Commissioner of Income Tax vs Guest Keen Williams Limited

Satish Chandra, C.J.—The assessment year in question is 1972-73, the accounting period ending on January 1, 1972. During the course of the accounting period, the West Bengal Payment of Gratuity Act came into force in the year 1971, under which the assessee was liable to make payment of gratuity to its employees for the past years and also make provision for payment of gratuity to its employees. It provided for a sum of Rs. 65,86,985 as its liability for this assessment year. The Income Tax Officer allowed the claim to the extent of Rs. 47,83,701 and disallowed the claim for the balance of Rs. 18,03,284. The disallowed amount was referable to the past services of the current employees of the assessee-company.

On appeal, the Appellate Assistant Commissioner reversed the finding of the Income Tax Officer and allowed the claim, in view of the decisions of this High Court as well as of the Tribunal in other cases. The Tribunal upheld this view.

At the instance of the Department, the Tribunal has referred the following question of law to this court for our opinion :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 18,03,284 representing the liability for gratuity payable in respect of the past services was an allowable deduction in computing the total income for the assessment year 1972-73?"

The point of law is well settled. The West Bengal Payment of Gratuity Act came into force in the year 1971 during the accounting period relevant to the assessment year 1972-73. In respect of this year, the assessee was liable to pay gratuity to its employees not only in respect of the services rendered by them during the course of the current year but also in respect of the services rendered by its current employees in past years. This has been held by this court as well as by other High Courts in Madho Mahesh Sugar Mills (P.) Ltd. v. CIT [1973] 92 ITR 503, India United Mills Ltd. Vs. Commissioner of Income Tax, Bombay City-I, , Commissioner of Income Tax (Central-I) Vs. Eastern Spinning Mills Ltd., and Commissioner of Income Tax Vs. Shyam Nagar Tin Factory (P.) Ltd., . In view of these decisions, we answer the question referred to this court in the affirmative, in favour of the assessee and against the Department.

Another question of law referred to this court is as follows:

"Whether, on a proper interpretation of Section 80J of the Income Tax Act, 1961, read with Rule 19A of the Income Tax Rules, 1962, the Tribunal was right in holding that borrowed money should be included in the ''capital employed'' for calculating the relief u/s 80J ?"

This question is covered by the decision of the Supreme Court in Lohia Machines Ltd. and Another Vs. Union of India (UOI) and Others, . In view of this decision of the Supreme Court, it must be held that borrowed money cannot be included in computing the "capital employed" for the purpose of relief u/s 80J of the Income Tax Act, 1961. We, therefore, answer question No. 1 referred to this court in the negative, in favour of the Department and against the assessee.

There will be no order as to costs.

Bhattacharjee, J.

I agree.