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TMI Blog1972 (8) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... as disallowed by the Income-tax Officer, the Appellate Assistant Commissioner of Income-tax and finally by the Income-tax Appellate Tribunal. The main ground for disallowing the claim, as set out in the order of the Tribunal, is that in the relevant accounting year no ascertained liability arose for payment of gratuity. When the reference came up for hearing before this court, it was felt that in order to effectively dispose of the reference, it was necessary to know the discounted value during the year in which the debit entry was made of the future gratuity payment. As the Tribunal had not applied its mind to this aspect of the question, the case was sent back to it for a supplementary statement of the case stating the discounted value of the liability on account of gratuity during the relevant year. The Income-tax Appellate Tribunal found that the amount claimed by the assessee did not represent the true discounted value of the liability. The Tribunal, accordingly, thought it proper to obtain expert calculations from an actuary. The assessee then produced a certificate from the Zonal Actuary of the Life Insurance Corporation of India, Kanpur. On the basis of that report the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year exceeding six months shall count as one full year and six months or less shall be ignored. (3) In calculating the amount of gratuity the period of service after the implementation of the wage structure as given in this order shall be taken first and the pay for the pre-implementation period will be the basis for the calculation of gratuity for the rest of the years. " It is in pursuance of this notification that the assessee-company set apart a total sum of Rs. 1,37,811 for payment of gratuity and made an appropriate entry in its books of accounts crediting the gratuity account and debiting the profit and loss account. According to the assessee the sum of Rs. 1,37,811, was made up as under : Rs. 17,063.25 for previous year. Rs. 1,20,747.62 for earlier years. As pointed out earlier, the Income-tax Appellate Tribunal has disallowed the claim on the ground that the liability of the assessee for payment of gratuity in the relevant accounting period was not ascertained and it was only a contingent liability which the assessee had to meet at a future date as and when a particular event took place. Now, it cannot be disputed that every expenditure incurred by an assessee wholl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounts on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid. " With these observations the Supreme Court held that the estimated liability of the assessee-company for payment of gratuity based on actuarial valuation was a permissible deduction. It further held that such a liability was a liability in praesenti though payable in future and it was ascertainable. In our opinion this decision of the Supreme Court provides a complete answer to the contentions raised by the department in the instant case. Mr. Deokinandan Agarwal, learned counsel appearing for the department, relied upon Standard Mills Co. Ltd. v. Commissioner of Wealth-tax. In that case the question was whether the liability to pay gratuity was a debt within the meaning of section 2(m) of the Wealth-tax Act. It is in that connection that the Supreme Court observed that such a liability was a contingent liability whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utes that proposition, but what is contended is that the liability for payment of gratuity ascertained on actuarial calculations is a liability which is a liability in praesenti and is capable of ascertainment. That is what the Supreme Court has held in the case of Metal Box Company of India Ltd. v. Their Workmen. The learned counsel for the department then contended that the payment of gratuity is provided for in clause (v) of sub-section (1) of section 36 of the Income-tax Act and it can only be allowed in accordance with that provision. That is a question which was not raised before the Tribunal. In any case, the answer to that question is plain. The present case is not governed by section 36(1)(v), which permits deduction out of the gross profits of any contribution made by an employer towards gratuity fund created under a trust. In the present case the amount is deductible in the computation of the gross profit itself. In the case of Metal Box Company of India Ltd. the Supreme Court has dealt with this aspect of the matter in the following words : " But the contention was that though Schedule VI to the Companies Act may permit a provision for contingent liabilities, the Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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