TMI Blog1987 (6) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... red an expenditure of Rs. 1,59,407 in the said assessment year and also recovered charges in respect thereof in a sum of Rs. 1,31,162. The difference of Rs. 28,245 was claimed by the assessee as a deductible expenditure. The Income-tax Officer disallowed the claim on the ground that the assessee maintained a guest house and was not entitled to claim deduction in respect of expenditure incurred for the same under section 37(4). In the assessment year involved, the assessee introduced a scheme for payment of gratuity to its employees, since an enactment on an all India basis for payment of gratuity by employers to their employees was being contemplated by the Legislature. The assessee obtained an estimate of its liability on account of such gratuity as on March 31, 1971, from qualified actuaries which was ascertained at Rs. 1,16,57,966. A deduction of the said amount was claimed from the total income of the assessee. The Income-tax Officer in making the assessment allowed only the amount of Rs. 12,75,558 as liability pertaining to the assessment year involved. Deduction of the balance was not allowed on the ground that the same constituted liability pertaining to the years prior to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t expenditure of the same nature as that of expenditure involved in the instant case should be held to have been incurred on account of entertainment and not admissible as a deduction. The Tribunal followed the decision of the Gujarat High Court in Patel Bros. Co. Ltd.'s case [1977] 106 ITR 424 and accepted the contention of the assessee. The addition of Rs. 34,100 was directed to be deleted from the total income of the assessee. On the assessee's claim for deduction of Rs. 28,245, the expenditure incurred in respect of the residential accommodation in the mill of the assessee, the Tribunal found, that the assessee had realised to a large extent the actual expenses incurred in providing boarding, lodging and accommodation from the persons enjoying the same and held that the persons who occupied the said house could not be called the guests of the assessee. The Tribunal found further that at the places where the assessee's mills were situated, there was no hotel or other accommodation available where the employees or customers of the assessee could be put up. The Tribunal held that the accommodation provided by the assessee was part and parcel of its business assets and the expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 87] 167 ITR 866 (Cal). I was a party to the said decision. In that case, it was held by the Division Bench that Explanation (2) introduced in section 37(2A) was made effective retrospectively on and from April 1, 1976. It was held that the law as it stood before the said date was required to be considered to determine such controversy where it arose prior to April 1, 1976. The High Court had taken different views. This court followed and applied the decision of the Gujarat High Court in Patel Bros. Co. Ltd.'s case [1977] 106 ITR 424 and held that there was a difference between the expenditure in the nature of hospitality and expenditure in the nature of entertainment. In the facts, it was held that the expenditure incurred by the assessee for providing tea, cold drinks and other refreshments to its customers was an expenditure incurred for the purpose of hospitality and not incurred for the purpose of entertainment. Following the said decision in the case of Agarpara Co. Ltd.'s case [1987] 167 ITR 866 (Cal), we hold that the expenditure incurred in the instant case for supply of tea and refreshments at the conference of its salesmen and distributing agents was an expenditure in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where no accommodation of any kind was available. The same was obviously not meant for entertainment or relaxation. It has also been found as a fact that the persons availing of the accommodation had been paying charges covering almost the entire expenditure. In view of the above, we answer question No. 2 in the affirmative and in favour of the assessee. On question No. 3, it was contended on behalf of the Revenue that the provision for payment on account of gratuity should not be held to be allowable as deduction in the instant case for a number of reasons. It was contended that there was no actual payment but it was merely a provision for a contingent liability. It was further contended that the assessee did not set apart any amount on account of gratuity nor deposit the same in any fund to be held exclusively for the purpose of payment of gratuity. The assessee retained full user of the amount. It was further contended that the liability for payment of gratuity was not a statutory liability as in the relevant assessment year there was no statute under which the assessee had to provide for and pay gratuity. In support of the respective contentions of the parties, a large nu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1968. The Supreme Court, following its decision in Shree Sajjan Mills Ltd.'s case [1985] 156 ITR 585, allowed the claim of the assessee and held that the said amount was deductible, as in the assessment year 1960-70, sub-section (7) had not been incorporated in section 40A of the Act. (c) Ishwar Industries Ltd. v. CIT [1984] 149 ITR 301 (Delhi). In this case, on March 31, 1970, the assessee introduced with effect from January 1, 1970, a gratuity scheme for its employees and in the assessment year 1971-72 claimed deduction of the provision made for payment of such gratuity on the basis of actuarial valuation. The income-tax authorities allowed part of the said amount on the ground that the same related to the year in question but the balance was disallowed on the ground that they related to earlier accounting years. The Tribunal affirmed the decision of the income-tax authorities. On a reference, a Division Bench of the Delhi High Court held that the liability of the assessee to pay gratuity under the scheme arose only when the scheme came into operation and became a known liability on calculation. The liability which related to the period before the assessment also arose in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was no statutory liability in the assessment year of the assessee to pay such gratuity. This aspect of the controversy in out view is also concluded by the decision of the Supreme Court in Andhra Prabha (P.) Ltd.'s case [1986] 158 ITR 416 (SC), where the Supreme Court allowed the provision made for payment of gratuity under an agreement between the assessee and the non-working journalists. In the earlier decision of this court in Remington Rand India Ltd.'s case [1986] 159 ITR 922, it was observed that liability to pay gratuity under an agreement or scheme would be more or less in the nature of a liability under a statute as the scheme was binding on the assessee. The Delhi High Court has taken the same view in Ishwar Industries Ltd.'s case [1984] 149 ITR 301. We are unable to hold that the assessee incurred no liability to pay gratuity to its employees as the same was not imposed by a statute but arose under a scheme. The scheme was binding on the assessee and enforceable by the employees. In fact, part of the liability pertaining to the relevant year has been allowed by the Income-tax Officer. For the reasons as aforesaid, we answer question No. 3 also in the affirmative a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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