1981 (3) TMI 6 - HC - Income Tax

Summary

Issues Involved:
1. Allowability of provision for gratuity as an admissible deduction.
2. Allowability of proportionate interest on a loan as an admissible deduction under Section 36(1)(iii) of the Income Tax Act, 1961.

Detailed Analysis:

1. Allowability of Provision for Gratuity:
The first issue concerns whether the provision for gratuity amounting to Rs. 1,86,461 can be allowed as an admissible deduction. The assessee had debited this sum to the salaries and wages account based on an actuarial valuation for the present value of future liability in respect of gratuity, as mandated by certain awards of the Industrial Tribunal effective from July 1, 1967. The Income Tax Officer (ITO) disallowed this claim, distinguishing the judgment in *Delhi Flour Mills Co. Ltd. v. CIT* [1974] 95 ITR 151 and relying on the Supreme Court's decision in *Bombay Dyeing & Mfg. Co. Ltd. v. CWT* [1974] 93 ITR 603.

However, both the Appellate Assistant Commissioner (AAC) and the Tribunal allowed the assessee's claim, referencing decisions from various High Courts, including *Tata Iron & Steel Co. Ltd. v. D. V. Bapat, ITO* [1975] 101 ITR 292, *Madho Mahesh Sugar Mills (P.) Ltd. v. CIT* [1973] 92 ITR 503, and *Delhi Flour Mills Co. Ltd.* [1974] 95 ITR 151. The Tribunal concluded that the provision for gratuity based on actuarial valuation is an admissible deduction, a principle established by the Supreme Court in *Metal Box Company of India Ltd. v. Their Workmen* [1969] 73 ITR 53. The Supreme Court had recognized that even a contingent liability, if scientifically ascertained, could be treated as trading expenses.

The court found no merit in directing a reference on this question, as the issue was settled by the Supreme Court's decision in *Metal Box* and consistently followed in subsequent judgments. Therefore, the court declined to direct the Tribunal to refer the first question raised by the Commissioner.

2. Allowability of Proportionate Interest:
The second issue pertains to the disallowance of proportionate interest amounting to Rs. 1,22,129 by the ITO, which the Tribunal allowed as an admissible deduction under Section 36(1)(iii) of the Income Tax Act, 1961. The assessee had borrowed Rs. 45 lakhs from the Life Insurance Corporation of India (LIC) to construct a multi-storeyed building, using part of the building for its business and letting out the rest. By the end of the relevant accounting year, only the basement and the first three floors were completed and occupied entirely by the assessee for its business purposes.

The ITO disallowed 40% of the interest, arguing that the loan was also intended for constructing portions of the building to be let out. However, the AAC and the Tribunal reversed this decision, emphasizing that the primary purpose of the construction was to house the company's office and press. The Tribunal noted that the loan amount was mixed with the company's general funds, and the entire constructed portion was used for business purposes during the relevant year.

The court upheld the Tribunal's findings, stating that the interest paid on the borrowed capital was for the purpose of the business, as the entire building constructed during the relevant year was used for business purposes. The court found no material to suggest that any part of the interest was for non-business purposes. The court also noted that any future disallowance of interest related to portions of the building let out would be a separate issue, not relevant to the current assessment year.

Conclusion:
The court dismissed the petition, affirming the Tribunal's decision on both issues. The provision for gratuity was deemed an admissible deduction based on actuarial valuation, and the interest on the borrowed capital was allowed as it was used entirely for business purposes during the relevant year. The Commissioner was ordered to pay the costs of the assessee, with counsel's fee set at Rs. 150.