TMI Blog1974 (6) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... l Board of Revenue, dated 3rd November, 1951, in regard to contributions to the gratuity fund in making assessments for the assessment years 1952-53 and 1953-54, was in accordance with law ? (4) Whether, on the facts and in the circumstances of the case, the assessee was entitled to a deduction in respect of the payment made to the Bombay Hospital Trust in determining the business profits of the company for the assessment years 1952-53, 1953-54 and 1954-55 ?" The first three questions relate to deduction claimed in respect of payments made towards gratuity payable to the employees of the assessee-mills while the last question relates to certain payments made to the Bombay Hospital Trust for the purpose of meeting the medical expenses of the employees who under an arrangement were to be treated by that hospital during the relevant years. We shall deal with the first three questions together and the last question separately. The assessee is a public limited company owning a chain of textile mills in Bombay City. The assessment years in question are 1952-53, 1953-54 and 1954-55 and the corresponding previous years are calendar years 1951, 1952 and 1953. In an arbitration betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... created a trust to hold the funds contributed to the gratuity fund and the trust was created by executing a deed on 20th February, 1952, and by making a payment of Rs. 20 lakhs to the trustees of that fund on 28th February, 1952, and a further sum of Rs. 1,50,466 on 4th March, 1952. Gratuity Fund Rules were also framed governing the disposal of the funds that were contributed to that trust and these rules came into force on 1st January, 1951. Rule 16 is material and it provides that an employee classified in rule No. 5(a) (being a member of the clerical staff) who has been dismissed for dishonesty or misconduct shall not be entitled to claim gratuity and any amounts contributed by the company on his account shall be transferred to "Lapse and Forfeiture Suspense Account" and in the second part of rule 16 a similar provision has been made in respect of employees classified in rule No. 5(B) (being a member of the technical and/or supervisory staff). Rule 11 is another important rule and it provides that all interest due for a year and all monies lapsed and/or forfeited during a year under these rules shall be held under separate accounts called the "Interest Suspense Account" and "Lap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellate Assistant Commissioner should issue a direction to the Income-tax Officer to grant relief in respect of the sums so contributed to the gratuity fund. The Appellate Assistant Commissioner, however, rejected the plea of the assessee and did not allow the deductions on either of the grounds sought. When the matter was taken to the Tribunal, the Tribunal dealt with the three aspects separately. As regards the circular issued by the Central Board of Revenue, the Tribunal took the view that the relief laid down in the circular relied upon by the assessee was essentially an extra legal relief and it was not for the Tribunal to consider reasonableness or otherwise of the assessee's request for relief in that behalf. In regard to the initial contribution the Tribunal agreed with the Appellate Assistant Commissioner's order but for different reasons. It rejected the claim on the ground that the said expenditure was of capital nature. It also took the view that what the industrial tribunal had fixed was not a liability to create a provision but the liability to pay gratuity as and when the employees left service and that, therefore, the company could either charge gratuity as and w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... best the assessee could claim only the gratuity relevant to the previous year. The discounted value of the assessee's liability to pay gratuity based on actuarial valuation was determined at the instance of the High Court at Rs. 1,05,200. It was held that the Government order provided that the gratuity would be payable to an employee not only in respect of his future services but also for his past services. Thus, in order to ascertain the quantum of liability as on the date the order came into effect, the past services of the employees had also to be taken into account. In the circumstances every businessman would make provision every year for his liability under the notification. Though no part of the gratuity may have been payable by the assessee in any of the earlier years, the past services of the employees had to be taken into account merely to arrive at the quantum of the liability which became payable after the notification. The liability for payment of gratuity ascertained on actuarial calculations, in which all contingencies are taken into consideration, is a liability in praesenti and is capable of ascertainment and, therefore, the sum of Rs. 1,05,200 was a permissible b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch liability could not be estimated on any fair standard, the amount claimed according to the profit and loss account should be presumed to be genuine and allowed. In that case a sum of Rs. 18.38 lakhs being estimated liability under two gratuity schemes framed by the company was deducted from the gross receipts in the profit and loss account. In 1960, the company introduced a gratuity scheme for its employees other than its officers under which gratuity was payable on the termination of an employee's service either due to retirement, death or termination of service, the amount of gratuity payable being dependent on his wages at that time and the number of years of service put in by him. The company had worked out on an actuarial valuation its estimated liability and made provision for such liability not all at once but spread over a number of years. Thus, in 1959-60, 1960-61 and 1961-62 the company allocated towards this liability Rs. 5 lakhs, Rs. 10 lakhs and Rs. 5 lakhs, respectively, from out of the profits, debiting these amounts in the profit and loss account. In all Rs. 40 lakhs had been provided in the aforesaid manner against the said liability. The practice followed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... senti had been properly assessed by adopting the method of actuarial valuation the claim for deduction was allowed by the Supreme Court. In view of the aforesaid two decisions it seems to us clear that in the instant case also setting apart of the two sums which was done by the assessee-company in 1951 will have to be allowed as business expenditure provided it could be said that the amount claimed as deduction had been arrived at by adopting a scientific method of evaluating the said liability. It was, however, urged by Mr. Joshi for the revenue that in the instant case setting apart of the two sums of Rs. 19,11,658 as initial contribution and Rs. 2,65,701 as annual contribution for the year 1951 had not been done by the assessee-company by adopting any actuarial valuation and, relying upon a decision of this court in Official Liquidator of the Sakeeria Cotton Mills Ltd. v. Commissioner of Income-tax, he contended that since no scientific method had been adopted for evaluating the liability arising in praesenti though payable in future, the deduction claimed could not be allowed. He pointed out that in the aforesaid decision also a provision for gratuity made by the assessee-co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this award, created a gratuity fund and provided for an amount of Rs. 21,77,359. The initial contribution was calculated on the basis of gratuity to which the existing employees were entitled up to the beginning of the accounting year by reference to the number of years put in by each employee. The annual contribution was calculated by reference to the additional liability which arose by reason of the year of service put in by each employee during the year of account." In other words, according to Mr. Kolah, the Tribunal could be said to have accepted the position that the calculation had been made on scientific basis, for according to him, actuarial valuation is not the only scientific method by adopting which the present value of the liability, though arising in praesenti but payable in future, could be arrived at. Mr. Joshi for the revenue, however, rejoined by contending that the calculations could be shown not to have been made on scientific basis, for he pointed out that the initial contribution of Rs. 19,11,658 actually represented the payment which the company would have been required to pay to the employees concerned had those employees either retired or resigned from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Southern Railway of Peru Ltd.). In our view, these facts constitute a distinguishing feature, on the basis of which it would not be possible to accept the department's contention before us that even for the assessment year 1953-54, the amounts which had been actually paid over to the trustees-the first one on February 28, 1952, and the other one on March 4, 1952-cannot be allowed as deduction while computing the business profits of the assessee-company. In this behalf we may usefully refer to certain observations of the Supreme Court in Commissioner of Income-tax v. Mysore Spg. Mfg. Co. Ltd. That was undoubtedly a case of expenditure having been incurred for maintaining two provident funds for the employees of the assessee provident funds which were not recognised under the Indian Income-tax Act, 1922. The contention of the revenue in that case was that under section 58K of the Income-tax Act the amounts so transferred were deemed to be in the nature of capital expenditure and that, therefore, the deduction claimed should not be allowed to the assessee. The Supreme Court held that section 58K was inapplicable to the facts of the case and, therefore, the second question arose whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d a letter from the Bombay Hospital Trust whereby the Bombay Hospital Trust offered its services for medical aid to the clerical staff of the assessee-company on certain terms. It was suggested that the assessee-company would be entitled to send the members of its clerical staff for medical, surgical or any other treatment in the hospital and that such treatment would be given to its clerical staff and no fees or any kind of remuneration would be charged to such members of the clerical staff either by the hospital or by its staff, honorary or otherwise, in any of its departments. It was also suggested that such members of the clerical staff drawing a salary of not less than Rs. 200 per month would be admitted to the diet paying class of the hospital free of charge and members drawing less than Rs. 200 per month would be admitted to the free class, and the hospital undertook to reserve and provide number of beds for the purpose. For rendering those services the Bombay Hospital Trust suggested that the assessee-company should pay to the Hospital Trust every year an amount equal to one anna from every Rs. 100 of the total of its turnover. The board of directors of the assessee-company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility which the hospital authorities had rendered to its clerical staff in those years. He further contended that normally speaking the assessee-company would have been required to incur expenditure for providing medical facilities to its own staff but instead of the assessee-company incurring that expenditure it made this arrangement with the Bombay Hospital Trust and, therefore, the Tribunal was in error in coming to the conclusion that the payments made to the hospital trust were not wholly and exclusively laid out for the purpose of business of the assessee-company. There is considerable force in this contention of Mr. Kolah and we are also in agreement with him that the finding of the Tribunal is really based on no evidence at all. In the first place, the assessee-company itself could have incurred the expenditure for providing medical facilities to its own staff and had that been done the expenditure incurred on that account would have been allowed as permissible deduction ; but instead of doing that the offer which was received from the Bombay Hospital Trust was sanctioned by the assessee-company. Secondly, the Appellate Assistant Commissioner has found as a fact on the mate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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