1987 (6) TMI 22 - HC - Income Tax

Summary

Issues Involved:
1. Deduction for provision made for payment of gratuity.
2. Applicability of Section 36(1)(v) and Section 37 of the Income-tax Act, 1961.
3. Impact of the West Bengal Employees' Payment of Compulsory Gratuity Act, 1971.
4. Relevance of judicial precedents and Supreme Court decisions.

Issue-wise Detailed Analysis:

1. Deduction for provision made for payment of gratuity:
The assessee, Steel Rolling Mills of Bengal Ltd., claimed a deduction of Rs. 57,643 for a provision made for payment of gratuity to its employees based on actuarial calculations. The Income-tax Officer disallowed this claim. The Appellate Assistant Commissioner, however, allowed the deduction, relying on actuarial principles and previous judicial decisions. The Tribunal upheld this decision, affirming that the liability for gratuity, as calculated actuarially, was deductible.

2. Applicability of Section 36(1)(v) and Section 37 of the Income-tax Act, 1961:
The Revenue argued that the deduction was only permissible under Section 36(1)(v), which pertains to contributions to an approved gratuity fund, and not under Section 37, which deals with general deductions. The Tribunal and the court, however, noted that prior to the enactment of Section 40A(7) in 1973, provisions for gratuity could be deducted under Sections 28 and 37, provided they were based on actuarial estimates.

3. Impact of the West Bengal Employees' Payment of Compulsory Gratuity Act, 1971:
The West Bengal Employees' Payment of Compulsory Gratuity Act, 1971, which came into force during the relevant accounting year, imposed a statutory liability on the assessee to pay gratuity. The court observed that the liability, though payable in the future, was ascertainable and deductible based on actuarial principles. This Act provided the legal basis for the assessee's provision for gratuity.

4. Relevance of judicial precedents and Supreme Court decisions:
Several precedents were discussed, including decisions from the Supreme Court and various High Courts. Key cases included:
- Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 (SC): Established that provisions for gratuity were deductible under Sections 28 and 37 before the introduction of Section 40A(7).
- CIT v. Eastern Spinning Mills Ltd. [1980] 126 ITR 686 (Cal): Affirmed that a provision for gratuity based on actuarial estimates was deductible.
- CIT v. Carborundum Universal Ltd. [1977] 110 ITR 621 (Mad): Highlighted that specific provisions in the Income-tax Act take precedence over general provisions.

The court concluded that the law allowed for the deduction of provisions for gratuity based on actuarial estimates prior to the enactment of Section 40A(7). The Tribunal's decision to allow the deduction was justified, and the question referred was answered in the affirmative and in favor of the assessee. The court also appreciated the assistance of the amicus curiae in the proceedings.