9911796707
TMI Blog1989 (1) TMI 111X X X X Extracts X X X X X X X X Extracts X X X X ..... he ground that there was no ascertained liability and the possibility of such a liability arising may or may not happen and that there was no method of evaluating or quantifying such liability, if any, in the accounting years in question and further that the unilateral action on the part of the firm in making a provision would enable it to use funds for any of its purposes. At the instance of the assessee, under section 256(1) of the Incometax Act, 1961 (hereinafter referred to as "the Act"), the following common question of law has been referred to this court for its opinion: "In the facts and circumstances of the case, was the Income-tax Appellate Tribunal right in holding that the assessee is not entitled to any deduction by way of provision for retrenchment compensation?" Learned counsel for the assessee contended that the adoption of modern methodology in business activities and business expediency have established that retrenchment is a common feature in any commercial establishment and it is necessary to make provision therefor as a prudent business expedient with a view to provide for commitments that may arise in future in that regard. The analogy of payment of insur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and cannot ordinarily be assumed to take place or be given effect to in any business establishment in any given year. Thus, retrenchment in business establishment may or may not take place and in that sense, it would be a doubtful and uncertain future event. The liability to pay retrenchment compensation in the doubtful and uncertain future event of such retrenchment taking place is only in the nature of a wholly contingent liability not resting on any definite obligation on the part of the employer when the business is run. Any provision, therefore, made to cover such doubtful contingent liability, which may or may not arise at all, cannot be treated as a definite obligation and as a permissible outgoing or deduction. The analogy of gratuity is also inapplicable while considering the provision made for retrenchment compensation. Payment of gratuity is made by the employer to the employee on his retirement or termination of his services for any reason and even though such payment is made at a particular point of time, it is generally not for the service rendered during the year when the payment is made, but is made in consideration of the totality of the service and its computati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treets being obliged to face the grim problem of unemployment by tiding over the hard period of such unemployment. When the aforesaid distinction between the concepts of retrenchment compensation and payment of gratuity is borne in mind, it is at once apparent that the purposes of payment of gratuity and retrenchment compensation are totally different and one cannot have any connection whatever with the other. We have pointed out the distinction only for considering the scope of the decision of the Supreme Court reported in Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53, considerable reliance upon which was placed by learned counsel for the assessee. That case dealt with a provision made on an actuarial valuation in respect of estimated liability for payment of gratuity under two schemes framed under the Act. In considering the question whether the liability for payment of gratuity under such schemes can be estimated on an actuarial valuation and that amount be deducted in the profit and loss account, the Supreme Court pointed out that if such a liability is properly ascertainable and it is possible to arrive at a properly discounted present value, it can be taken in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim by the assessee as business expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922, of the amounts credited to a fund to meet an eventual liability under section 25F of the Industrial Disputes Act. Such liability, it was pointed out, may arise de futuro on the happening of a particular contingency and need not be allowed as a deduction either under section 10(2)(xv) or on commercial principles as to computation of profits. Further, it was also pointed out that the liability of the assessee in respect of retrenchment compensation under section 25F of the Industrial Disputes Act was not a liability in praesenti, but was only a contingent liability, which cannot be taken into account as an accrued liability, even though the assessee has been maintaining accounts on the mercantile system and that the assessee had still control or dominion over the reserve, which it was at liberty to recall for use for its own business purposes and the claim for deduction as an "expenditure" cannot be countenanced. In CIT v. Gemini Cashew Sales Corporation [1967] 65 ITR 643 (SC), firm stood dissolved by the death of one of the partners and its business was taken over and continued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paying retrenchment compensation to employees could be included in the computation of the capital for purposes of surtax. The assessee-company had appropriated various sums to an account called "Reserve for Employees' Indemnities" with view to meet any claim of retrenchment compensation arising out of retrenchment of any member of the staff. All the authorities took the view that the appropriation was not designed to meet any known liability and that the amount of reserve would be includible for purposes of the capital computation for surtax. It was held that the setting apart of the amount by way of provision for employees' indemnities intended to be spent for payment of retrenchment compensation arising out of a future retrenchment of any member of the staff could not be regarded as one for any known or existing liability and, therefore, the setting apart of this item would have to be regarded as a reserve which would be properly includible in the capital computation for surtax purposes. Though the decision was rendered with reference to the includibility of the amount set apart in the capital for surtax purposes, we are of the view that that would not make any difference to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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