Bombay H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the decision of the AAC that provision for gratuity amounting to Rs. 43,584 was a real liability to be allowed as a deduction under s. 37(1) of the IT Act, 1961 ?

High Court Of Bombay

CIT vs. Camlin Pvt. Ltd.

Sections 37(1), 36(1)(v)

Asst. Year 1972-73

S.P. Bharucha & T.D. Sugla, JJ.

IT Ref. No. 492 of 1976

15th September, 1989

Counsel Appeared

Dr. V. Balasubramanian, J.P. Devadhar & K.C. Sidhwa, for the Revenue : Arun Sathe, for the Assessee

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 AAC that provision for gratuity amounting to Rs. 43,584 was a real liability to be allowed as a deduction under s. 37(1) of the IT Act, 1961 ?”

The assessee is a company and the proceedings relate to the asst. yr. 1972-73. The assessee claimed a sum of Rs. 43,584 representing provision for gratuity as deduction. The claim was disallowed by the ITO 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 s. 36(1)(v) of the IT Act. The AAC and the Tribunal allowed the assessee’s claim for deduction mainly relying on the CBDT’ Circular No. 47, dated September 21, 1970 [(1970) 78 ITR (St.) 13], and the Allahabad High Court decision in Madho Mahesh Sugar Mills (P) Ltd. vs. CIT (1973) 92 ITR 503 (All). The Department’s contention that the CBDT Circular [(1970) 78 ITR (St.) 13] was subsequently withdrawn was not found acceptable by the Tribunal as the circular [(1970) 78 ITR (St.) 13], was withdrawn after the assessment under reference was completed.

Dr. Balasubramanian, learned counsel for the Department, has reiterated that the Board’s circular ( (1970) 78 ITR (St.) 13) relied upon by the Tribunal was subsequently withdrawn. It was urged that the assessee’s liability in respect of gratuity was only Rs. 4,730 and that the entire claim could not have been allowed for 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 Co. of India Ltd. vs. Their Workmen (1969) 73 ITR 53 (SC), and several other decisions including that of this Court in India United Mills Ltd. vs. CIT (1975) 98 ITR 426 (Bom). The provision for gratuity based on actuarial valuation was, therefore, rightly allowed. As regards the contention that the gratuity liability 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 for them. It was, thus, contended that the entire liability was incurred during the year and was rightly allowed as deduction both by the AAC 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 asst. yr. 1972-73, i.e., the year to which the newly inserted provisions of s. 40A(7) of the IT 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 (supra), and this Court decision in India United Mills Ltd.’s case (supra).

Accordingly, the question is answered in the affirmative and in favour of the assessee. No order as to costs.

[Citation :180 ITR 638]

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