisions. The provision for gratuity, based on actuarial valuation, was deemed legitimate. The contention that the liability for the year was only Rs. 4,730 was refuted, asserting that the liability for gratuity for whole-time directors arose when a gratuity scheme was adopted for them in October 1971, making the entire amount a valid deduction for the year.

The High Court, in its judgment, held that since the liability for gratuity was accrued based on a scheme implemented in the previous year, the entire liability, regardless of the period, was attributable to the current year. As the assessment year in question was 1972-73, the newly inserted provisions of section 40A(7) of the Income-tax Act did not apply. Therefore, the liability based on actuarial valuation was allowed as a deduction, citing the Allahabad High Court decision in Madho Mahesh Sugar Mills (P.) Ltd.'s case [1973] 92 ITR 503 and the court's decision in India United Mills Ltd.'s case [1975] 98 ITR 426. Consequently, the court answered the question in the affirmative, in favor of the assessee, with no order as to costs.