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TMI Blog1979 (11) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... ision for gratuity made by the assessee was a deduction admissible for the assessment year 1971-72 in computing the total income of the assessee ? " The assessee is a company engaged in the manufacture of yarn. It did not have any gratuity scheme. In 1956, the Govt. of India constituted a wage board for textile industry. This board recommended that a uniform gratuity scheme should be applied in the case of all the textile mills. Though several units at Coimbatore region implemented the recommendations, the assessee did not do so, and in 1968, a second wage board was constituted to consider the entire matter afresh. This board recommended that the units which had a gratuity scheme should increase the gratuity payable by 25%. In pursuance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions made in respect of the current year holding that gratuity liability on the basis of the actuarial valuation relating to past years would be allowed as deduction as and when the payments were made to the workers. The way in which he worked out the allowable amount will be clear from the following figures: Rs. Accrued liability up to the end of the account year 1,20,338 Less: accrued liability up to 31-12-1969 as per actuarial valuation 1,04,329 ---------------- Balance 16,009 ---------------- The sum of Rs. 16,009 was allowed as deduction. The assessee appealed against the disallowance of the balance of the claim before the AAC. The AAC held that the entire liability was an admissible deduction under s. 37(1) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the retrospective introduction of the scheme was to permit payment of gratuity even to persons who had retired on or after 1st January, 1969, and before the scheme was actually agreed with the labour on 7th September, 1971. The agreement with the labour was arrived at bona fide. In these circumstances, the only question that arises for consideration is whether by reason of the fact that the amount of actuarial valuation was obtained with reference to the period of service of earlier years, the amount referable to the earlier period of service cannot be allowed as deduction in this year. The assessee has been maintaining its accounts on the mercantile system. It is, therefore, not necessary for the allowability of the expenditure that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not necessary to go into the applicability of the provisions of s. 36(1)(v) or s. 40A(7) as those provisions are not referred to in the present case. In the said case, after referring to the relevant statutory provisions on the point, the principle applicable was set out as follows (p. 770): " So, the very concept of profit would require adjustment being made for the claims of the employees for gratuity in so far as it is possible to relate it to the current year. The estimate is a present one for a future liability. This will have to be properly worked out on legal or scientific basis. Any arbitrary claim in this behalf cannot be countenanced. " It was pointed out in that case that where provision was made for future payment on a sci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted in [1980] 123 ITR 760 (Mad)], that the question would have to be considered in the light of the concept of real income. The I.T. Act cannot tax the assessee on what does not form part of his income. There is no specific provision dealing with a claim like this. The I.T. Act contemplates deductions for allowances as contrasted with expenditure, in arriving at profit. This sum is a proper outgoing or allowance in arriving at the profit. After all, when part of the provision, to the extent it relates to the liability incurred in the current year, viz., Rs. 16,009, has been allowed as deduction by the ITO himself, there can be no valid objection to the allowance of the rest of the amount. This is not a case of an expenditure or allowance i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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