1984 (7) TMI 29 - HC - Income Tax

Summary

Issues Involved:
1. Deductibility of Rs. 13,43,923 withheld for gratuity payment in computing business loss for the assessment year 1971-72.
2. Entitlement to deduction under Section 32(1)(iii) of the Income-tax Act, 1961, for plant, machinery, and buildings sold in the assessment year 1971-72.

Detailed Analysis:

Issue 1: Deductibility of Rs. 13,43,923 Withheld for Gratuity Payment

The assessee, a public limited company, sold four of its tea estates to Gounder & Co. P. Ltd. and handed over possession on May 1, 1970. The sale consideration was Rs. 42,00,000, with Rs. 15,00,000 retained by the buyer as a reserve fund for gratuity payments. The final amount withheld was Rs. 13,43,923. The assessee claimed this amount as a deduction in its return for the assessment year 1971-72, which was disallowed by the ITO on the grounds that it was a contingent liability. The AAC and the Tribunal upheld this disallowance.

The court examined whether the liability for gratuity was a present liability or a contingent one. It referenced several precedents, including Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC), which established that an estimated liability for gratuity, if properly ascertained, is deductible as it is a present liability payable in the future. The court distinguished between a present liability (debitum in praesenti, solvendum in futuro) and a purely contingent liability.

The court concluded that the liability for gratuity was a present liability, as it accrued at the end of each year of service, although payable in the future. Therefore, the assessee was entitled to claim the deduction of Rs. 13,43,923 for the assessment year 1971-72.

Issue 2: Entitlement to Deduction under Section 32(1)(iii)

The assessee claimed deductions for plant, machinery, and buildings sold under Section 32(1)(iii) of the Income-tax Act, 1961. The Tribunal and lower authorities disallowed this claim, stating it was premature since the actual sale occurred on April 30, 1971, which fell in the subsequent accounting year.

Section 32(1)(iii) allows deductions for depreciation of assets sold, discarded, demolished, or destroyed in the previous year. The court agreed with the Tribunal that the deduction could only be claimed in the assessment year 1972-73, as the sale took place in the accounting year 1971-72.

Conclusion:

1. First Question: The court answered in the affirmative, in favor of the assessee, allowing the deduction of Rs. 13,43,923 withheld for gratuity payment.
2. Second Question: The court answered in the negative, in favor of the Revenue, disallowing the deduction under Section 32(1)(iii) for the assessment year 1971-72.

Both parties were directed to bear their respective costs. A copy of the judgment was to be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.