9911796707
TMI Blog1982 (7) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... ending on June 30, 1965, corresponding to the assessment year 1966-67, it claimed deduction of a sum of Rs. 1,09, 575 as provision for gratuity for two of its full time directors by name Sri C. Valdettaro and Sri G. Abbagnane. The ITO did not allow the same on the ground that gratuity fund has not been recognised by the Commissioner of Income-tax and that it was only a provision and not an actual payment. He also took note of the fact that the provision has been made on the basis of twelve years' salary for one director and 9 1/4 years' salary for the other director and that the provision thus, in fact, related to the earlier years and not to the year of account only. The disallowance of the claim of the assessee was questioned before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Surtax Act, the general discussion as to the nature of the liability for payment of gratuity to the employees and its allowability in respect of a provision made towards that liability was considered. The decision in that case appears to apply squarely to the facts of this case. Before dealing with the said decision, it will be useful to refer to some of the decisions of this court on the point at issue. In CIT v. Andhra Prabha (P.) Ltd. [1980] 123 ITR 760, the question arose whether a provision which had been made for payment of gratuity calculated on a scientific and legal basis could be debited to the profit and loss account and whether it is allowable as a deduction under s. 37(2) of the I.T. Act. After referring to s. 36(1)(v) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s whether in computing the amount of bonus payable to workmen, a provision made for payment of gratuity to the workmen on a future date could be deducted from the profits. The Supreme Court held that such a provision for discharge of a liability on a future date would be a proper deduction in the calculation of the commercial profits. The relevant observation of the Supreme Court is as follows (pp. 62-63): " In the case of an assessee maintaining his accounts on 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble of valuation and if profits cannot be properly estimated without taking them into account. " In Southern Railway of Peru Ltd. v. Owen [1957] 32 ITR 737 (HL), an English company operating a railway line in Peru, which was bound to pay its employees compensation on the termination of their services, claimed as against each year's profits certain amounts as and by way of provision for gratuity and other payments which would ultimately be payable. In examining that claim, Lord Radcliffe, with whom the other two Law Lords agreed, observed (p. 754): " What the appellant claims the right to do is to charge against each year's receipts the cost of making provision for the retirement payments that will ultimately be thrown upon it by virtue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be claimed as a deduction, even though the actual discharge of that liability by payment arises later. In CIT v. Sri Rani Lakshmi Ginning, Spg. Wvg. Co. Ltd. [1981] 132 ITR 360, this court was concerned with a question as to whether a provision for gratuity liability arrived at by adopting a scientific method of valuation could be claimed as deduction. The court expressed the view that it had to be regarded as a business expenditure incurred by the assessee wholly and exclusively for the purposes of the business and, hence, it was properly allowable as a deduction, even though there is no specific provision for such deduction in the I.T. Act. In Vazir Sultan Tobacco Company Ltd. v. CIT [1981] 132 ITR 559 (SC), a question arose as to w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wealth of the assessee and the Supreme Court has taken the view that the liability is a contingent one and, therefore, it is not a debt under s. 2(m) of the W.T. Act, though it would be deductible under the I.T. Act, while computing the taxable profits and that different considerations would have to apply to cases arising under the W.T. Act and the I.T. Act. In the later case in Metal Box Co. of India Ltd. V. Their Workmen [1969] 73 ITR 53, the Supreme Court was directly concerned with the nature of a liability under a scheme of gratuity in the context of the Payment of Bonus Act, and the question was whether the estimated liability under the gratuity schemes framed by the company could be deducted from the gross receipts in the profit and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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