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1987 Supreme(Cal) 189
High Court Of Calcutta
D.K.Sen, Shyamal Kumar Sen, JJ.
Commissioner Of Income Tax
Vs.
Steel Rolling Mills Of Bengal
Decided On : Jun 11, 1987
Advocate Appeared:
A.N.Bhattacharya, R.N.Bajoria,
An assessee is entitled to claim deduction of a provision made for payment of gratuity to its employees under S. 37 of the Income-tax Act, 1961, where the liability to pay gratuity arises under a statute and the provision is made on the basis of actuarial calculation.
Headnote:
INCOME TAX - GRATUITY - DEDUCTION - LIABILITY UNDER STATUTE - ACTUARIAL CALCULATION - WEST BENGAL EMPLOYEES' PAYMENT OF COMPULSORY GRATUITY ACT, 1971 - S. 36(1)(V), S. 37, S. 40A(7) OF INCOME TAX ACT, 1961.
Fact of the Case:
The assessee claimed deduction for a provision made for payment of gratuity to its employees on the basis of actuarial calculation. The assessee's claim was disallowed by the Income-tax Officer but allowed by the Appellate Assistant Commissioner and the Tribunal. On reference, the question arose whether the assessee was entitled to claim deduction of the provision made for gratuity.
Finding of the Court:
The court held that the assessee was entitled to claim deduction of the provision made for gratuity. The court noted that the West Bengal Employees' Payment of Compulsory Gratuity Act, 1971, came into force during the relevant assessment year and created a liability on the assessee to pay gratuity to its employees. The court also noted that the assessee had made the provision for gratuity on the basis of actuarial calculation, which was a legal and scientific method of estimating the liability.
Issues: Whether the assessee was entitled to claim deduction of the provision made for gratuity.
Ratio Decidendi: The court held that the assessee was entitled to claim deduction of the provision made for gratuity on the following grounds: * The West Bengal Employees' Payment of Compulsory Gratuity Act, 1971, created a liability on the assessee to pay gratuity to its employees. * The assessee had made the provision for gratuity on the basis of actuarial calculation, which was a legal and scientific method of estimating the liability. * The assessee was entitled to claim deduction of the provision under S. 37 of the Income-tax Act, 1961, as it was an expenditure incurred for the purpose of business.
Final Decision: The court answered the question referred in the affirmative and in favour of the assessee.
1. THE facts on record which are material and the proceedings leading up to this reference are. shortly, that Steel Rolling Milts of Bengal, Ltd., the asses-see, was assessed to income-tax for the assessment year 1972-73, the relevant accounting year ending on 31/7/1971. In the said assessment year, the asses-see originally filed its return on 18 May 1972. Subsequently, the asses-see filed a revised return on 30 September 1974, which was accepted. The asses-see claimed deduction on account of a provision made for payment of gratuity to its employees of Rs. 57,643. 00 on the basis of actuarial calculation supported by a certificate of an actuary. During the relevant assessment year, the West Bengal Employees payment of Compulsory Gratuity Ordinance, 1971, was promulgated and came into force on 14 June 1971. The said Ordinance was replaced by the West Bengal Employees' payment of Compulsory Gratuity Act, 1971, which was promulgated some time in August 1971, with retrospective effect from 14 June 197l. The Income-tax Officer disallowed the claim of the asses-see for deduction on account of the aforesaid provision for gratuity.
2. BEING aggrieved, the asses-see preferred an appeal from the said assessment before the appellate Assistant Commissioner. It was contended on behalf of the asses-see before the appellate Assistant Commissioner that the liability in respect of payment of gratuity accrued on the last day of the accounting period relevant to the assessment year involved. The Appellate Assistant Commissioner held, following the decision of the Bombay High court in Official Liquidator, Sakseria Cotton mills, Ltd. v. Commissioner of lname-tax [1971 (81) I. T. R. 528], that liability in respect of gratuity was allowable on the basis of actuarial and scientific calculation. The Appellate Assistant Commissioner accepted the certificate of the actuary furnished by the asses-see that the present discounted liability for payment of gratuity to the various employees of the assess -see retiring in future amounted rs. 57,643. Following the decision of the bombay High Court in Tata Iron and Steel company, Ltd. v. D. V. Bapat, Income-tax officer [1195 (101) I. T. R. 292], and an unreported decision of the Calcutta High court in Civil Rule No. 55 (W) of 1975, the Appellate Assistant Commissioner held further that the asses-see was entitled to deduction of the said amount of Rs 57,643 on the basis of the West Bengal Employees' payment of Gratuity Act, 1971, as ascertained on actuarial principles. The Appellate assistant Commissioner directed the income-tax Officer to allow deduction of the said amount of Rs. 57,643. 00 in computing the total income of the asses-see.
Being aggrieved, the revenue preferred an appeal from the order of the Appellate assistant Commissioner to the Income-tax appellate Tribunal. It was submitted on behalf of the revenue before the Tribunal that liability for payment of gratuity even under the provisions of the West Bengal employees' Payment of Compulsory Gratuity act, 1971, was only a contingent liability. It was submitted further that the assessee did not create any approved fund under s. 36 (1) (v)of the Income-tax Act, 1961. It was contended that the assessee was not entitled to any deduction on account of provision for payment of gratuity.
3. THE Tribunal noted that the West bengal Employees' Payment of Gratuity Act, 1971, came into force during the relevant assessment year. The liability of the assessee for payment of gratuity to its employees on the basis of actuarial calculation was accepted to be Rs. 57,643. Following the decision of the Bombay High Court relied on by the appellate Assistant Commissioner and also a decision of the Allahabad High Court in madho Mahesh Sugar Mills, (Private), Ltd. v. Commissioner of Income-rax [1973 (92)I. T. R. 503], the Tribunal held that the assessee was entitied to claim deduction of the amount found to be payable to its employees on account of gratuity as ascerta
