1981 (11) TMI 36 - HC - Income Tax

Summary

Issues:
1. Deductibility of provision made for gratuity payable in past assessment years for computing total income of the assessee for the assessment year 1971-72.
2. Admissibility of provision for gratuity as a business expenditure under section 37 of the Income-tax Act, 1961, for the assessment year 1971-72.

Analysis:

Issue 1:
The first issue in this case revolves around the deductibility of a provision made for gratuity payable in past assessment years for computing the total income of the assessee for the assessment year 1971-72. The assessee, a firm engaged in the manufacture and sale of yarn, had made a provision of Rs. 5,80,892 for gratuity in its account year ended July 31, 1970. The Income Tax Officer (ITO) allowed only a portion of this provision as a deduction, disallowing the rest. However, on appeal, the Tribunal granted a deduction for the entire amount of Rs. 5,09,661. The Tribunal held that the provision made for gratuity, based on actuarial valuation, was a definite obligation of the business and thus a permissible deduction in computing the business profits. This decision was in line with the Supreme Court's ruling in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 (SC), which emphasized that a provision for gratuity based on actuarial valuation is a proper charge against profits, even if the liability remains contingent during the year. The High Court concurred with the Tribunal's decision, citing the principles established by the Supreme Court and ruled in favor of the assessee.

Issue 2:
The second issue pertains to the admissibility of the provision for gratuity as a business expenditure under section 37 of the Income-tax Act, 1961, for the assessment year 1971-72. The Department contended that unless a liability towards gratuity falls under section 36(1)(v) of the Act, no deduction is permissible. The Tribunal, however, held that the provision for gratuity, being based on actuarial valuation, qualifies as a proper charge against profits and should be deducted under section 37 of the Act. The High Court supported the Tribunal's stance, referencing a prior decision in CIT v. Andhra Prabha P. Ltd. [1980] 123 ITR 760. In that case, it was clarified that section 36(1)(v) applies to contributions to a gratuity fund and not to cases where the gratuity liability is ascertained actuarially without a specific fund. Such cases are to be examined under section 37 of the Act. Following the reasoning of the earlier decision, the High Court ruled in favor of the assessee, holding that the provision for gratuity should be treated as an admissible business expenditure under section 37. The Court granted leave to the Commissioner to appeal to the Supreme Court on this issue, as consistent with a previous decision.

In conclusion, the High Court upheld the Tribunal's decision on both issues, affirming the deductibility of the provision made for gratuity and recognizing it as an admissible business expenditure under section 37 of the Income-tax Act, 1961, for the assessment year 1971-72.