TMI Blog1983 (4) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee in respect of both the matters. Aggrieved by the order of the Tribunal, the Revenue has sought for and obtained a reference of the following questions to this court for its opinion : Assessment year 1968-69: (1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs.7.22 lakhs representing the amount outstanding to M/s. Joseph Lucas (Industries) Limited, England, on plant account should be included in the computation of capital for the purpose of relief under s. 80J for the assessment year 1968-69 ? Assessment year 1972-73: (2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the gratuity amount of Rs. 9,87,422 provided in the accounts should be allowed as a deduction ? So far as the first question is concerned, it is, seen that the assessee purchased plant and machinery from Messrs. Joseph Lucas (Industries) Ltd., England, and towards the said purchase, a sum of Rs. 7.22 lakhs is outstanding. According to the Revenue, the said sum of Rs. 7.22 lakhs represents the balance of sale consideration due to the supplier and, therefore, it sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be a debt owed by the company to the supplier. We do not see how the assessee-company can be treated to be a debtor even during the period before the allotment of shares. As already stated, the bargain between the assessee-company and the supplier, so far as the supply of plant and machinery is concerned, is that the consideration for the supply should be by way of allotment of shares in the company and, therefore, even if there is delay in the allotment of shares, that will not make the assessee-company a debtor to the supplier. The learned counsel for the Revenue also refers to regulation 18 of the Regulations for Management of a Company Limited by Shares, which provides for payment of interest on advance share money in support of his plea that the amount payable for the plant and machinery by the company can be taken to be a debt. The said regulation 18 is as follows: "The Board (a) may, if it thinks fit, receive from any member willing to advance the same, all or any part of the moneys uncalled and unpaid upon any shares held by him; and (b) upon all or any of the moneys so advanced, may (until the same would, but for such advance, become presently payable) pay intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aimed as a deduction under s. 10(2)(xv). Thus, even in a case where the parties have bargained for interest on a certain amount, the said amount cannot be a debt merely on the ground that interest is paid. In Addl CIT v. Bangalore Soft Drinks P. Ltd. [1980] 126 ITR 38 (Kar), a question similar to the one arising in this case came up for consideration before the Karnataka High Court. In that case, a sum of Rs. 6,00,000 was received by the company from non-resident shareholders towards allotment of shares and kept under the head " Share capital account " awaiting permission from the Reserve Bank of India for allotment of Shares to them. A question arose as to whether during the relevant assessment year, the said sum of Rs. 6,00,000 constituted a liability and, therefore, was a debt and should have been deducted while computing the capital under r. 19A for the purpose of allowing relief under s. 80J. The court held that the amounts were paid to the company for the specific purpose of allotment of shares and were not paid by way of loan, that the amounts could be returned only if the Reserve Bank of India did not Approve of the allotment of shares, that even if there was a delay in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... towards gratuity is based on actuarial basis or other scientific method and the present discounted value of the future liability has been claimed as a deduction, the same has to be allowed. In Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53, the Supreme Court has ruled that, while working out the net profits, a trader can deduct from his gross receipts his liability to pay a certain sum for every additional year of service (which he receives from his employees) if such liability is properly ascertainable and it is possible to arrive at a proper discounted present value, and that even if the liability is a contingent one, it can be taken into account, provided its discounted present value is ascertainable on some scientific basis and that such contingent liability discounted and valued as necessary can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation. The principle laid down in the above has been followed by this court in CIT v. Andhra Prabha P. Ltd. [1980] 123 ITR 760. This court specifically dealt with the provision for payment of gratuity in that case and held that where a provision was made for a future paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ears. It is clear that if by adopting such scientific method any appropriation is made, such appropriation will constitute provision representing fairly accurately a known and existing liability for the year in question." Thus, it is clear that if an assessee by adopting a scientific method makes an appropriation towards a future liability, such appropriation will constitute a provision representing fairly accurately a known and existing liability for the year in question and, therefore, such a provision which represents the discounted present value of a future liability under the terms of a gratuity scheme on a scientific basis has to be allowed as deduction in the relevant assessment year during which such appropriation has been made. Having regard to the above principle laid down by the Supreme Court, we have to hold that the deduction claimed by the assessee-company on an actuarial basis of the present discounted value of the future liability for gratuity has to be allowed. Therefore, we have to agree with the Tribunal on this aspect of the case also. The result is, we have to answer both the questions in the affirmative and against the Revenue. Accordingly, both the ques ..... 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