Dishergarh Power Supply Co. Ltd. vs Commissioner of Income Tax

Bhagabati Prasad Banerjee, J.—The Tribunal has referred the following questions of law before this Court u/s 256(1) of the income tax Act, 1961 (''the Act'') :

(a) Whether, on the facts and in the circumstances of the case the income tax Appellate Tribunal was correct in holding that the sum of Rs. 1,72,743 transferred to contingency reserve account is not liable to deduction in arriving at the taxable income of the assessee-company ?

(b) Whether having regard to the provisions of the Electricity (Supply) Act, 1984 and the provision of the Sixth Schedule hereto the amount of Rs. 1,72,743 transferred to contingency reserve account constitutes income in the hands of the assessee ?

(c) Whether the amount covered by the contingency reserve is a diverse of income by reason of overriding obligation created by the statute

(a) Whether on the facts and in the circumstances of the case the income tax Appellate Tribunal was justified in holding that the accrued liability for pension valued actuarially was not an admissible deduction in computing the business income ?

(b) Whether on the facts and in the circumstances of the case the income tax Appellate Tribunal was justified in holding that the liability for pension on actuarial basis can arise only on retirement of an employee or on happening of similar event ?

The assessment year involved is 1979-80 for which the relevant accounting period ended on 31-3-1979.

It is not in dispute that the first question is now concluded by the decision of this Court in the case of Commissioner of Income Tax Vs. Sijua (Jharriah) Electric Supply Co. Ltd., Following the said decision, the first question is answered in the affirmative and in favour of the revenue.

The second question relates to pension liability of Rs. 7,58,628. For the assessment year 1979-80, the assessee made a provision of Rs. 7,58,620 for pension liability. The claim was said to have been based on actuarial basis. All along the assessee had been claiming a consolidated amount towards gratuity and pension every year which was offered for taxation and the actual payment of pension and gratuity in the corresponding year was separately allowed. But such claim was disallowed by the ITO in this assessment year. On appeal, the Commissioner (Appeals) held that admittedly no fund was created by the assessee-company for the purpose of payment of pension. The Commissioner (Appeals) was of the view that though the pension might be given considering the past services of the officers, it could not be denied that the liability arose only on retirement or happening of similar event and thereafter the liability continued in the form of actual payment made to the person concerned. It was further held by the Commissioner (Appeals) that the company had not withdrawn its claim to get deduction on the basis of actual claim because, in fact, it had pressed its actual claim in this year also. Under the circumstances, the Commissioner (Appeals) held that it was not open to the company to claim deduction on both the basis. This view was also upheld by the Tribunal holding, inter alia, as follows:

It was, however, admitted that no funds were created for this purpose. The CIT (Appeals) was of the view that though the pension may be given considering the past services of the officers, it cannot be denied that the liability arises only on retirement or happening of similar event, and thereafter the liability continues in the form of actual payment made to the person concerned. As the assessee was being allowed deduction of actual payment in respect of pension, the CIT (Appeals) found no justification for change-over of the system. The CIT (Appeals) further noted that the company has not withdrawn its claim to get deduction on the basis of actual claim and that in fact, it has pressed its actual claim in this year also. So the CIT (Appeals) in these circumstances was of the view that it is not open to the company to claim deduction on both the basis, especially as the liability of giving the pension arises only when the retirement takes place and actual payment is made. The action of the ITO in this regard was, accordingly, upheld.

It was open to the company to frame a scheme and to provide necessary fund for the purpose of payment of pension on actuarial basis. But, in the instant case, the company had all along paid the pension actually and thereafter claimed deduction on the basis of actual payment made. But in the year in question the company had claimed deduction on account of actual payment and at the same time claimed deduction for a sum of Rs. 7,58,628 for the purpose of making a provision for the existing employees. In our view, it was not open to the company to pursue both methods at the same time. In any event, the company would get the deduction as and when such sums were actually paid to the employees. In our view, therefore, the Tribunal has rightly decided the question.

In this connection a reference was made to a decision of this Court in the case of Commissioner of Income Tax Vs. National Insurance Co. of India, . In that case, it was held that the person in respect of whom provision for pension was made had already retired and there was an existing liability under the terms of his employment. Further, existing liability was actuarially computed and thereafter the provision for pension represented accrued liability and was an admissible deduction in computing the profits of the assessee for that assessment year. In that case, only one method was followed. But, in the instant case before us, the assessee intended to follow two different methods, one on the basis of actuarial basis and another on the basis of actual payment made. These two systems cannot go together and, accordingly, they cannot be allowed to go together. Accordingly, the second question is also answered in the affirmative and in favour of the revenue. There will be no order as to costs.

Sen, J.

I agree.