Commissioner of Income Tax vs Camlin Pvt. Ltd.

T.D. Sugla J.

The only one question referred to this court at the instance of the Department is :

"Whether, on the facts and in the circumstances of the case, the tribunal was right in law in upholding the decision of the Appellate Assistant Commissioner of Income Tax that provision for gratuity amounting to Rs. 43,584 was a real liability to be allowed as a deduction u/s 37(1) of the Income Tax Act, 1961 ?"

The assessee is a company and the proceedings relate to the assessment year 1972-73. The assessee claimed a sum of Rs. 43,584 representing provision for gratuity as deduction. Thy claim was disallowed by the Income Tax Officer on two grounds, namely, (i) the gratuity liability pertaining to the year under reference was only Rs. 4,730 and the balance of Rs. 38,854 represented the assessee''s liability for earlier period; and (ii) the amount of Rs. 4,730 could also not be allowed as deduction in view of the provisions of section 36(1)(v) of the Income Tax Act. The Appellate Assistant Commissioner and the Tribunal allowed the assessee''s claim for deduction mainly relying on the Central Board of Direct Traces Circular No. 47 dated September 21, 1970 [1970] 78 ITR 13, and the Allahabad High Court decision in Madho Mahesh Sugar Mills (P.) Ltd v. CIT [1973] 92 ITR 503. The Department''s contention that the Central Board of Direct taxes'' Circular [1970] 78 ITR 13. was subsequently withdrawn was not found acceptable by the Tribunal as the circular [1970] 78 ITR 13, was withdrawn after the assessment under reference was completed.

Dr. Balasubramanian, learned counsel of the Department, has reiterated that the Board''s circular [1970] 78 ITR 13 relied upon by the Tribunal was subsequently withdrawn. It was urged that the assessee''s ability n respect of gratuity was only Rs. 4,730 and that the entire claim would not have been allowed of the year under reference. The assessee''s learned counsel, Shri Sathe, on the other hand, contended that the assessee''s claim was not based on the Board''s circular alone. The law in this behalf was well-settled in view of the Supreme Court decision in the case of Metal Box Company of India Ltd. Vs. Their Workmen, , and several other decisions including that of this court in India United Mills Ltd. Vs. Commissioner of Income Tax, Bombay City-I, . The provision for gratuity based on actuarial valuation was, therefore, rightly allowed. As regards the contention that the gratuity ability for the year under reference was only of Rs. 4,730 it was stated that the submission was not correct According to him the liability in respect of gratuity payable to whole-time directors was incurred by the assessee for the first time on October 12, 1971, i.e., when a gratuity scheme was adopted of them. It was thus, contended that the entire liability was incurred during the year and was rightly allowed as deduction both by the Appellate Assistant Commissioner and the Tribunal.

In view of the fact that the liability to gratuity accrued in this case on the basis of a scheme framed during the previous year, it has to be held that the assessee''s liability as at the end of that year, irrespective of the period involved, is the liability for the year. The assessment year involved being the assessment year 1972-73, i.e., the year to which the newly inserted provisions of section 40A(7) of the Income Tax Act are not applicable, it is to be further held that liability based on actuarial valuation is allowable as deduction in view of the Allahabad High Court decision in Madho Mahesh Sugar Mills (P.) Ltd.''s case [1973] 92 ITR 503, and this court decision in India United Mills Ltd.''s case [1975] 98 ITR 426.

Accordingly, the question is answered in the affirmative land in favour of the assessee.

No order as to costs.