1996 (2) TMI 15 - SC - Income Tax

High Court was right in holding that no claim for a deduction could have been allowed merely because the appellant chose to debit his P/L A/c during its course. In fact, no payment was made by the appellant to any of the employees; this was merely an accounting entry. This entry did not represent any disbursement of money and, therefore, neither on the principles of the mercantile system nor on the basis of the cash system could the appellant validly claim this amount as a deduction.

Summary

Issues:
1. Claim for deduction of gratuity by an individual appellant for the assessment year 1971-72.
2. Interpretation of liability towards payment of gratuity under the Kerala Industrial Employees' (Payment of Gratuity) Ordinance.
3. Application of mercantile system of accounting in claiming deductions.
4. Discharge of liability through accounting entries without actual payment.

Analysis:

The case involved an individual appellant who transitioned his sole proprietorship business into a partnership, with the accounting year ending on October 14, 1970. The issue revolved around the appellant's claim for deduction of gratuity payable to employees for the assessment year 1971-72. The liability towards gratuity arose from an Ordinance in 1969, obligating employers to set aside amounts for gratuity payments. The appellant did not make any entry for this liability in the accounting year 1969-70 but debited the amount in the subsequent period, claiming it as a deduction.

The Income-tax Officer rejected the claim, stating that the liability included amounts from earlier years and could only be allowed for the specific assessment year. The Appellate Assistant Commissioner and the Tribunal concurred that the liability accrued in the 1969-70 accounting year and should have been claimed then. The Tribunal, however, treated the amount as an expenditure for 1971-72, considering the business transition and accounting entries made by the appellant.

The High Court upheld the Revenue's stance, emphasizing that the liability had arisen in 1969-70 and could only be claimed as a deduction for that year. The court highlighted that the appellant's accounting entry did not represent an actual payment, thus invalidating the deduction claim under both mercantile and cash accounting principles. The court dismissed the appeal, affirming that no costs would be awarded.

In conclusion, the judgment centered on the timing of claiming deductions for gratuity liabilities under the Ordinance, emphasizing the importance of actual payments versus accounting entries in determining tax deductions. The courts consistently ruled against the appellant, supporting the Revenue's position and denying the deduction claim for the assessment year 1971-72.