1986 (3) TMI 122 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of gratuity on actuarial valuation under section 37(1) of the Income-tax Act, 1961.
2. Deduction for liability of liquidated damages from the Cotton Corporation of India Ltd.
3. Relief under section 80J of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deduction of Gratuity on Actuarial Valuation:
The first issue revolved around whether the deduction of Rs. 26,09,102 on account of gratuity based on actuarial valuation was allowable under section 37(1) of the Income-tax Act, 1961. The Commissioner (Appeals) held that this deduction was not allowable, referencing section 40A(7) of the Act and the decision of the Hon'ble Calcutta High Court in CIT v. New Swadeshi Mills of Ahmedabad Ltd. [1984] 147 ITR 163. The Tribunal concurred with the Commissioner (Appeals), emphasizing that the specific provisions of section 40A(7) disallowed such deductions unless certain conditions were met, which were not satisfied in this case.

2. Deduction for Liability of Liquidated Damages:
The second issue concerned the deduction of Rs. 9,03,665 claimed by the assessee for liquidated damages owed to the Cotton Corporation of India Ltd. The assessee argued that the liability arose during the year and should be deductible even if not accepted. The Commissioner (Appeals) and the ITO rejected this claim, noting that the liability was not accepted by the assessee and was not provided for in the accounts. The matter was further complicated by ongoing litigation in the Bombay High Court. The Tribunal decided that the ITO should re-examine the contracts and the dates on which the Cotton Corporation of India Ltd. sold the consignment to other parties, as the liability was still under dispute and not accepted by the assessee. This decision was not unanimous, as the Judicial Member dissented, arguing that the liability was not ascertained and thus not deductible.

3. Relief under Section 80J:
The third issue involved the computation of relief under section 80J of the Income-tax Act, 1961. The assessee claimed relief of Rs. 8,00,307, but the ITO computed it as Rs. 2,62,945. The Tribunal, agreeing with the assessee's counsel, decided to set aside the orders of the authorities below and directed the ITO to recompute the relief in light of the Supreme Court's decision in Lohia Machines Ltd. v. Union of India [1985] 152 ITR 238.

Separate Judgment by Judicial Member:
The Judicial Member did not fully concur with the majority decision, particularly on the issue of the liability for liquidated damages. He emphasized that the liability was not ascertained and was being contested in court, thus it should not be deductible. He referenced several judicial precedents to support his view that a contractual liability must be ascertained before it can be deducted. Furthermore, he argued that the power of remand should be exercised judiciously and not capriciously, and in this case, all necessary materials were already on record.

Conclusion:
The appeal was partly allowed for statistical purposes, with the majority decision directing further examination of the contracts related to the liquidated damages and recomputation of the relief under section 80J. The dissenting opinion highlighted the need for ascertained liabilities for deductions and the judicious use of remand powers.