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TMI Blog1987 (9) TMI 64X X X X Extracts X X X X X X X X Extracts X X X X ..... employees Union. It was also submitted that since the liability was a contractual one and the assessee's accounts were maintained on a mercantile basis the claim was allowable. It was also urged that maintenance of an approved gratuity fund was not a necessary pre-requisite for considering the claim. 4. The AAC allowed the claim on the basis of the Bombay High Court decision in the case of Tata Iron and Steel Col Ltd. vs. D.V. Bapat ITO (1975) 101 ITR 292 (Bom) as also the Board's instruction contained in their circular No. 47 (F. No. 9)/100/69-IT (A-II) dt. 21st Sept., 1970. He, however, directed the ITO to grant deduction on the basis of the certificate of an actuary. 5. The Department challenged the order of the AAC before the Tribunal where it was contended that the assessee had sought to change "method of accounting" since in earlier years the payments actually made were being allowed as a deduction. It was also submitted that the claim for 1971-72 reflected a change which was not bonafide since it did not have the ITO's approval. The assessee, on the other hand, not only pressed for the acceptance of the AAC's order but also enlarged its claim to a figure of Rs. 41,05, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antile system of accounting. The ITO is correct when he asserts that there are two systems of accounting, namely, the cash system and the mercantile system. But the difference between the two systems of accounting ends here only. Under the cash system you account for a certain set of transaction. Under the mercantile system you account for a larger set of transactions including the set of transactions which would have been covered by the cash system of accounting. It is true that an item of income that has accrued in an earlier year will, under the mercantile system, be accounted for in that year, and not in any subsequent year when it is actually received, and would be under the cash system, recorded in that subsequent year. But this is not to say, in the circumstances like the appellant's, that the method of accounting is changed, when instead of claiming deduction on account of gratuity on payment basis, it is now being claimed, in addition to the payment basis, also on the accrued liability basis. Since no change in the method of accounting is, in my opinion, involved there is no question of deciding the issue as to whether the change was justified or not. Even assuming that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entered into the appellant is for ever precluded from making any such provision and all that it can claim is a deduction of the actual payments made on account of gratuity. Now it appears to me that this reasoning of the ITO is not well founded. The ITO does not dispute if a provision had been made in the year in which the agreement with the employees was entered into, the same would be admissible. His only grievance is that the provision was not made in the first year itself. If the appellant did not make the provision, in the very first year itself, either through inadvertence or otherwise, it would not be proper, in my opinion to refuse to the appellant an opportunity to make the provision in the year in which it was advised to do so. If allowability of such a claim is accepted and, if the provision is not made in the year in which the liability arose, there should be no objection to permit an assessee, in the circumstances similar to those of the appellant when the liability continues to exist in subsequent years, to create a provision in the year which the appellant may be advised to do so. There now remains the last question of ensuring that the appellant does not get the be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was sought to be urged on behalf of the Revenue. But upon the possible contingency of misuse by the assessee the rights of the parties under the Act cannot be decided. It seems that the legislature has taken note of that possibility by sub-s. (7) of s. 40A of the IT Act 1961". The second, and the more relevant decision is that of the Gujarat High Court rendered on 6th Aug., 1980 in Income-tax Reference No. 149 of 1975 in the case of the Nagri Mills Co. Ltd., vs. CIT, Gujarat (1981) 131 ITR 257 (Guj). In that case, the company had accepted an award made by the Industrial Court for payment of gratuity to the workers. The company used to debit in its books of accounts payments when actually made and the same were claimed as deduction in computation of the assessable income. The company was allowed the deduction by the ITO. For the asst. year under appeal, the company decided to make provision for meeting its gratuity liability on the basis of an actuarial valuation and decided charge against that year's income the cost of making provision for such liability. The claim of the company was negatived by the ITO and this action was confirmed by the Tribunal. The question that arose for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility for earlier years as borne out by the following submissions before the Tribunal at the time of the first hearing: "Shri Patel however admitted that the liability claimed before the ITO was not only a liability of this year but also concluded liabilities of earlier years" (v) That if any thing was to be allowed it could be the lower of (i) the assessee's original claim of Rs. 16,93,186 and (ii) the discounted value of the incremental liability referable to the assessment year under consideration. The learned standing counsel referred to various reported authorities to support his arguments. He first of all cited the decision of the Gujarat High Court in the case of Nagari Mills Co. LTD. vs. CIT (1981) 131 ITR 257 (Guj) for the proposition that the deduction allowed therein pertained to the gratuity liability quantified for the relevant "year" on the basis of an actuarial valuation. He next referred to the decision of the Karnataka High Court in the case of Mysore Tabacco Co. Ltd. vs. CIT (1978) 115 ITR 698 (Karn) for the proposition that an assessee cannot aggregate the expenditure which could have been claimed in earlier years and claim the same in a lump sum in a si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the actuary took into account the persons who were in the employment of the company as on 31st March, 1971 as also the period of employment. This according to the learned counsel did not mean that the liability of the earlier year was being claimed. According to him it was a "liability in present", a "contractual liability" and an allowable one on the basis of the mercantile system of accounting being followed by the assessee. 8.2 It was also urged that earlier years payments had been already allowed by the ITO on "cash basis" and there would be no case of "double deduction" in case the deduction of Rs. 41,05,760 was upheld. According to him even the CIT(A) had taken care of this aspect by giving suitable directions in Paras 9 and 17 of his order. 8.3 The learned counsel also referred to the report of the actuary appended on his paper book to support its accuracy which according to him had not been challenged by the Revenue. 8.4 The learned counsel also advanced arguments pertaining to the change in the method of accounting on account of gratuity to contend that the change was bona fide. It was also submitted that the decision of the Gujarat High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the matter back to the file of the AAC to decide four specific issues which were: (1) Whether there was a change in the method of accounting and if so whether justified. (2) Whether the assessee could be permitted to claim a higher amount. (3) Change in the law from asst. yr. 1973-74. (4) Adequate directions to ensure that no double deduction was allowed. The learned CIT(A) with whom the jurisdiction vested at the rehearing stage decided these issues on the following lines: (1) There was no change in the method of accounting since the cash system was a part of the larger mercantile system itself. The decision of the Supreme Court in the case of CIT vs. Krishnaswamy Mudaliar (A) (1964) 53 ITR 122 (SC) was relied upon. Even if it was presumed that there was a change it was a bona fide one since the assessee was following the more scientific method of actuarial valuation. (2) The claim for a higher amount was justified in view of the reasons stated in (1). (3) The subsequent change in the law from asst. yr. 1973-74 had no effect since the assessment year involved was 1971-72. (4) Actual payments made during a year were not to be allowed while making an al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. CIT (1978) 115 ITR 698 "Held, that, even on the basis of the actuarial valuation, the sum of Rs. 3,63,007 was a liability incurred by the assessee from the commencement of the scheme in the year 1957 till 31st March, 1970. It was not permissible for the assessee to aggregate such expenditure which might have been claimed in the earlier years and claim the same in a lump sum in the asst. yr. 1971-72. The fact that the assessee had not made such a claim in the earlier years was of no consequence. The decision of the Supreme Court in Metal Box Co's case (1969) 73 ITR 53 cannot be stretched to the extent of saying that a liability or expenditure which could be claimed in relation to a particular assessment year could be kept in suspense and claimed in a subsequent year of the assessee's choice as accruing or incurred in such subsequent year". (2) CIT vs. Kerala Nut Food Co. 1976 CTR (Ker) 92 : (1978) 111 ITR 252 (Ker) "The assessee firm, whose method of accounting was the mercantile system, debited a sum of Rs. 56,173 to its profit and loss account and credited the same to the Gratuity and Retrenchment Compensation Payable Account in respect of the accounting year ending ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eated a liability for the first time and where an estimate of the liability was possible, such liability was properly deductible in computing the profit of the relevant year of the assessee. There was nothing improper in admitting as deduction, provisions to meet contingent liabilities if by so doing a truer balance was arrived at between the receipts of the year and the cost of earning them, or between the expenses of the year and the fruits of incurring them. Any sum claimed as such a provision must, however, be seen to be an essential charge against the receipts of the year in which it appeared in the accounts in order to enable a true profit from that source to be stated". "That as the estimate made was not excessive and unreal and the W.B. Employees' Payment of Compulsory Gratuity Act, 1971, came into operation for the first time, in arriving at the true profit of the company under s. 37 of the Act, the provision for gratuity was a permissible deduction". "The assessee claimed its right to deduct the sum because the amount was a special liability which was created for the first time in 1971." 13. It is apparent that in the aforesaid decision the liability arose for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the judicial opinion is against the view canvassed on behalf of the assessee. 17. We would now refer to the CBDT Circular No. 47 dt. 21st Sept., 1970 which has been relied upon by the assessee's counsel, this circular states as follows; "A question has arisen whether the provision made by an assessee in its accounts on account of the estimated service gratuity payable to the employees can be allowed as a deduction, when no gratuity fund has been set up under Part C of the Fourth Schedule of the IT Act, 1961. The Board have decided that following the decision of the Supreme Court in the case of Metal Box Co. Of India Ltd. (1969) 73 ITR 53 (SC), the provision of gratuity on a scientific basis (in the form of an actuarial valuation carried out every year) can be considered to represent a real liability of the employer to the employees. The Supreme Court in the case of Garment Cleaning Works (Civil Appeal No. 621 of 1960 dt. 3rd April, 1961) decided that the employer would be required to pay gratuity even to an employee who has been dismissed on account o misconduct. The Board have therefore, come to the conclusion that the liability so ascertained cannot be considered a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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