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TMI Blog1984 (7) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... lant and machinery in question, was made under the deed executed on April 30, 1971 ? " The assessee is a public limited company carrying on the business of manufacture and sale of tea, coffee, pepper, cardamom, etc. It owned five tea estates in the State of Kerala. In the accounting year ending on September 26, 1970, relevant to the assessment year 1971-72, the assessee entered into an agreement dated April 15, 1970, with Gounder Company P. Ltd. for the sale of four of its estates, pursuant to which, possession was handed over to the latter on May 1, 1970. In the following accounting year, relevant to the assessment year 1972-73, by a deed of sale dated April 30, 1971, the ownership in the property was also transferred to Gounder Co. P. Ltd. (hereinafter referred to as "the buyer "). In terms of the agreement dated April 15, 1970, the assessee was entitled to receive as sale consideration a sum of Rs. 42,00,000 out of which a sum of Rs. 15,00,000 was agreed to be retained by the buyer as a reserve fund for settlement of the assessee's liability towards gratuity payable to the employees of the four estates in respect of their services under the assessee. On settlement of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within the accounting year relevant to the assessment year in question. This liability covered not only the year of account, but also the earlier years of service. Gratuity is payable to each employee, in respect of the entire period of his service, on the happening of any one of the events specified under s. 4 (see Ordinance No. 7 of 1969 and Act 6 of 1970), namely, (a) superannuation; (b) retirement, resignation, retrenchment, discharge or dismissal after completion of a minimum period of continuous service; and (c) death or total disablement due to accident or disease. This means that with the promulgation of the Ordinance with effect from December 10, 1969, which was well before the transfer of the estates, it became the responsibility of the assessee to ensure that the gratuity payable for the years of service of each employee under it was provided for, in order that, on the happening of any one of the specified events, the employee would receive the gratuity. Since it was the buyer who would be called upon to pay the amounts not only in respect of the service under it, but also for the earlier period, the aforesaid sum of Rs. 13,43,923 was, in terms of the agreement, retained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertaken to carry out was an accrued liability which was a present liability, though it was to be discharged at a future date, and it was, therefore, an allowable deduction under the Act in arriving at the profits and gains of the business in a mercantile system of accounting. The ratio of this decision is that, to give rise to an allowable deduction, it must be a present liability an accrued liability although payable only in the future on the happening of an event, not a mere contingent liability which is a future liability. In Indian Molasses Co. v. CIT [1959] 37 ITR 66, the Supreme Court disallowed a claim for deduction on the ground that the money put aside to meet a contingency was not an expenditure within the meaning of s. 10(2)(xv) of the Indian I.T. Act, 1922. The court distinguished a liability in praesenti from a liability in futuro, which for the time being was only contingent, and pointed out that the former alone qualified for deduction as business expenditure. Speaking for the court, Hidayatullah J., as he then was, emphasised the true nature of an expenditure and the distinction between a contingent liability and a payment dependent upon contingency. He said (pp. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. This principle was followed by the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. CWT [1966] 59 ITR 767, Standard Mills Co. Ltd. v. CIT [1967] 63 ITR 470 (SC) and Bombay Dyeing Mfg. Co. Ltd. v. CWT [1974] 93 ITR 603 (SC). In Kesoram Industries and Cotton Mills. Ltd.'s case [1966] 59 ITR 767 (SC), the Supreme Court stated (p. 784): "A debt is a present obligation to pay an ascertainable sum of money, whether the amount is payable in Praesenti or in futuro : debitum in praesenti, solvendum in futuro. But a sum payable upon a contingency does not become a debt until the said contingency has happened. A liability to pay income-tax is a present liability though it becomes payable after it is quantified in accordance with ascertainable data. There is perfected debt at any rate an the last day of the accounting year and not a contingent liability." On the same reasoning, a claim for deduction in respect or dividend was disallowed by the court in that case. The amount had been set apart by the assessee as dividend on the basis of a report of its directors, but it had not been, as on the valuation date, accepted by the company in its general body meeting. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the business " in terms of section 10(2)(xv) of the Indian Income-tax Act, 1922. This is the decision that counsel for the Revenue strongly relies upon. We shall presently revert to it. In Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC), the Supreme Court examined the nature of the liability of an assessee, maintaining his accounts on the mercantile system, to pay gratuity in the context of the Bonus Act. The court observed that an estimated liability under a scheme of gratuity, if properly ascertained and its present value fairly discounted, was deductible from the gross receipts while preparing the profit and loss account. The court said (pp. 62, 63, 67) : " In the case of an assessee maintaining his accounts on the mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid ...... . In our view, an estimated liability under gratuity schemes such as the one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tification aforesaid on November 1, 1960. Before that date, there was no such liability upon it. The notification, however, provided that the gratuity would be payable to an employee not only in respect of his future services but also for his past services. Thus, in order to ascertain the quantum of liability as on November 1, 1960, the past services of the employees had also to be taken into account. That does not mean that any part of the gratuity was payable by the assessee in any of the earlier years. The past services of the employees bad to be taken into account merely to arrive at the quantum of the liability which became payable after the notification." The ratio of this decision is that, in the year of account when the liability was imposed for the first time under the notification in respect of the past and future services of the employees, it was open to the assessee to take into consideration not only the liability of that year, but also of the earlier years, for arriving at the right amounts falling due as per the notification. This principle was adopted in the decisions of this court in CIT v. High Land Produce Co. Ltd. [1976] 102 ITR 803 (Ker), CIT v. Kerala Nut Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loyer, or when the ownership or management of the undertaking is, except in the cases contemplated by the proviso, transferred to a new employer, and not till then ............ During the entire period that the business was continuing, there was no liability to pay retrenchment compensation. The liability which arose on transfer of the business was not of a revenue nature....A deduction which is proper and necessary for ascertaining the balance of profits and gains of the business is undoubtedly properly allowable, but where a liability to make a payment arises not in the course of the business, not for the purpose of carrying on the business, but springs from the transfer of the business, it is not, in our judgment, properly debitable item in its profit and loss account as a revenue outgoing. " The Supreme Court was dealing with a case of retrenchment compensation payable under s. 25FF of the Industrial Disputes Act, 1947, where the liability did not arise during the continuance of the employment under the transferor. Until the transfer of the business, the liability was purely contingent as distinguished from an accrued liability, such as gratuity, of which payment alone was co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enchment compensation from a liability which was not purely contingent. The court said (p. 649 of 65 ITR): ".........,the present value on commercial valuation of money to become due in future, under a definite obligation, will be a permissible outgoing or deduction in computing the taxable profits of a trader, even if in certain conditions the obligation may cease to exist because of forfeiture of the right. Where, however, the obligation of the trader is purely contingent, no question of estimating its present value may arise, for, to be a permissible outgoing or allowance, there must in the year of account be a present obligation capable of commercial valuation." Counsel for the Revenue refers to three decisions of the Madras High Court in Stanes Motors (South India) Ltd. v. CIT [1975] 100 ITR 341 ; CIT v. Pathinen Grama Arya Vyasa Bank Ltd. [1977] 109 ITR 788 and CIT v. Salem Bank Ltd. [1979] 120 ITR 224, where that court held that the liability for payment of gratuity, being a wholly contingent liability springing from the transfer of the business, and not in the course of the business, was not an allowable deduction. In so stating, the court relied upon the decision in CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atever they were, with the sudden imposition of a liability under the statute, the assessee, as held by this court, became entitled to make provisions therefor in accordance with the mercantile system of accounting, which it had always followed and to claim deduction as business expenditure. Any provision which it chose to make for the earlier years as well as for the year of account had to be made in the year of account when the statute came into force or else, as stated in CIT v. Kerala Nut Food Co. [1978] III ITR 252 (Ker), it would have been too late for deduction. The fact that subsequently the business was transferred made no difference to the liability which arose under the Gratuity Ordinance or the Act and to the concomitant right of deduction in terms of s. 37 of the Act. It must be stated that, in the absence of any exemption having been granted under s. 5 from the operation of the Gratuity Ordinance or the Act, the assessee was bound to make payments in accordance with the statute, and not any scheme. In the circumstances, we see no merit in the contentions of the Revenue in regard to the first question, the extremely well prepared arguments of its counsel notwithstand ..... X X X X Extracts X X X X X X X X Extracts X X X X
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