TMI Blog1979 (2) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee was printing the Vijayawada edition of the daily newspaper " Indian Express " and its Sunday Edition, for Indian Express (Madurai) Private Ltd. The Madurai company, in its turn, printed for the assessee the " Andhra Prabha Illustrated Weekly " for circulation in Bangalore area. The printing charges for the illustrated weekly came to Rs. 425 for ten pages of Indian Express size. The assessee was printing the daily Indian Express and its Sunday Edition by the ordinary letter press process, whereas the Madurai company was printing the Andhra Prabha Illustrated Weekly by the offset process. Printing by offset process was costlier than by ordinary letter press process. So, the Madurai company increased the printing charges from Rs. 4.25 to Rs. 5.50 for ten pages of Indian Express size. The increase in this charge resulted in the assessee-company having to pay a sum of Rs. 1,27,245 to the Madurai company. This claim for increase in printing expenses made by the assessee was disallowed by the ITO holding that it was not a bona fide expenditure. According to him, there was no agreement between the two parties governing the substantial increase; and the resolutions approving the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inted out by the Tribunal that a written agreement is not a condition precedent for the allowance. It was also contended that this device had been adopted for getting funds for the construction of a building by another sister concern in Bombay. The Tribunal pointed out that there was no material to show that the higher recovery of printing charges found its way to the holding company in Bombay and utilised in the construction of a skyscraper in Bombay. The last contention was that there was no corresponding increase in the charges for printing Indian Express for the Madurai company by the assessee. It has been pointed out that the process employed by the Madurai company in printing the illustrated weekly being a costlier one, the charges came to be increased, while there was no need for any increase in the charges with reference to the printing by the ordinary letterpress process. Thus, every one of the contentions taken by the revenue has been examined by the Tribunal and negatived. We do not find that there is any error committed by the Tribunal in arriving at the conclusion that the amount was liable to be deducted under s. 37(2) of the Act. The first question is, accordingly, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s part of the order of the Tribunal that has given rise to the second question set out already. At the relevant time, the only provision that related to the allowance of gratuity was contained in s. 36(1)(v) of the Act. The provision, in so far as it is relevant, ran as follows: " 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28--... (v) any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust." Subsequently, a new provision, s. 40A(7), came to be introduced by the Finance Act, 1975, with effect from 1st of April, 1973. The new provision stated : " (a) Subject to the provisions of clause (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason. (b) Nothing in clause (a) shall apply in relation to-- (i) any provision made by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to s. 40A(7) from 1st April, 1973, while it was actually enacted in 1975. We need not go into the provision as it is not germane to the assessment under consideration for 1969-70. Thus, the two provisions, even taking into account s. 40A(7), take care of : (a) the claim for deduction based on payment to an approved gratuity fund, and (b) provision for payment to an approved fund and provision for payment for which a liability has arisen. We are here concerned with a third category where provision is made for a future payment, on a " scientific " method of calculation, for which no statutory provision exists. The provision made is in principle a present liability though it could be discharged later. In the present case, the sum of Rs. 1,32,653 represents an estimate of an accrued liability calculated on a " scientific " basis, which had to be discharged in future. Therefore, s. 36(1)(v), which applied to actual payments, would not stand in the way of the matter being considered in the light of the other provisions of the Act. The Supreme Court pointed out in Badridas Daga v. CIT [1958] 34 ITR 10, 15, after observing that the word " profits " had to be understood in its na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rged 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 just as receipts, though not actual receipts but accrued due, are brought in for income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business. At page 64, it was stated : " In the instant case, the question is not whether such estimated liability arising under the gratuity schemes amounts to a debt or not. The question that concerns us is whether, while working out the net profits, a trader can provide from his gross receipts his liability to pay a certain sum for every additional year of service which he receives from his employees. This, in our view, he can do, if such liability is properly ascertainable and it is possible to arrive at a proper discounted present value. Even if the liability is a contingent liability, provided its discounted present value is ascertainable, it can be taken into account. Contingent lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the contention that such liability was contingent, Lord Radcliffe observed at page 758 : "...where you are dealing with a number of similar obligations that arise from trading, although it may be true to say of each separate one that it may never mature, it is the sum of the obligations that matters to the trader, and experience may show that, while each remains uncertain, the aggregate can be fixed with some precision" In the same page, it was further observed : " But, whatever the legal analysis, I think that for liabilities as for debts their proper treatment in annual statements of profit depends not upon the legal form but upon the trader's answers to two separate questions. The first is: Have I adequately stated my profits for the year if I do not include some figure in respect of these obligations ? The second is: Do the circumstances of the case, which include the techniques of established accounting practice, make it possible to supply a figure reliable enough for the purpose? " Viewing in this line, the House of Lords allowed in principle the claim of the assessee for a deduction. In the same case, Lord Mac Dermott, at page 7 47 of the report, has observed : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability of the company in respect of gratuity was deductible. It was held, following an earlier decision of the Supreme Court in Standard Mills Co. Ltd. v. CWT [1967] 63 ITR 470, that such a deduction was not permissible. In the course of the judgment, it was observed that the decision in Metal Box Company's case [1969] 73 ITR 53 (SC) was one rendered under the Bonus Act. The attempt of the learned counsel for the revenue to confine the principle decided in Metal Box Company's case [1969] 73 ITR 53 to cases under the Bonus Act cannot be accepted. The Supreme Court in Metal Box Company's case [1969] 73 ITR 53 elaborately went into the question of the computation of " profits " under the I.T. Act, and then considered the question of allocable surplus. In order to arrive at the commercial profits, it was necessary for the Supreme Court to go into the question of computation of " profits " under the I.T. Act, as several items of expenditure deductible under the I.T. Act arise for consideration only in the context of computation of commercial profits. In fact, the consideration of decisions on the computation of profits under the I.T. Act was a necessary and essential step in examinin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility of a particular amount and where the claim is not consistent with the particular provision, then, one cannot seek to claim the amount as a deduction under the general concept of ascertaining the true profits and gains. That is not the position here. There is no provision for deduction of the amount of claim that is now before us. Section 36(1)(v), as already seen, does not apply to the matter before us nor does s. 40A(7). This is not a case where the assessee after failing to satisfy a specific provision falls back on the general concept of profits. In these circumstances, the assessee would be eligible for the allowance of the claim so long as there is no provision which stood in the way of the acceptance of the assessee's claim. In fact, this aspect has been pointed out in CIT v. High Land Produce Co. Ltd. [1976] 102 ITR 803 (Ker). In dealing with a similar claim for deduction in respect of the amount set apart for the payment of gratuity in future, Govindan Nair C.J. observed that the mere fact that a claim would not fall within s. 36 would not automatically make it unsustainable under the other provisions of the Act. That decision supports the assessee's claim here. Du ..... X X X X Extracts X X X X X X X X Extracts X X X X
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