1981 (8) TMI 41 - HC - Income Tax

Summary

Issues:
1. Deductibility of increase in future liability for gratuity in business profit computation.
2. Interpretation of provisions under section 40(c)(i) and 40(c)(iii) for guarantee commission.
3. Allowability of guarantee commission paid to directors as a deduction.

Analysis:

Issue 1:
The High Court addressed the question of whether the assessee could deduct the increase in the present value of its future liability to pay gratuity to employees in the computation of business profit for the relevant year. The Income Tax Officer (ITO) disallowed the deduction as the liability was considered contingent and not an admissible deduction. The Appellate Tribunal upheld this decision, stating that the incremental liability had not accrued to the assessee during the relevant year. However, the High Court referred to a previous case and held that even contingent liabilities could be allowed as deductions if sufficiently certain and capable of valuation. It was established that an incremental liability had indeed accrued to the assessee during the relevant assessment year.

Issue 2:
Regarding the interpretation of sections 40(c)(i) and 40(c)(iii) concerning guarantee commission paid to directors, the Appellate Tribunal accepted the assessee's claim in full based on previous decisions. The Tribunal viewed the provisions as mutually exclusive and considered the guarantee commission under section 40(c)(i) only. The High Court agreed with this interpretation, citing a previous case where it was held that guarantee commission paid to directors for providing personal security was for legitimate business needs. The entire claim for guarantee commission was allowed as a deduction under section 40(c)(i).

Conclusion:
The High Court answered the questions in favor of the assessee, allowing the deduction for the increase in future liability for gratuity and the guarantee commission paid to directors. The Tribunal was tasked with determining the quantum of the incremental liability for the relevant year. The High Court deemed question 2 as academic and did not address it. The assessee was awarded costs, and the judgment favored the assessee in both issues 1 and 3, with issue 2 being deemed inapplicable.