1995 (8) TMI 95 - AT - Income Tax

Summary

Issues:
1. Rejection of request for rectification of adjustments made by the Assessing Officer under section 143(1)(a) regarding provision of gratuity.
2. Disallowance of provision for gratuity under section 115J of the Income-tax Act.
3. Nature and character of provision for payment of gratuity.
4. Whether provision for gratuity was an ascertained liability.

Detailed Analysis:
1. The appeal was against the rejection of the request for rectification of adjustments made by the Assessing Officer under section 143(1)(a) regarding the provision of gratuity for the assessment year 1989-90. The Assessing Officer added a sum of Rs. 6,20,000 representing provision of gratuity for computing book profit under section 115J of the Income-tax Act. The assessee claimed that the provision for gratuity was an ascertained liability payable and due to the employees. The Assessing Officer rejected the application stating it was not an ascertained liability at the close of the financial year. The CIT(A) upheld the action of the Assessing Officer, leading to the appeal.

2. The bone of contention was whether the provision made by the assessee for gratuity was an ascertained liability and should not be added for the purposes of section 115J in adjustments made under section 143(1)(a) of the Income-tax Act. The assessee contended that the provision for gratuity was made on a legal and scientific basis and was definitely an ascertained liability. The ITAT considered the nature and character of the provision for gratuity to determine if it was a contingent liability or an ascertainable liability. The ITAT noted that the Assessing Officer assessed the provision of liability as "otherwise than ascertained" without examining any material available on record.

3. The ITAT referred to relevant case law, including decisions by the Hon'ble Supreme Court, to establish that a present liability of gratuity on a scientific basis can be deducted from the profit of the year. The ITAT emphasized that the present discounted value of a contingent liability can be ascertainable and deductible as a trading expense if sufficiently certain to be capable of valuation. The ITAT highlighted that the nature of the liability under the scheme of gratuity must be properly examined to determine if it can be considered an ascertained liability.

4. The ITAT concluded that the addition of Rs. 6,20,000 for the purpose of section 115J of the Income-tax Act without hearing the assessee and without examining all relevant material was without jurisdiction. The ITAT directed the Assessing Officer to carry out the necessary rectification, emphasizing that the adjustments in question could not be made under section 143(1) of the Income-tax Act without hearing the assessee and examining all relevant material. The ITAT allowed the appeal of the assessee based on the above analysis and findings.