TMI Blog1979 (8) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the filing, of the return, nor had it debited the said amount in the profit and loss account or in the profit and loss appropriation account. In the balance-sheet for the year ending on 30th June, 1973, the staff pension and gratuity reserve stood at Rs. 7,125 both at the beginning and at the end of the year. The claim for the deduction of Rs. 1,60,233 came to be made for the first time by a letter addressed to the Agrl. ITO on 15th January, 1974. Along with the letter, a revised return was filed, and as regards the claim for gratuity, the assessee's case was that it had become a statutory liability under the Payment of Gratuity Act, 1972, which came into force on 16th September, 1972, which fell during the previous year ending on 31st March, 1973. The Agrl. ITO did not allow this claim observing that the gratuity would be allowed as a deduction as and when payment was made. On appeal, the Asst. Commr. of Agrl. I.T. confirmed the order of the assessing authority. The assessee took the matter on further appeal to the Tribunal, and the Tribunal, after elaborately considering the matter, came to the conclusion that neither the assessee's method of accounting nor its claim that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s: " The accrued liability in respect of gratuity to employees up to 30-6-73 has been provided out of general reserve. The additional gratuity liability accrued during the year has been charged to the profit and loss account." The assessee's counsel contended that the accounts had been maintained only under the mercantile system of accounting and that under such a system of accounting, the liability in present, but payable in future, is liable to be allowed as deduction. It is in this context that we have to look into the findings of the Tribunal as regards the method of accounting employed by the assessee. In para. 6 of its order for the assessment year 1973-74, the Tribunal has stated as follows : " Besides, gratuity can be dealt with in two ways, even as mentioned earlier either by debit in the year in which the death or retirement occurs or by actuarial valuation. The appellant has been following the first method." In para. 7 the finding is in the following words: " In the appellant's case, besides the fact that provision had not been made in the year, even the provision made in the subsequent year, is not on any actuarial basis. No discount has also been made for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as deduction or to avoid the taxation of any receipt, which would otherwise be taxable. The assessee cannot also change the method of accounting so as to get a double advantage by way of getting deduction for an expenditure already deducted. A change which is otherwise bona fide cannot be rejected out of consideration. In the present case, what we find from the accounts themselves is that the assessee, while being conscious of the liability which arose as result of the Payment of Gratuity Act having been passed by Parliament, did not want to make a provision therefor. In the accounts for the year ended 30th June, 1973, there is a note, which runs as follows: " The future liability in respect of gratuity payable to estate workers and employees as per the Payment of Gratuity Act, 1972, as at 30-6-73 amounts to Rs. 1,50,483. As the practice of the company is to pay gratuity to workers and employees as and when such claims arise, no provision has been made in the accounts." Thus, this note by the assessee itself shows that consistently with the method of accounting employed by it, the amount could not have been claimed as deduction in the first of the two years under considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich there was no basis made out. The other decision brought to our notice may now be briefly noticed. In Madho Mahesh Sugar Mills (P.) Ltd. v. CIT [1973] 92 ITR 503, the Allahabad High Court dealt with the claim of an assessee in respect of liability imposed on persons running sugar mills to provide gratuity to their workmen in accordance with the scale provided in a notification. In pursuance of the notification, the assessee set apart the sum of Rs. 1,37,811 and claimed it as deduction. During the pendency of the matter before the High Court, an actuarial calculation of the liability was made and this calculation came to Rs. 1,05,200. The High Court held that the liability to the extent of Rs. 1,05,200 was a permissible business expenditure in the assessment year concerned. The point to be noticed about this decision is that the assessee had actually debited in its accounts a sum of Rs. 1,37,811 on the basis of the notification and was allowed only the actuarial liability. In the present case, as seen from the printed accounts of the assessee, the assessee itself conceived that the amount need not be provided as a liability and that on the basis of the accounting method employe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. High Land Produce Co. Ltd. [1976] 102 ITR 803 and L. J. Patel Co. v. CIT [1974] 97 ITR 152 (Ker) were noticed and it is not, therefore, necessary for us to consider those decisions for our present purpose. The principle that was applied by the High Court was that only the liability towards gratuity which arose during the relevant accounting year could be allowed as deduction. It was pointed out, after referring to the decision in CIT v. High Land Produce Co. Ltd. [1976] 102 ITR 803 (Ker), that the deductions were permissible in respect of the liability for gratuity arising during the relevant accounting year and that such a liability should be valued for a particular accounting year by ascertaining the present value of the contingent liability, i. e., on actuarial principles. Thus, the Kerala High Court held that the amount could not be allowed as deduction. This decision supports the Government's stand here. The Allahabad High Court in Swedish Cotton Mills Co. Ltd. v. ITO [1978] 112 ITR 1038 considered the case of an assessee which debited its accounts on actuarial valuation. It was pointed out that the ITO was bound by the decision of the High Court rendered in Madho Mahesh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee coupled with a transfer to the reserve account, it would not be possible to examine the claim. Allowance of a claim on the basis of a mere guess-work is against all canons of taxation for arriving at the real or proper income for taxation. The liability is, in essence, a contingent liability. But the actuarial calculation takes out a good portion of the contingency aspect by the present valuation of the future payment worked out on scientific basis. It is in that sense that the liability, without the money going out, would have to be allowed as a deduction. Though there are decisions which take the view that only the amount which goes out could be allowed as deduction, there are other decisions based on the basis of the system of accounting employed, which have taken the view that even a liability in respect of a future payment is allowable as a deduction, if scientifically estimated, and such amount would have to be appropriately shown in the accounts so as to permit scrutiny whether there is any duplication of the claim. It is in this sense it is found that the assessee, without creating any such reserve of such actuarial calculation, cannot be granted the deduction. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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