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TMI Blog2004 (8) TMI 72X X X X Extracts X X X X X X X X Extracts X X X X ..... GRAWAL., K. N. OJHA. JUDGMENT The judgment of the court was delivered by R.K. Agrawal J.- The Income-tax Appellate Tribunal, Allahabad, has referred the following questions of law under section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), for the opinion to this court:- "1. Whether, on the facts and in the circumstances of the case, the Tribunal was in law justified in holding that the liability of gratuity amounting to Rs. 16,45,092 relating to past years accrued in the accounting year relevant to the assessment year 1972-73 and was, therefore, an allowable deduction for that assessment year? 2. Whether, on the facts and in the circumstances of the case, when the system of accounting of the assessee was mercantile and when Dr. Sampurnanand Award of 1961 was extended by the U.P. Government year after year, the Tribunal was justified in law in holding that the liability of Rs. 16,45,092 relating to the past years arose for the first time in the assessment year 1972-73? 3. Whether, the Tribunal having found that the assessee-company had failed to claim the liability for gratuity for the past year was justified in law in holding that it was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on No. 4268, dated November 19, 1971, and the Payment of Gratuity Act, 1972. However, he allowed the claim of the respondent-assessee only for Rs. 1,66,495 in respect of gratuity actually paid and debited to the profit and loss account as in the earlier years. The Assessing Officer had rejected the claim in respect of the remaining two amounts on the ground that the liability accrued from year to year in the past and not in the accounting year under consideration under the Dr. Sampurnanand Award of 1961. Further, there was no approved gratuity fund created under irrevocable trust as laid down under the Act or the Rules made thereunder and the conditions laid down in section 36(1)(v), Fourth Schedule and the Income-tax Rules were not fulfilled. He further held that the assessee had been regularly following the system of claiming deduction on payment basis and no bona fide reason for deviation therefrom could be established. He was further of the opinion that not only an irrevocable trust was to be created, the fund has also to be invested in the manner provided in the Income-tax Rules. Further, during the assessment year in question the respondent-assessee received (sic) a sum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... residuary provision under section 37(1) of the Act. On the question of allowability of interest, he submitted that the amount in question represented the interest paid on income-tax, which is not an allowable deduction as it has not been laid out for the purposes of carrying on business. He relied upon a decision of the Gujarat High Court in the case of Saurashtra Cement and Chemical Industries Ltd. v. CIT [1995] 213 ITR 523. Learned counsel for the respondent-assessee, however, submitted that no doubt in the earlier years the respondent assessee was claiming deduction on account of gratuity on the basis of actual payment but on account of subsequent development, i.e., the notification dated November 19,1971, issued by the State Government, the amount of gratuity became a statutory liability which had accrued during the relevant previous year. It was quantified on a scientific basis on the actuarial report and, therefore, it has to be allowed as a deduction. He further submitted that under section 40(a)(ii) of the Act any sum paid on account of rate or tax levied on the profits or gains of business, is not allowed as a deduction. The interest paid for not depositing or paying the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uity schemes such as the ones before us even if it amounts to a contingent liability and is not a debt under the Wealth-tax Act, if properly ascertainable and its present value is fairly discounted is deductible from the gross receipts while preparing the profit and loss account." This court in the case of Madho Mahesh Sugar Mills (P.) Ltd. [1973] 92 ITR 503 has held that (headnote) "though no part of the gratuity may have been payable by the assessee in any of the earlier years, the past services of the employees had to be taken into account merely to arrive at the quantum of the liability which became payable after the notification. The liability for payment of gratuity ascertained on actuarial calculation in which all contingencies are taken into consideration, is a liability in praesenti and is capable of ascertainment and, therefore was a permissible business expenditure in the assessment year concerned." In the case of Delhi Flour Mills Co. Ltd. [1974] 95 ITR 151, the Delhi High Court has followed the decision of the apex court in the case of Metal Box Co. of India Ltd. [1969] 73 ITR 53 and of this court in the case of Madho Mahesh Sugar Mills (P.) Ltd. [1973] 92 ITR 503 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dr. Sampurnanand Award under which there was the liability for payment of the amount of gratuity, had been in force during all the previous assessment years on account of extension by the State Government every year and it came to an end on September 13, 1971 as it was not extended after September 13, 1971. However, vide notification dated September 18, 1971, it was made applicable from September 14, 1971. The scheme of gratuity framed under the Dr. Sampurnanand Award was an annual affair as its operation was initially for a period of one year and had been extended every year whereas the gratuity scheme enforced on November 19, 1971, vide Notification No. 4268, dated November 19, 1971, was for a period of 3 years. The provisions of the two schemes have been found to be similar. It may be mentioned here that the Payment of Gratuity Act, 1972 came into force on September 16, 1972 and, therefore, was not in existence during the assessment year in question. Thus, the same principle regarding payment of gratuity would be applicable with the exception that the liability for payment of gratuity which had accrued during the assessment in question but had not been paid to the employees bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Swadeshi Mining and Manufacturing Co. Ltd. [1978] 112 ITR 276 (Cal); CIT v. Swadeshi Mining and Manufacturing Co. Ltd. [1979] 118 ITR 975 (Cal); CIT v. Shri Sarvaraya Sugars Ltd. [1987] 163 ITR 429 (AP); CIT v. Aggarwal Rice and General Mills [1989] 180 ITR 29, 31 (P H); CIT v. Ram Chand Kanshi Ram [1989] 180 ITR 114, 166 (P H). Where a statute imposes liability with retrospective effect such liability, even of past years, accrues in the accounting year wherein the statute first comes into operation, as held by the Calcutta High Court in the case of CIT v. West Chusick Coal Co. Ltd. [1981] 129 ITR 62. Further it is not in all cases correct to say that a statutory liability created in a particular year, becomes a liability for deduction in that year under the mercantile system of accounting. It depends on the facts and circumstances of the case and on statutory provisions in that regard, as held by the Calcutta High Court in the case of CIT v. Padmavati Raje Cotton Mills Ltd. [1993] 203 ITR 375. In the aforesaid case an ordinance levying market fees was promulgated on May 15, 1980. The demand for the market fees relating to earlier years was made during the accounting year relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. [1952] 33 TC 259, 274, 282 (HL) and Allen (H. M. Inspector of Taxes) v. Farquharson Brothers and Co. [1932] 17 TC 59, 63 (KB). Interest on account of deficiency in payment of advance tax or on account of delay in payment of tax or in the filing of the return of income, on the money borrowed for payment of income-tax, is neither deductible as business expenses under section 37 nor as interest on borrowings under section 36(1) (iii) of the Act, as held in the case of Aruna Mills Ltd. v. CIT [1957] 31 ITR 153 (Bom); Balmer Lawrie and Co. Ltd. v. CIT [1960] 39 ITR 751 (Cal); Maharajadhiraj Sir Kameshwar Singh v. CIT [1961] 42 ITR 774 (Patna); Mannalal Ratanlal v. CIT [1965] 58 ITR 84 (Cal); CIT v. Oriental Carpet Manufacturers (India) P. Ltd. [1973] 90 ITR 373 (P H) ; Gopaldas Dahyabhai Lavsi v. CIT [1977] 108 ITR 531 (Guj); Waldies Ltd. v. CIT [1977] 110 ITR 577 (Cal); National Engineering Industries Ltd. v. CIT [1978] 113 ITR 252 (Cal); Kishinchand Chellaram v. CIT [1978] 114 ITR 654 (Bom); CIT v. Om Parkash Behl [1981] 132 ITR 342 (P H); CIT v. International Instruments (P.) Ltd. [1983] 144 ITR 936 (Karn); Smt. Padmavati Jaikrishna v. Addl. CIT [1987] 166 ITR 176 (SC); CIT v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f profits and gains from business. But for the special provision made, interest on the capital borrowed for the payment of tax is not allowable expenditure. If that be so on the same principle the interest paid for the late payment of tax cannot be held allowable expenditure as the same cannot be held to be expenditure incurred wholly and exclusively for the purpose of the business." We are in respectful agreement with the principles laid down in the aforementioned cases and are of the considered view that interest on late payment of income-tax is not an allowable deduction while computing the profits and gains from business or profession. In view of the foregoing discussions, we are of the considered opinion that the interest on late payment of income-tax/advance tax or self-assessment tax or any other direct tax cannot be allowed as a deduction. In view of the foregoing discussions, our answer to questions Nos. 1 to 3 and 6 are in the negative, i.e., in favour of the Revenue and against the assessee and our answer to question No. 5 is in the affirmative, i.e., in favour of the assessee, and against the Revenue. So far question No. 4 is concerned, the amount of Rs. 16,45,092 w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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