TMI Blog2011 (3) TMI 604X X X X Extracts X X X X X X X X Extracts X X X X ..... ntitled to such claim without further complying with the provisions of Section 40A (9) of the Act whether the assessee was entitled to the benefit of Section 37 of the Act in a case where the expenses is in the nature of one mentioned in Section 36 but is not an approved one and at the same time, the deduction of expenses was claimed on the basis of a liability created by a resolution of the board of directors of the company which is capable of being reversed by a subsequent resolution - it is well known, is an authority for what it decides but what necessarily follows from such decision is not to be taken as a precedent - answer the first question in the affirmative and the second one in the negative - ITA 139/1999 - - - Dated:- 1-3-2011 - Hon ble Mr. Justice Bhaskar Bhattacharya Hon ble Mr. Justice Sambuddha Chakrabarti Appellant: Dr. D. Pal, Mrs. Sutapa Roychowdhury, Mr. Somak Basu. Respondent: Mr. M. P. Agarwal. [Bhaskar Bhattacharya, J.]- This appeal under Section 260A of the Income Tax Act, 1961 is at the instance of an assessee and is directed against an order dated 25th March, 1999, passed by the Income Tax Appellate Tribunal, D Bench, Calcutta, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utives of the company, to the persons who, retired prior to introduction of the pension scheme, and were not in receipt of any pension, the liability had arisen and crystalised during the year under the reference and since the company was following the mercantile system of accounting, and as the liability in respect of such pension arose and crystallized during the said year, the company was entitled to claim deduction of such pension liability determined on actuarial basis in the relevant previous year in which such liability arose. (e) The learned Tribunal below, however, overruled the aforesaid claim of the assessee and dismissed the appeal. Being dissatisfied, the assessee has come up with the present appeal. 3. Dr. Pal, the learned senior counsel appearing on behalf of the assessee, has strenuously contended before us that his client having maintained its account on mercantile basis, is entitled to the deduction of the entire amount which accrued during the year as liability for the purpose of the said pension notwithstanding the fact that his client had actually paid a lesser amount. In support of such contention, Dr. Pal has relied upon the following decisions: 1. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he scheme in question not having fallen within those provisions, his client is entitled to the benefit of the residuary Section 37 of the Act. Therefore, the question that boils down in the present case is whether an employer maintaining account on the basis of mercantile system is entitled to deduction on actuarial basis for discharging any liability on account of unapproved pension scheme. In order to appreciate the aforesaid question, it would be profitable to refer to the provisions contained in Sections 36 and 40A of the Act which are quoted below: 36. Other deductions . (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28 *************************************************************************** (iv) any sum paid by the assessee as an employer by way of contribution towards a recognised provident fund or an approved superannuation fund, subject to such limits as may be prescribed for the purpose of recognising the provident fund or approving the superannuation fund, as the case may be; and subject to such conditions as the Board may think fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unts to expenditure of the company so as to get the benefit of deduction under the Act even if such liability is of the nature contemplated under Section 36 but not in conformity with the same. 9. In order to get the benefit of deduction of expenditure, the assessee must bring his case strictly within the purview of either of the provisions of Sections 30 to 36 of the Act or at least within the residuary Section 37 of the Act. In our opinion, in order to get the benefit of deductible expenditures by creating a liability through a mere resolution of the board of directors which does not fall under any of the Sections 30 to 36 of the Act, such liability must not be of the nature described in Sections 30 to 36 of the Act and at the same time, should not be of the nature of capital expenditure or personal expenses of the assessee as provided in Section 37 of the Act which is quoted below: 37. General . (1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or professio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in Sections 30 to 36 but actually not coming within their purview or in excess thereof, cannot get the benefit of Section 37 of the Act. 11. Secondly, a resolution taken by the board of directors can be modified or reversed by a subsequent resolution and for that reason the legislature put various restrictions provided in Section 36 of the Act to be complied with in order to get the benefit of the deduction for expenditure of that nature. By taking aid of an avoidable promise, an assessee cannot claim the benefit of the expenditure in the nature of those provided in Section 36 of the Act and that too, without complying with the requirement of Section 40 A(9) of the Act. 12. If we accept the contention of Dr. Pal that expenditure made in the nature of but not exactly the one provided in Section 36 should come under the purview of Section 37 of the Act, the effect would be disastrous. Any company, following mercantile method of accounting, by taking a fake resolution to pay pension without any intention to pay, would, for years, not actually pay the amount, or may make payment of a paltry percentage of amount of the shown liability and may even, subsequently, recall or v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in said decision, the question raised before us was never decided and thus, the said decision can be of no assistance to Dr. Pal. 16. In the case of Calcutta Co. Ltd. vs. Commissioner of Income-tax, West Bengal ( supra) , the appellant bought lands and sold them in plots fit for building purposes undertaking to develop them. When the plot was sold, the purchaser paid only a portion of the purchased land and undertook to pay the balance on installments. The appellant in its turn undertook to carry out the developments within six months but the time was not the essence of the contract. In the relevant accounting year, the appellant actually received in cash only as sum of Rs.29,392/- towards the sale price, but in accordance with the mercantile system of accounting adopted by it credited to in its accounts the sum of Rs.43,692/- representing the full sale price. At the same time, it debited an estimated amount of Rs.24,809/- as expenditure for the development it had undertaken to carry out although no part of that amount was actually spent. The department disallowed the expenditure. The Supreme Court allowed such deduction observing that having accepted the receipt of Rs.43,692/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot help Dr. Pal s client in anyway. 19. In the case of Keshav Mills Ltd. vs. Commissioner of Income-tax ( supra), the Supreme Court was dealing with the general principle of the mercantile system of accounting in respect of an enforceable legal liability incurred by an assessee and such principle is well-settled. But if expenditure is not permissible as a deductable one under the Act, the assessee cannot be benefitted by maintaining the account through such system. For the selfsame reason, the decision of the Supreme Court in the case of E. D. Seassoon Company Ltd and others vs. Commissioner of Income-tax reported in (1954) 26 ITR 27 (SC) which deals with the mercantile and cash system of accounting is inconsequential for the purpose of dealing with the question involved before us. 20. In the case of Metal Box Company of India Ltd vs. Their workmen (supra), the Supreme Court held that the contingent liabilities discounted and valued as out of necessity could be taken into account as trading expenses if these were capable of being valued. It was further held that an estimated liability under a gratuity scheme, even if it was a contingent liability, if properly ascertain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year. The Income-tax Officer disallowed this claim on the ground that the amount in question was allowable to be treated as 'capital expenditure' under the provisions of Section 58K of the Act. An appeal was taken to the Appellate Assistant Commissioner but it failed. The assessee appealed the Appellate Tribunal. The Tribunal held that there was a transfer of the fund to Trustees which came within the scope of Section 58K of the Act and, therefore, the amount was not deductible nor could the deductions be allowed under Section 10 (1) or Section 10(2)(xv) of the 1922 Act. The assessee sought reference and the following two questions were referred: (1) Whether the provisions of Section 58K of the Income-tax Act apply to the transfer of the sum of Rupees 3,01,772-1-7 to the Regional Provident Fund Commissioner. (2) If the answer to the above question is in the negative, whether the sum of Rs.3,01,882-1-7 is allowable as deduction in arriving at the commercial profits under Section 10(1) or is an allowable deduction under Section 10(2)(xv) of the Income-tax Act in the computation of the assessable 'business' profits. The High Court, however, proceeded to consider the mat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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