TMI Blog1970 (2) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... h July, 1955, an agreement was reached whereby it was agreed between the parties that the employees would be entitled to receive gratuity on the following terms : " It is agreed that the employees will receive gratuity on the following terms : (a) On the death of an employee Half a month's wages for each while in service of the company. year of service to be paid to his/her heirs or assignee. (b) On retirement or termination Half a month's wages for each of service. year of service. (c) On resignation by the employees Half a month's wages for each after 5 years. year of service. All employees of sister concerns whose services were transferred and/ or placed at the disposal of M/s. Escorts (Agents) Ltd. will also be entitled to gratuity at the above scales, and their services will be calculated from the date of their first appointment. The wages for purposes of calculating gratuity shall be the average wages during the 3 months next previous to death, retirement or termination of service or resignation, as the case may be, Gratuity will not be paid to an employee who is dismissed for misconduct involving financial loss to the company." Pursuant to the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serve or fund out of which the gratuity was to be paid, and the employer as well as the employees were treating the gratuity as an additional remuneration earned by and paid to the employees. He, therefore, held that the gratuity credited to the account of the employees was an additional remuneration paid by the assessee to its employees for the year under appeal and that the assessee had deducted tax at source from the payments so made and so he allowed Rs. 41,313 as a deduction. The department appealed against the said decision to the Tribunal and the Tribunal accepted the department's appeal. The relevant portion of the order of the Tribunal is quoted as under : " We have carefully perused the Assistant Commissioner's order and it seems that his reasoning is that the amount though credited in a later year relates to the year under appeal and as such the assessee is entitled to claim deduction in this year. He has presumed that the amount has been set apart and earmarked for the specific purpose and that the company was merely in the position of trustee with regard to this amount. In our opinion, the Assistant Commissioner is clearly in error in thinking so. From the facts st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me-tax, Commissioner of Income-tax Nedungadi Bank Ltd and Burma Corporation Ltd v. Commissioner of Income-tax and he cited commissioner of Income-tax v Songari Bai and a decision or the House of words Southern Railway of Peru Ltd, v. Owen. The learned counsel for the assessee has invited our attention to section 7 and the last clause under the heading "Deductions" in Part IV of the particulars of income-tax returns required under sub-section (5) of section 22 of the income-tax Act. He has claimed the deduction in question under clause (x) as well as clause (xv) of sub-section (2) of section 10 of the Income-tax Act which read as follows : Clause (x) of sub-section (2) of section 10 " any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission : Provided that the amount of the bonus or commission is of a reasonable amount with reference to-- (a) the pay of the employer and the conditions of his service : (b) the profits of the business, profession or vocation for the year in question ; and (c) the general practice in similar businesses, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at in order to claim the benefit under clause (xv) the amounts sought to be deducted must constitute an expenditure. The word "expenditure" is defined in the Shorter Oxford English Dictionary as "the action or practice of expending, disbursement, consumption, or the amount expended from time to time" and the word "expend" is defined as to pay away, lay out and spend. The Supreme Court in the judgment in Indian Molasses Co. P. Ltd v. Commissioner of Income-tax laid down, at page 78, that : "Expenditure is equal to 'expense' and 'expense' is money laid out by calculation and intention though in many uses of the word this element may not be present....... But the idea of 'spending' in the sense of 'paying out or away' and is something which is gone irretrievably...But whatever the character of the expenditure, it must be a paying out or away...." Consequently, in order to constitute "expenditure" within the meaning of clause (xv), the amount claimed must have been paid away or laid out and if the same had not been done in the relevant year, it could not be said to constitute a deductible expenditure The learned counsel for the assessee laid great stress on the submission that as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur opinion it is only when the claim to profit bonus, if made, is settled amicably or by industrial adjudication that a liability is incurred by the employer, who follows the mercantile system of accounting, within section 10(2)(x), read with section 10(5) of the Act. On the facts of this case, it is clear that it was only in 1949 that the claim to profit bonus was settled by an award of the Industrial Tribunal. Therefore, the only year the liability can be properly attributed to is 1949, and hence we are of the opinion that the High Court was right in answering the question in favour of the assessee." The said authority does not support the proposition contended for by Mr. Kirpal that the amount became due as soon as the liability had been declared by the industrial adjudication or amicable settlement irrespective of its deferred payment or debit in the books of accounts. Their Lordships have themselves referred to section 10(5) of the Act and the authority indicates that a mere entry without liability to pay would not constitute a deductible expenditure, but the question whether in spite of the liability if the amount had been deferred and not paid or debited in the books, it c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nthly and the total was larger than the amount received by the managing agents. In this context their Lordships observed that, no doubt, in this case the amount of commission was credited every six months which only meant that, as an interim arrangement, the accounts of all sales were also made tip at the end of six. of all sales were also made up at the end of six months but this would not affect the construction of the clause containing the terms for payment of commission which was an integrated and indivisible agreement to the reduction made there as a result of the modified arrangement. The amount which accrued or which the agents would have a right to receive could not be affected by the manner in which the entry was made. The aforesaid authority deals with the construction of a document creating legal liability as unaffected by the manner in which the entry was made. The aforesaid authority deals with the construction of a document creating legal liability as unaffected by the manner in which the entry had been made. The same is not an authority for the proposition contended for by the assessee that without there being an entry of any kind or in any manner, the amount can b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2, Chapter No. IX-B has been added specifically in respect of payment of bonus and that the authority is not of great assistance in deciding the question of law arising before us. Mr. D. K. Kapur invited our attention to Blurma Coyporation Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax v. Singari Bai but the said authorities are of no assistance in determining the controversy raised before us. Mr. Kapur, however, strongly relied upon a judgment of the House of Lords in Southern Railway of Peru Ltd. v. Owen in which Lord MacDermott observed as follows : " As a general proposition it is, I think, right to say that, in computing his taxable profits for a particular year, a trader, who is under a definite obligation to pay his employees for their services in that year an immediate payment and also a future payment in some subsequent year, may properly deduct, not only the immediate payment, but the present value of the future payment, provided such present value can be satisfactorily determined or fairly estimated. (Further),such a procedure .... brings the true costs of trading in the particular year into account for that year and thus promotes the ascertainment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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