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TMI Blog1962 (9) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... ccording to the assessee, this was a statutory obligation or burden imposed upon it under section 25F of the Industrial Disputes Act. We shall refer to the provisions of this Act and to the nature of the assessee's liability a little later. In the year of assessment 1956-57, the assessee claimed this amount of ₹ 5,600 as a permissible deduction in the computation of its profits chargeable to tax. The claim for deduction was apparently based on section 10(2)(xv) of the Indian Income-tax Act, and presumably also on the principle of computation of the true profits of the business, allowing all legitimate costs incurred in earning the income. The Income-tax Officer, City Circle III, Madras, disallowed the claim, holding that the assessee would not be entitled to make a revenue charge on the income of the year of account against prospective liabilities of a contingent nature. The assessee went up on appeal to the Appellate Assistant Commissioner of Income-tax, B-Range, Madras. The appellate authority affirmed the view taken by the Income-tax Officer. He held that the provision made for payment in respect of a statutory obligation would not amount to an " expenditure &quo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r not less than one year under an employer shall be retrenched by that employer until (a) the workman has been given one month's notice in writing, indicating the reasons for retrenchment and the period of notice has expired, or the workman has been paid in lieu of such notice, wages for the period of the notice : . . . . (b) the workman has been paid, at the time of retrenchment, compensation which shall be equivalent to fifteen days' average pay for every completed year of service or any part thereof in excess of six months" The word " retrenchment " has been defined under the Act as meaning the termination by the employer of the service of a workman for any reason whatsoever, otherwise than as a punishment inflicted by way of disciplinary action, but does not include voluntary retirement, retirement of the workman on reaching the age of superannuation or termination of the service of a workman on the ground of continued ill-health. The Supreme Court held in the Barsi Light Railway case ([1957] S. C. R. 121 ; A. I. R. 1957 S. C. 121) that the word " retrenchment ", as defined under the Act, has no wider meaning than the ordinary accepted connotation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that a provision for meeting a future liability, which is uncertain and contingent, cannot be a proper charge on the business income of an assessee even under the mercantile system of accounting and, secondly, that even in a case of definite future liability, making a provision by constituting a reserve in the assessee's accounts would not amount to " expenditure ", without which no deduction can be claimed. In our opinion, both these contentions are well-founded and we have only to see whether these principles apply to the present case and prevent the assessee from claiming the deduction. A trader's profit and loss accounts, however much it may be in line with established accountancy and commercial principles, may not be sanctified for income-tax purposes by the department. In respect of costs allowable for earning income, standards of commercial men or qualified professional accountants cannot enlarge the statutory limits of proper and admissible debits. The opinion of the expert accountant and the accountancy usage or practice, must stand the scrutiny of the court, which is guided only by the statute. The angles of vision, of the department and the trading as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al liability, which is deductible, and a liability which is future or contingent and for which no deduction can be made. " The same principle has been upheld by the Supreme Court in Indian Molasses Co. v. Commissioner of Income-tax ([1959] 37 I. T. R. 66 ; [1959] Suppl. 2 S. C. R. 964). Hidayatullah J. observed thus at page 75 : " The income-tax law does not allow as expenses all the deductions a prudent trader would make in computing his profits. The money may be expended on grounds of commercial expediency but not of necessity . . . . . . Thus, in finding out what profits there be, the normal accountancy practice may be to allow as expense any sum in respect of liabilities which have accrued over the accounting period and to deduct such sums from profits. But the income-tax laws do not take every such allowance as legitimate for purposes of tax. A distinction is made between an actual liability in praesenti and a liability de futuro which, for the time being, is only contingent. The former is deductible but not the latter. " The contention on behalf of the revenue is that a provision by way of reserve by the assessee to meet the liability, if any, to which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aggregate. The question was whether the company was entitled to make the deductions. The House of Lords held that the company was not so entitled. The decision of the House of Lords is that though the company was entitled to charge against each year's receipts the cost of making provision for the retirement payments which would ultimately be payable as it had had the benefit of the employee's services during the year, the claim could be sustained only if the present value of the future payments can be fairly estimated. The assessee failed on the ground that in calculating the amount which it claimed to deduct in each year it had ignored the factor of discount. The following observations of the learned Law Lords have been relied upon by Mr. Swaminathan. At page 751, Lord MacDermott observes thus : " . . . . . . the true view is that the yearly increments by which a lump sum is built up ought to be reckoned for present purposes as remuneration in respect of the years in which they accrue. " In the same page, the learned Law Lord further observes : " . . . . I would hold that the appellant was right in contending that in principle it was entitled to mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dustrial life. If the position is that no fair estimate or satisfactory computation of the provision to be made as respects the appellant's prospective liabilities can be arrived at, then that is an end of the matter and the appeal must be dismissed. " Lord Radcliffe dealt with this matter thus at page 759 : " When account is taken of all the circumstances, I should have thought that the sums charged were a very long way from affording a scientific appraisement of the additional burden arising in respect of the year's services ; and were, therefore, in the nature of a rough reserve against the future rather than a measured provision. Because what the appellant has done is simply this. It has calculated what sum would be required to be paid to each employee in respect of retirement benefit if he retired, without forfeiture, at the close of the year : and the aggregate of what is required is set aside in so far as the year has contributed to the aggregate . . . But it seems to me to leave out of account several factors that are essential to the appraisement. " It is clear that the assessee must fail in this case even on the principle laid down by the House ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liability, which cannot be taken into account as an accrued liability, even though the assessee has been maintaining his account books on the mercantile system. We are further of opinion that even if it is permissible to charge the year's profits to build up the sinews to withstand the result of an uncertain event of retrenchment, the actual provision made is so over-generous, and is so improper an appraisement of the present value of a future liability that it has to be struck down as an over-reserve. Mr. S. Ranganathan, learned counsel for the department, is wellfounded in his submission that there is no expenditure at all incurred by the assessee by the mere process of putting the amount under the " gratuity reserve fund ". The decision of the Supreme Court in Indian Molasses Co. v. Commissioner of Income-tax ([1959] 37 I. T. R. 66 ; [1959] Suppl. 2 S. C. R. 964) supports this contention. At page 78, Hidayatullah J. observes : " But there is no case directly on what is ' expenditure ', and if the authorities under the English statute were to be of real assistance, the whole of the matter should have been before us. The question, however, limits the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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