1984 (5) TMI 33 - HC - Income Tax

Summary

Issues Involved:
1. Deductibility of gratuity liability for the assessment year 1971-72.
2. Timing of liability accrual under the gratuity scheme.
3. Scientific basis for actuarial valuation.
4. Control and management of the gratuity fund.

Issue-wise Detailed Analysis:

1. Deductibility of Gratuity Liability for the Assessment Year 1971-72:
The primary issue was whether the assessee's liability to pay gratuity to its employees was deductible in the computation of its business income for the assessment year 1971-72. The Income Tax Officer (ITO) disallowed the gratuity related to earlier years but allowed it for the assessment year in question. The Appellate Assistant Commissioner (AAC) upheld the ITO's decision, stating that the liability for Rs. 1,55,997 had accrued before the beginning of the accounting year. The Tribunal also disallowed the deduction on the grounds that the liability was not ascertained on a scientific basis during the previous year and was not a result of an award, notification, or statute but was only on an ad hoc basis.

2. Timing of Liability Accrual Under the Gratuity Scheme:
The Tribunal noted that the actuarial valuation was made on May 24, 1972, and hence the account must have been kept open and antedated. It was observed that the liability which was ascertained on May 24, 1972, could not be provided for in the accounting year ending on December 31, 1970. The Tribunal concluded that the liability did not accrue in the previous year and hence, the deduction could not be allowed. The court, however, found that the liability under the gratuity scheme must be considered to arise as soon as the scheme is operated, and the calculation of the exact liability can be made earlier or later. The court emphasized that the liability for the accounting year in question was rightly determined but the remaining amount, i.e., Rs. 1,55,997, was also a liability for this year and could only be debited in the accounts for this period.

3. Scientific Basis for Actuarial Valuation:
The Tribunal had refused the deduction on the ground that the liability was not ascertained on a scientific basis during the previous year. The court referred to several cases, including Vazir Sultan Tobacco Co. Ltd. v. CIT, where it was held that a provision representing fairly accurately a known and existing liability for the year in question could be made on an actuarial basis. The court noted that even if the actuarial valuation was made later, the amount could still be allowed as a deduction if it was determined on a proper scientific basis by the ITO.

4. Control and Management of the Gratuity Fund:
The Tribunal also disallowed the deduction on the ground that the dominion and control over the funds continued to be vested in the management. The court examined the scheme, particularly rule 18, which gave the board of directors the power to alter, amend, or add to the rules. However, rule 14 clarified that the company would not have any lien or charge on the gratuity fund, and no moneys belonging to or credited to the gratuity fund would be receivable by the company under any circumstances except as provided in the scheme. The court concluded that as soon as the amount was credited to the gratuity fund, it was no longer capable of being used by the company for its own purposes.

Conclusion:
The court concluded that the liability under the gratuity scheme must be considered to arise as soon as the scheme is operated, and the calculation of the exact liability can be made earlier or later. The court held that the amount of Rs. 1,55,997, which was disallowed by the Tribunal, was also a liability for the year in question and should be allowed as a deduction. The court answered the question referred to it in the negative, in favor of the assessee and against the Department, and clarified that the accrued liability for the previous years also had to be allowed in this year. The parties were directed to bear their own costs.