1987 (9) TMI 64 - AT - Income Tax

Issues Involved:
1. Entitlement to deduction of Rs. 41,05,760 on account of Gratuity liability.
2. Change in the method of accounting.
3. Claim for a higher amount.
4. Applicability of changes in law from the assessment year 1973-74.
5. Prevention of double deduction.

Detailed Analysis:

1. Entitlement to Deduction of Rs. 41,05,760 on Account of Gratuity Liability:
The primary issue was whether the assessee was entitled to a deduction of Rs. 41,05,760 for gratuity liability. The CIT(A) allowed the claim based on the Bombay High Court decision in Tata Iron and Steel Co. Ltd. vs. D.V. Bapat ITO (1975) 101 ITR 292 (Bom) and Board's instruction in Circular No. 47 (F. No. 9)/100/69-IT (A-II) dt. 21st Sept., 1970. The Tribunal, however, set aside the CIT(A)'s order and remanded the matter for de novo consideration, emphasizing that the provision should be based on an actuarial valuation and ensuring no double deduction.

2. Change in the Method of Accounting:
The Tribunal directed the CIT(A) to examine if there was a change in the method of accounting and whether it was justified. The CIT(A) concluded that there was no change in the method of accounting, stating that the cash basis of accounting is part and parcel of the larger mercantile system. Even if there was a change, it was justified and bona fide, as the assessee moved to a more scientific actuarial valuation method.

3. Claim for a Higher Amount:
The CIT(A) allowed the assessee to claim a higher amount of Rs. 41,05,760, concluding that the initial lower claim was a bona fide mistake. The decision in Addl. CIT vs. Gurjargravures Pvt. Ltd. supported the assessee's right to claim a higher amount during appellate proceedings.

4. Applicability of Changes in Law from the Assessment Year 1973-74:
The CIT(A) held that changes in law effective from the assessment year 1973-74 were irrelevant for the assessment year 1971-72. The ITO's argument that the liability should have been accounted for in the year the agreement with employees was entered into (1967) was rejected. The CIT(A) reasoned that the provision could be made in the year the assessee was advised to do so, even if it was not done initially.

5. Prevention of Double Deduction:
The CIT(A) directed that while making an allowance for incremental liability, actual payments made during the year should not be allowed again as a deduction. This was to prevent double deduction, ensuring that the amount admissible would be the incremental liability less actual payments debited to the profit and loss account.

Tribunal's Conclusion:
The Tribunal approved the CIT(A)'s findings on the method of accounting, the claim for a higher amount, and the irrelevance of changes in law from the assessment year 1973-74. However, it disagreed with the CIT(A)'s decision regarding the allowance of the entire claim of Rs. 41,05,760. The Tribunal held that the assessee was only entitled to the incremental liability for the year under consideration, based on actuarial valuation, and not the cumulative liability of previous years. The Tribunal cited various judicial precedents, including Mysore Tobacco Co. Ltd. vs. CIT (1978) 115 ITR 698, to support its decision.

Final Decision:
The Tribunal partially allowed the Revenue's appeal, restricting the assessee's deduction to the incremental liability for the year under consideration, as determined by actuarial valuation.

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