TMI Blog1966 (4) TMI 77X X X X Extracts X X X X X X X X Extracts X X X X ..... see claimed that, in the computation of its profits and gains for the accounting period, it was entitled to a deduction of ₹ 75,000, being the amount set apart as a reserve fund in its balance-sheet as on 28th February, 1957, for the payments it may have to make to its workers in the next year on account of holiday wages under section 79 of the Factories Act, 1948. Similarly, it claimed a deduction of ₹ 1,75,000 on account of the compensation it may be required to pay under section 25F of the Industrial Disputes Act, 1947, to those of its workmen who may be retrenched in the following year. The Income-tax Officer rejected the claim of the assessee on account of both the deductions taking the view that the assessee's liability for holidaywages under the Factories Act, 1948, and for payment of retrenchment compensation under the Industrial Disputes Act, 1947, was only a contingent liability and not an actual liability in praesenti and, therefore, the amounts of ₹ 75,000 and ₹ 1,75,000 which the assessee set apart for meeting these contingent liabilities could not be regarded as expenditure deductible for income-tax purposes , and that the expenditure ded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is as follows: In computing the profits of a trade it is the normal accountancy practice to allow as an expense any sum in respect of liabilities which have accrued over the accounting period, and to make a deduction of such sums from the profits. Following the decision in Peter Merchant Ltd. v. Stedeford (Inspector of Taxes) [1948] 30 Tax Cas. 496, however, it appears that the nature of liabilities which may be deducted on business and accountancy principles does not accord with the nature of liabilities deductible for income-tax purposes. For income-tax purposes it was held that a distinction must be drawn between an actual, i.e., legal, liability, which is deductible, and a liability which is future or contingent and for which no deduction can be made. The above passage makes it very clear that if an assessee out of prudence sets aside a part of the profits in one year to meet a contingency, then he cannot claim any deduction on account of the money so set apart for the simple reason that the sum set apart does not amount to expenditure . Now, it is clear from an examination of section 79 of the Factories Act, 1948, that the liability of the assessee for hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of holiday wages which would have to be paid to them some time in the following year in accordance with section 49B of the Factories Act, 1934. The Calcutta High Court agreed with the Tribunal that the assessee was not entitled to the deduction claimed both for the reason that no expenditure had been actually incurred and also for the reason that the amount could not be claimed even as an account representing a certain liability. After examining the provisions of section 49B of the Factories Act, 1934, the learned Chief Justice of the Calcutta High Court said: It should be clear from what I have stated above that such statutory liability for holiday wages as the Factories Act creates is only a contingent liability which may or may not have to be discharged; and, secondly, the measure of that liability can never be known in advance. It cannot be so known, because it cannot be known in advance how many employees will avail themselves of how many holidays and when and, necessarily, at what rate, holiday wages would be payable. In those circumstances it is perfectly clear that not only is the amount claimed not allowable as an item of expenditure, because, in fact, no expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with, then the retrenchment becomes illegal and improper. But section 25F does not cast on the employer a statutory obligation to retrench a particular number of employees in any particular year. It is for the employer to decide whether, at any given moment, because of business exigencies or vicissitudes of business, it is necessary to retrench any of the workmen employed in the industry. It is plainly impossible for an employer to say in advance the number of employees he will be required to retrench at a subsequent point of time having regard to the state of business then existing. Much less is it possible for him to evaluate his liability for the payment of retrenchment compensation in the event of his being required to retrench some workmen. When, therefore, in any year of account the assessee claims a deduction of a sum which he may be required to pay as retrenchment compensation the next year or some time later, then the deduction that is claimed is not on account of a liability in praesenti but on account of a liability which may arise in future on the happening of a particular contingency. As pointed out earlier, such a deduction is clearly not permissible under section 10( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hment compensation depends on the existence and fulfilment of certain conditions, and that makes the assessee's prospective liability contingent until the services of any employees are terminated by way of retrenchment. The principle laid down by the House of Lords in the case of Southern Railway of Peru [1957] A.C. 334; 32 I.T.R. 737 (H.L.) is, therefore, not applicable to the present case. The decision that is relevant here, and which fully supports the view we have taken, is the decision of the Madras High Court in Commissioner of Income-tax v. Indian Metal and Metallurgical Corporation [1964] 51 I.T.R. 240. In that case, it has been ruled that the liability of an employer-assessee in respect of retrenchment compensation under section 25F of the Industrial Disputes Act, 1947, is not a liability in praesenti but is only a contingent liability which cannot be taken into account as an accrued liability, even though the assessee has been maintaining his account books on the mercantile system. For the foregoing reasons, our answer to the question referred to us for decision is in the affirmative. The assessee shall pay the costs of this reference. Counsel's fee is fixed at ..... X X X X Extracts X X X X X X X X Extracts X X X X
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