TMI Blog1994 (8) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... es. However, in the course of the assessment proceedings, the assessee confined its claim for deduction to Rs. 1,43,124 as per the valuation of the actuary. The Income-tax Officer allowed a sum of Rs. 55,459 and disallowed the balance of Rs. 87,665 on the ground that the latter sum related to the liability for earlier years. The Appellate Assistant Commissioner, however, allowed the assessee's claim. This order was affirmed by the Appellate Tribunal. The Appellate Tribunal followed the observations of the Bombay High Court in Tata Iron and Steel Co. Ltd. v. D. V. Bapat, ITO [1975] 101 ITR 292 that the provision for gratuity would be an admissible deduction in the computation of the assessee's income if such a provision is not for a contingent liability but is based on a scientific estimate of the present liability which is allowable in the case of an assessee who keeps its accounts under the mercantile system. Learned counsel for the Revenue contended that the assessing authority was justified in excluding the sum of Rs. 87,665 because it related to the earlier years, and that the accounting period was July 1, 1969, to June 30, 1970. If so, the gratuity scheme comprising the esti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law which was prevalent earlier. The relevant observations of the Supreme Court are at page 599 and they read as under : "It would thus be apparent from the analysis aforesaid that the position till the provisions of section 40A(7) were inserted in the Act in 1973 were as follows : (1) Payments of gratuity actually made to the employee on his retirement or termination of his services were expenditure incurred for the purpose of business in the year in which the payments were made and allowed under section 37 of the Act. (2) Provision made for payment of gratuity which would become due and payable in the previous year was allowed as an expenditure of the previous year on accrued basis when the mercantile system was followed by the assessee. (3) Provision made by setting aside an advance sum every year to meet the contingent liability and gratuity as and when it accrued by way of provision for gratuity or by way of reserve or fund for gratuity was not allowed as an expenditure of the year in which such sum was set apart. (4) Contribution made to an approved gratuity fund in the previous year was allowed as deduction under section 36(1)(v). (5) Provision made in the profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9-70. The gratuity scheme was implemented for the first time in the assessment year 1971-72 relating to the accounting year ending June, 1970. Since the assessee follows the mercantile system of accounting, only the liability pertaining to the year ending 1970 can be said to be a liability for this year. The liability for the earlier years cannot be claimed against the profits of the current year. I would, therefore, allow only a sum of Rs. 55,459 and the balance amount of Rs. 1,76,236 is disallowed." The provision made by the assessee for gratuity was found by the Appellate Tribunal as based on a scientific estimate of a present liability and, therefore, allowable as a deduction. In the circumstances, we do not think we can accept Mr. Pandey's contention. In Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53; 39 Comp Cas 410 ; 35 FJR 181, the Supreme Court held that it is legitimate for a company keeping accounts on the mercantile basis to estimate its liability under a gratuity scheme for its employees on an actuarial valuation and deduct such estimated liability from gross profits in the profit and loss account while working out its net profits. In such a system ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d "reserves", which are appropriations of profits. "Provisions" are usually shown in the balance-sheet by way of deductions, whereas general reserves and reserve funds are shown as part of the proprietor's interest. The provision for a contingency is set aside out of profits. Therefore, there can be no doubt that the provision made for payment of gratuity in future is a liability ; but its current value can be fairly estimated and if so, it can be deducted as business expenditure. Since the liability is first recognised and sought to be enforced when the gratuity scheme is first introduced, the existing liability as valued as on the said date, shall necessarily have to be considered as a deductible expenditure out of the profits of the said year, because the provision is made during that year for the first time and the legal liability arose also during the said year. The above inference drawn by us finds considerable support in the decision of the Madras High Court in CIT v. Mettur Spinning Mills [1983] 140 ITR 991. There, the relevant question referred to the High Court was (at page 992) : "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal wa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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