1982 (3) TMI 181 - AT - Income Tax

Summary

Issues:
- Allowance of incremental liability towards gratuity in excess of insurance premia
- Interpretation of provisions under section 36(1)(v), section 40A(7)(b)(i), and section 40A(7)(b)(ii)
- Application of mercantile system of accounting
- Actuarial assessment of incremental liability
- Consideration of pre-existing approved gratuity fund
- Dispute over deduction eligibility for incremental liability
- Argument regarding coverage of liability by insurance premia
- Upholding of first appellate authority's orders

Analysis:

The judgment concerns two appeals arising from the Commissioner (Appeals) order regarding the assessment years 1975-76 and 1976-77 for a company. The main issue revolves around the claim for allowance of incremental liability towards gratuity, exceeding the insurance premia already permitted by the Income Tax Officer (ITO). The company had established a gratuity fund and obtained approval for a Group Gratuity-cum-Life Assurance Scheme. The ITO allowed only the actual payment of premia and gratuity, not the incremental liability, as he believed the company's liability did not exceed the premia paid. However, the Commissioner (Appeals) found that the incremental liability, determined on an actuarial basis, should be allowed as a deduction under section 36(1)(v) and section 40A(7)(b)(i) of the Income Tax Act.

The departmental appeal contended that only actual gratuity payment and premia should qualify for deduction under section 36(1)(v). The company argued that the incremental liability, supported by an actuarial certificate, should be deductible as it constitutes a statutory and contractual liability. The Tribunal agreed, emphasizing that the incremental liability, even without a specific provision in the accounts, is a charge on the company's profits under the mercantile system of accounting. The Tribunal highlighted that the legal position supports the deduction of such liabilities, as long as the conditions under section 40A(7) are met, regardless of the actual provision in the books of account.

Furthermore, the Tribunal addressed the argument that the company's liability was covered by insurance premia, stating that the incremental liability, not fully covered by the insurance, should be allowed as a deduction. The Tribunal upheld the orders of the first appellate authority, concluding that the incremental liability towards gratuity, actuarially ascertained and supported by a pre-existing approved gratuity fund, should be allowed as a deduction under the relevant sections of the Income Tax Act. The appeals were ultimately dismissed, affirming the allowance of the incremental liability as a deduction.