9911796707
TMI Blog1975 (7) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... la Industrial Employees' Payment of Gratuity Act, 1970 ?" (3) I.T.R.C. No. 68 of 1974: "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in allowing the assessee's claim for deduction of Rs. 6,42,917 towards liability for gratuity under the Kerala Industrial Employees' Payment of Gratuity Act, 1970, for the assessment year 1970-71 ?" The year of assessment in I.T.R.C. No. 43 of 1974 is 1970-71 and the relevant accounting period is that which ended on December 31, 1969. The year of assessment with which we are concerned in I.T.R.C. No. 68 of 1974 is also 1970-71 though the relevant accounting period therein is that which ended on March 31, 1970. The assessment year relating to I.T.R.C. No. 59 of 1974 is also 1970-71, the accounting period being that which ended on March 31, 1970. The Kerala Industrial Employees' Payment of Gratuity Ordinance, 1969, was passed with effect from December 10, 1969, providing for a gratuity scheme and a liability to pay gratuity at a certain number of days' wages for every year of service on death, superannuation, resignation or dismissal. The Ordinance was replaced by the Kerala Indus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estimate can be made of the present value of that contingent liability. Counsel on behalf of the revenue, on the other hand, contended that such deductions are not permissible. He urged that there is specific provision made in section 36(1)(v) of the Act for deducting payments towards a fund for meeting the liability towards gratuity. Deduction towards gratuity liability can be made only under section 36(1)(v) and since, admittedly, in these cases the terms of section 36(1)(v) not having been satisfied, such liability cannot be reckoned for purposes of determining the true profits and gains. We must at this stage read section 36(1)(v) and section 37(1) of the Act: "36. (1) The deductions provided for in the following clauses shall be allowed in respect of matters dealt with therein, in computing the income referred to in section 28;...... (v) any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust." "37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alls under these clauses (i) to (xiv), that fact by itself would exclude entertainment of the claim under clause (xv) of section 10(2) of the Act." We are in respectful agreement with the observation. The residuary nature of the provision in section 37(1) will, therefore, have to be given its full play. Bearing in mind the reason for the introduction of the words within the brackets "not being expenditure of the nature described in sections 30 to 36" we have to remember that those words do not preclude certain species of liabilities but only exclude consideration of liabilities which would fall under any of those sections. We shall explain. Taking for instance, the liability for gratuity, the nature of the liability is a liability towards gratuity. It is towards that liability provision has been made under section 36(1)(v) of the Act. If the submission of counsel for the revenue is accepted, only payments made to a fund such as contemplated by section 36(1)(v) of the Act will be permissible as deductions towards gratuity liability for computing profits and gains. We cannot accept this contention. We cannot give a meaning to the words "in the nature of" so as to stultify a legiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-tax. But in Standard Mills Co. Ltd. v. Commissioner of Wealth-tax, it was held that an estimate towards gratuity liability was not a debt for the purpose of the Wealth-tax Act. Much reliance has been placed on this decision as well as the decision in Indian Molasses Co. (Private) Ltd. v. Commissioner of Income-tax by counsel on behalf of the revenue against the contention put forward by the assessee that the gratuity liability must be taken into account for determining the profits and gains. These two decisions, we do not think, have any application in deciding the question before us. The true principle is that stated by Lord Radcliffe in the decision in Southern Railway of Peru Ltd. v. Owen, which is in these terms: " Now, the question is, how ought the effects of this statutory scheme to be reflected in the appellant's accounts of the annual profits arising from its trade ? One way, which is certainly the simplest one, is to let the payments made fall entirely as expenses of the year of payment and ignore any question of making provision for the maturing obligation during the years of service that precede ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... true profits and gains, there is no reason why the same cannot be done under the Bonus Act unless there is any provision therein forbidding such a practice recognised by commercial accountancy." Having said so, their Lordships further observed: "No such provision was shown to exist in the Bonus Act." And we are able to discern no such provision in the Income-tax Act either. So the principle laid down by the House of Lords in the decision in Southern Railway of Peru Ltd. v. Owen and accepted by the Supreme Court must govern this case as well. The actual obligation to pay the gratuity will of course arise only on superannuation, retirement, resignation, retrenchment, discharge or dismissal or death as is provided in section 4 of the Gratuity Act. But no prudent employer would wait for the day of death or for the occurrence of the event mentioned in section 4 of the Gratuity Act for the purpose of payment of liability which has accrued through the period of service of an employee which may be for 20 or 30 years. A prudent employer would either create a fund or determine his profits for the year by taking into account the liability towards gratuity relatable to the year of ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
