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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 ..... ating 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 debarred from claiming the liability of earlier years in the assessment year 1972-73? 4. Whether, on the facts and in the circumstances of the case, when the provisions of section 36(1)(v) of the Income-tax Act, 1961, the provisions as contained in Part C of Schedule IV of the Income-tax Act, 1961 and the rules relating thereto were not complied with, the Tribunal was in law justified in allowing the claim of gratuity of Rs. 16,45,092 in the assessment year 1972-73? 5. Whether, on the facts and in the circumstances of the case, when the provisions of section 36(1)(v) of the Income-tax Act, 1961, the provisions as contained in Part C of Schedule IV of the Income-tax Act, 1961 and the rules relating thereto were not complied with, the Tribunal was in law justified in allowing the claim of gratuity of Rs. 12,45,428 in the assessment year 1972-73? 6. Whether, on the facts and in the circumstances of the case, the Tribunal was ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 41,490 as interest from the Income-tax Department. It, however, disclosed an amount of Rs. 13,030 only. The balance amount of Rs. 28,460 was disallowed by the Assessing Officer and was added to its income. The assessee, feeling aggrieved, preferred an appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner upheld the disallowance of Rs. 16,45,092 which was in respect of the years prior to the previous year under consideration holding that the method of accounting being mercantile, the claim should have been made in the earlier years. However, he held that the claim of Rs. 12,45,428 in respect of the previous year under consideration was allowable as liability for this amount accrued in the assessment year under consideration. He, however, confirmed the disallowance of interest of Rs. 28,460. Both, the assessee and the Revenue, preferred separate appeals before the Tribunal. The Tribunal relying upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 tax would not come under the aforesaid provisions and has, therefore, been rightly allowed as a deduction by the Tribunal. He relied upon the following decisions: (i) Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC); (ii) Madho Mahesh Sugar Mills (P.) Ltd. v. CIT [1973] 92 ITR 503 (All); (iii) Delhi Flour Mills Co. Ltd. v. CIT [1974] 95 ITR 151 (Delhi); (iv) Tata Iron and Steel Co. Ltd. v. Bapat (D. V.), ITO [1975] 101 ITR 292 (Bom); (v) Addl. CIT v. Lakshmi Sugar Mills [1977] UPTC 31; (vi) CIT v. Laxmi Sugar and Oil Mills Ltd. [1978] 114 ITR 684 (All); and (vii) CIT v. Warner Hindustan Ltd. [1985] 151 ITR 701 (AP). Having heard learned counsel for the parties, we find that the apex court in the case of Metal Box Co. of India Ltd. [1969] 73 ITR 53 had considered the question as to whether it is legitimate in such a scheme of gratuity to estimate the liability on an actuarial valuation and deduct such estimated liabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . [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 and had held that the provision made by the assessee for payment of gratuity was an allowable deduction. Similar view has been taken by the Bombay High Court in the case of Tata Iron and Steel Co. Ltd. [1975] 101 ITR 292; this court in the case of Lakshmi Sugar Mills [1977] UPTC 31 and Laxmi Sugar and Oils Mills Ltd. [1978] 114 ITR 684 (All) and the Andhra Pradesh High Court in the case of Warner Hindustan Ltd. [1985] 151 ITR 701. The apex court in the case of Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585, has summarized the position regarding allowability of the amount of gratuity prior to the insertion of section 40A(7) in the Act by the Finance Act, 1975, with effect from April 1, 1973, as follows: "(1) Payments of gratuity actually made to the employee on his retirement or termination of his services were expenditure incurred for the purpose of business in the year in which the payments were made and allowed under section 37 of the Act. (2) P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 being a liability in praesenti, is to be allowed as a deduction while computing the profits and gains from business of the respondent. However, the amount of gratuity which relates to the earlier assessment years, had accrued in the earlier years and not in the assessment year in question and, therefore, it cannot be allowed as a deduction in this year. There is a distinction between the 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 as held in Peter Merchant Ltd. v. Stedeford (H. M. Inspector of Taxes) [1948] 30 TC 496 (CA); Indian Copper Corporation Ltd. v. CIT [1977] 110 ITR 434 (Patna); CIT v. Instrumentation Ltd. [1987] 167 ITR 354 (Raj); Standard Mills Co. Ltd. v. CIT [1998] 229 ITR 366 (Bom). It is also settled that an assessee who follows the mercantile system of accounting, is entitled to claim a deduction even though the expenditure is actually not expended. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 to the assessment year 1983-84. On these facts, it has been held that though the statutory liability was created in the year 1980, the said liability became real and enforceable when the demand was made. Therefore, the assessee was held entitled to deduction in respect of such demand for the assessment year 1983-84. Thus, applying the principles laid down by the apex court in the afore-mentioned cases, the amount of gratuity can be deducted either under section 28 or section 37 of the Act. Further, the contribution made to an approved gratuity fund is only allowable under section 36(1)(v) of the Act. Thus, the Tribunal was justified in allowing the amount of Rs. 12,45,428, being the amount of gratuity, as deduction for the assessment year in question as the said liability has been ascertained on actuarial calculation and it is a liability in praesenti and was a permissible business expenditure. However, the Tribunal was not justified in allowing the sum of Rs. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Ghatkopar Estate and Finance Corporation (P.) Ltd. [1989] 177 ITR 222 (Bom); Federal Bank Ltd. v. CIT [1989] 180 ITR 37 (Ker); Assam Forest Products (P.) Ltd. v. CIT [1989] 180 ITR 478 (Gauhati); Orient General Industries Ltd. v. CIT [1994] 209 ITR 490 (Cal) and Bharat Commerce and Industries Ltd. v. CIT [1998] 230 ITR 733 (SC). In the case of Saurashtra Cement and Chemical Industries Ltd. [1995] 213 ITR 523, the Gujarat High Court has held that the interest paid on late payment of income-tax is not an allowable deduction. It has held as follows: "The argument apparently appears to be facile but does not stand scrutiny of reason. The mere fact that the interest on the late payment of the tax is compensatory does not make it an expense wholly or exclusively carried out for the purpose of business. The essence of section 37 of the Act is that such expenses are wholly laid out or incurred for the purpose of business. If the preliminary liability to be discharged by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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