M.R.A. Ansari, J.
(1) The following two questions have been referred to this Court by the Income-tax Appellate Tribunal, Delhi Bench, (hereinafter referred to as the Tribunal) under section 66(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act:- 1. Whether on the facts and in the circumstances of the case, the loss of Rs. 66,417.00 was allowable under section 10(1) of the Indian Income-tax Act, 1922 or could be set off against the company's profits of the business under proviso (a) to Explanationn 2 of section 24(1) of the said Act? 2. Whether on the facts and in the circumstances of the case, Rs. 52,633.00 claimed as business expenditure for assessment year 1957-58 and Rs. ll,578.00 claimed as such for assessment year 1958-59 under section 10(2) (xv) of the Indian Income-Tax Act, 1922, have rightly been disallowe ?
(2) The facts relevant to the first question may now be stated. M/s. Delhi Flour Mills Co. Ltd., New Delhi, (hereinafter referred to as the assessed) carried on the following businesses:- 1. Grinding of wheat for manufacturing atta and wheat products. 2. Manufacturing of ice and maintaining a cold storage. 3. Washing, calendaring and dyeing business which is a part of the hosiery department.
(3) During the accounting year relevant to the assessment year 1957-58, the assessed entered into forward transactions in Matra (a substitute of gram). These transactions comprised purchases amounting to Rs. 6.82,141.00 and sales amounting to Rs. 6,16,124.00. There was thus a loss amounting to Rs. 66,417.00 resulting from these forward transactions. These transactions were concluded not by actual delivery of the goods but by payment of differences. These transactions were, thereforee, in the nature of 'speculative transactions' within the meaning of Explanationn 2 to section 24(1) of the Act. The assessed claimed a set off of the loss of Rs. 66,417.00 which it had sustained in these forward transactions on two grounds, namely :- (i) that these transactions were in the nature of hedging transactions which were saved by the proviso (a) to Explanationn 2 of section 24(1) of the Act; and (ii) that even if these transactions were in the nature of speculative transactions, the losses sustained by the assessed in such transactions were liable to set off against its profits in other business.
(4) The assessed's claim was, however, rejected by the Income-tax officer, the Appellate Assistant Commissioner and also by the Tribunal.
(5) The second ground state above on which the assessed claimed the set off of the loss of Rs. 66,417.00 against its other business profits was based upon two decision of the Allahabad High Court, namely.- 1. Jagannath Mahadeo Prasad v. Commissioner of Income- tax (1965) 55 Itr 502 and 2. Gauri Dutt Bhagwan Dass v. Commissioner of Income- tax : 56ITR423(All) . in which the view was taken that an assessed was entitled to a deduction of the loss in speculative transactions while computing the profits and gains under the head 'profits and gains from business' under section 10 of the Act. Some of the other High Courts, namely, Bombay, Punjab, Mdaras, Andhra Pradesh, Calcutta and Gujarat, had, however, taken a contrary view. The controversy was ultimately settled by the Supreme Court in the case of Commissioner of Income-tax tax v. Kantilal Nathuchand Sami : 63ITR318(SC) .in which it was held as follows:-
THEprincipal clause of section 24(11) lays down that, if there be a loss of profits or gains in any year under any of the heads mentioned in. section 6, that loss has to be set off against the income, profits or gains of the assessed under any other head in that year. If this provision had stood by itself without any provisos, the result would have been that. all losses incurred by an assessed under any of the heads mentioned in section 6 would be adjusted against profits under all other heads, and then the total income of the assessed would be worked out on that basis. The first proviso to this sub-section, however, lays down an exception to this general rule contained in the principal clause. The exception relates to income from business consisting of 'speculative transactions, and places the limitation that losses sustained in speculative transactions are not to be taken into account in computing the profits and gains chargeable under the head 'Profits and gains of business, profession or vocation', except to the extent that they will be set off against profits and gains in any other business, which itself consists of speculative transactions. The effect of the proviso is that if there are profits in speculative business, those profits .are added to income under the other heads mentioned in section 6 for purposes of computing the total income of the assessed in order to determine the tax under section 23 of the Act. On the other hand, losses in speculative business are not to be taken into account when computing the total income, except to the extent to which they can be set off against profits from other speculative business. The first proviso, thus, clearly limits the applicability of the principal clause of section 24(1); and, when applied, it governs the manner in which the total income of the assessed is to be computed.
(6) The above rule was re-affirmed by the Supreme Court in a latter decision in Commissioner of Income-tax v. Jagannath Mahadeo Prasad : 71ITR296(SC) . In view of the above decisions of the Supreme Court, Shri Kirpa Ram Bajaj, learned counsel for the assessed, did not press before us the second ground on which the assessed had claimed the set off of the loss of Rs. 66,417.00.
(7) The first ground on which the assessed has claimed the set off of its loss in the forward transactions referred to above is based upon proviso (a) to Explanationn 2 of section 24(1) of the Act which reads as follows:-
PROVIDED that for the purposes of this section,- (a) a contract in respect of raw materials or marchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him shall not be deemed to be a speculative transaction.
(8) According to the learned counsel, a forward transaction in any commodity which has been entered into for the purposes of guarding against the loss through future price fluctuations in respect of the goods manufactured or sold by the assessed would come within the scope of the proviso and that it is not necessary that the forward transactions should be in respect of the same commodity or goods which are manufactured or sold by the assessed. His contention, thereforee, is that even though the forward transactions in the present case were in Maira which was not either the raw material used by the assessed for manufacture of atta or wheat products or the article sold by it such forward transactions must be treated as hedging transactions within the meaning of the proviso. The learned counsel has not cited any decision before us in support of this contention, but has drawn our attention to the report of the Direct Taxes Administration Enquiry Committee 1958-59 which contains extracts from the speech of the Finance Minister made in Parliament while piloting proviso (a) to Explanationn 2 of section 24(1) of the Act, It is only in cases where the language of any section of the statute is vague and the language is capable of being interpreted in different ways that a Court may derive some guidance from the speech of the Minister who was piloting the particular piece of legislation in the Legislature. In our view, the language of proviso (a) to Explanationn 2 is quite clear and we need not, thereforee seek any guidance in the interpretation of this proviso from the speech of the Finance Minister. Even if we do refer to the relevant portions of the speech of the Finance Minister, we do not find anything in them to support the contention of the learned counsel. This is what the Finance Minister stated in the speach:-
INthe Bill, as it is drafted, we have excluded hedging transactions, the common hedging transactions, that is a mill buys cotton and sells cloth. There are various other varieties of hedging transactions and after discussions with the representatives of trade and business, I have come to the conclusion that they are also legitimate. One category of transactions is the one I referred to just now: a man wants to protect himself against any loss in certain scripts he holds, but he sells some other scripts which he expects will have a reverse movement. The object is to save that kind of transactions. The other is where there are jobbers and brokers and others-it is their regular business and their ordinary transactions are not transactions such as we want to avoid, namely, selling and buying of losses.
(9) The examples which the Finance Minister gave of hedging transactions are not of the same nature as the forward transactions entered into by the assessed in the present case. The learned counsel also referred to some other portions of the report of the Direct Taxes Administration Enquiry Committee. But it is not necessary for us to express our view regarding the same, because views expressed in such reports need not necessarily be taken as reflecting the intention of the Legislature. In fact it may well be that if the views expressed by the Committee were not clearly reflected in the statute, it may be understood that the Legislature did not accept such views.
(10) The learned counsel also referred to a decision of the Central Board of Direct Taxes. Decisions of the Central Board are not binding upon Courts. They are meant only for the guidance of the departmental authorities. If these departmental decisions are not in accordance with the provisions of the statute, they have to be disregarded. The decision referred to by the learned counsel appears at page 1110 of Iyengar's commentary upon the Income-tax Act and it is to the following effect :-
ATTENTIONis invited to Board's letter No. 13(102) IT/55 dated 8-9-1954 in which it was stated that as regards hedging in raw materials, the Income-tax Officers should not be too particular about the quantities and timing so long as the transactions constitute genuine hedging. Similarly, Income-tax Officers should not treat genuine hedging transactions in connected commodities as speculative transactions though the transactions may not be in identically the same commodity. Thus, hedging transactions in one type of cotton against another type of cotton, one variety of oil seed against another, one type of grain against another should not be treated as speculative transactions provided the other conditions of Expln. 2 to s. 24 are satisfied. The conditions mentioned in the last two sentences of the decision on point (i) above will apply here also.
(11) Even if we apply this decision to the facts of the present case, it is clear that the forward transactions made by the assessed were not in connected commodities because Matra comes under the category of pulses, whereas wheat comes under the category of grain. The two cannot be called connected commodities the nature mentioned by the Board.
(12) From the plain language of the proviso it is quite clear that the raw materials or merchandise in respect of which the forward transactions have been made by a person must have a direct connection with the goods manufactured or merchandise sold by him. Otherwise, the use of the words 'raw materials' would have no special significance. It must be presumed that the Legislature deliberately used these words so as to give them a special significance in relation to the goods manufactured by the assessed. In the present case, Malm may be considered to be raw material for manufacturing Basin or some other articles made out of Matra. Matra cannot certainly be considered as raw material for the manufacture of atta and other wheat products. thereforee, the forward transactions made by the assessed in respect of Matra cannot be treated as hedging transactions within the meaning of proviso (a) to Explanationn 2 and the loss sustained by the assessed in such transactions cannot be set off against his profits in the business of manufacturing atta and other wheat products.
(13) We find support for this view from two reported decisions, one of the Andhra Pradesh High Court and the other of the Gujarat High Court. In Omkarmal Agarwal v. Commissioner of Income-tax : 67ITR329(AP) , the assessed was carrying on business in buying raw cotton, ginning it, and converting it into lint with the aid of machinery, and selling lint and cotton seed. The assessed entered into forward contracts for the delivery of lint at a future date, and these contracts were settled without effecting delivery of the goods and even before the time fixed for completion of the contract. There were no contracts in respect of raw materials or merchandise. The assessed claimed that the transactions were not speculative transactions since according to him they were hedging contracts to guard against possible loss from another set of transactions. The High Court rejected the assessed's claim holding that the transactions in question were not in the nature of hedging transactions. We may usefully refer to the following observations of the high Court:-
THEnature of the business conducted by the assessed was buying kapas (raw cotton), ginning it and selling lint and cotton seed. In respect of the impugned transactions there are only one set of contracts and not two sets as required by clause (a) of the proviso to Explanationn 2. That proviso contemplates two contracts: (i) a contract for actual delivery of goods manufactured by the assessed or merchandise sold by him, and (2) a contract in respect of raw materials or merchandise entered into in the course of the assessed's manufacturing or merchanting business to guard against loss through future price fluctuations. In the present case there were no contracts in respect of raw materials or merchandise. There were only one set of contracts for the delivery of the manufactured product, namely, lint at a future date, and even these contracts were settled without making an actual delivery and even before the time fixed for completion of the contract. So, as found by the Appellate Tribunal in agreement with the Commissioner, there are no such contracts here as are contemplated by clause (a) of the proviso to Explanationn 2 of section 24(1). It follows that these transactions are indubitably of a speculative nature as envisaged by Explanationn 2 to section 24(1). The loss sustained by the assessed in respect of these transactions cannot be set off against the profits earned by him in any other business. The Appellate Tribunal, in our opinion, is thereforee perfectly right in its view that the speculative transactions in question are not saved by clause (a.) of the proviso to Explanationn 2 of section 24(1).
(14) In Chimanlal Chhotalal v. Commissioner of Income-tax : 69ITR129(Guj) , the assessed carried on business as a dealer in cotton and cotten seeds. The assessed entered into certain forward contracts of sale of Kapas (unginned cotton in pods) and cotton bales. The assessed sustained a loss in these forward contracts and claimed a set off of this loss against his business income on the ground that these forward transactions were in the nature of hedging transactions. The High Court rejected the assessed's claim. The proviso to Explanationn 2 was interpreted by the High Court in the following manner :-
THEproviso takes out of the ambit and operation of the second Explanationn a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business' and, prima facie, these words would include not only a contract for purchase of raw materials or merchandise but also a contract for sale of raw materials or merchandise. But such contract, under the proviso, has to be hedging contract entered into by the person concerned for the purpose of guarding himself against loss through future price fluctuations in respect of his 'contracts turn actual delivery of goods manufactured by him or merchandise sold by him'. It is by way of hedging 'against contracts for actual delivery of goods manufactured by him or merchandise sold by him' that a person can enter into 'a contract in respect of raw materials or merchandise' within the meaning of the proviso. Now in the case of a person carrying on manufacturing business 'contracts for actual deliver of goods manufactured by him' would obviously be contracts of sale by such person and in respect of such forward contracts of sale he is permitted to enter into a hedging contract and the hedging contract in such a case must, thereforee, necessarily be a forward contract of purchase. Similarly, when we turn to 'contract for actual delivery of merchandise sold by him', that is, by a person carrying on merchanting business, it is clear that the contracts which are contemplated are forward contracts for sale of merchandise and in respect of which such forward contracts of sale, a hedging contract of purchase can be entered into by such person within the meaning of the proviso. The hedging contracts contemplated by the proviso are thereforee clearly contracts of purchase and not contracts of sale. It is, thereforee, clear that proviso (a) takes out from the scope and ambit of the second Explanationn only forward contracts of purchase of raw materials or merchandise entered into by an assessed in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his forward contracts of sale for actual delivery of goods manufactured by him or merchandise sold by him. Where forward contracts of sale are entered into by an assessed as hedge contracts for the purpose of guarding him against loss through future price fluctuations in respect of his forward contracts of purchase, such forward contracts for sale are not covered by proviso (a) and they are not taken out of the definition of speculative transactions in the second Explanationn.
(15) In order to decide the point at issue in the present case, it is not necessary for us to express our assent or dissent with the view taken by the Andhra Pradesh High Court that there must necessarily be two contracts, one for actual delivery of the goods manufactured by the assessed or merchandise sold by him and the other, a contract in respect of raw materials or merchandise entered into in the course of the assessed's manufacturing or merchanting business to guard against loss through future price fluctuations in order to bring the forward transactions within the scope of proviso (a) to Explanationn 2 or with the view of the Gujarat High Court that a contarct in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business should only be a contract for the purchase of the raw materials or merchandise and that such a contract does not include a contract for sale of the raw materials or merchandise. We are, however, in respectful agreement with the views expressed by these High Courts to the extent that the raw material in respect of which the assessed has entered into the forward transactions must be the same raw material which is used by him in his manufacturing business. The forward transactions in Matra made by the assessed, thus, do not fall within the scope of proviso (a) to Explanationn 2 and the assessed cannot claim a set off of the loss sustained by it in such worward transactions in Mali'a against his profits in the business of grinding wheat for manufacturing atta and wheat products. The first question is, thereforee, answered in the negative, i.e., against the assessed and in favor of the Revenue.
(16) The relevant facts with regard to the second question may now be stated. Following disputes between the assessed and its employees, a settlement was reached between them on 14-2-1956. Clause (4) of the memorandum of settlement which was in Hindi and which has been translated into English by the Tribunal provided that-
THEemployees on completing 10 years of service or more will be paid, on leaving work on their own will, on total service, gratuity at the rate of 15 days basic pay for every year's service but not exceeding in any case 10 months basic salary. In case of death, the condition of 10 years service shall not apply.
(17) In pursuance of this agreement, the assessed transferred a sum of Rs. 55,712.00 and Rs. 12.001.00 to the Employees Gratuity Fund as representing the gratuity payable to its employees under the agreement for the assessment years 1957-58 and 1958-59 respectively. The assessed showed these amounts under the head 'current liabilities and provision' in its balance sheets as on 31-10-1959 and 31-10-1957 respectively. It would also appear from the documents annexed by the Tribunal along with the statement of the case that on 31-10-1956 The assessed had made the following entry in the Journal Voucher:-
DEBIT:To amount irrevocably transferred to gratuity and welfare fund G/c to provide against the liability of the Co. in terms of agreement dated 14-2-56 including 55, 712-2-3 Rs. 3,078/11.00 already paid during the year. Credit : Gratuity and Welfare payable to staff fund by amount as above against Rs. 55,712-2-3.
(18) It would also appear from these documents that the assessed had given credit of the amount of gratuity payable to the employees under the agreement in the account of each of the employees. The assessed claimed allowance for these two amounts from its income for the two assessment years under section 10(2) (xv) of the Act. The Income-tax Officer allowed the assessed's claim in respect of the first assessment year only to the extent of Rs. 3,078/11.00which was the amount actually paid to the employees during that year and disallowed the balance of Rs. 52.633.00. Similarly, the Income-tax Officer allowed the assessed's claim in respect of the second year only to the extent of Rs. 425.00 which was the amount actually disbursed during that year and disallowed the balance of the assessed's claim amounting to Rs. 11,576.00. The disallowance made by the Income-tax Officer was confirmed by the Appellate Assistant Commissioner as well as by the Tribunal.
(19) The crucial question to be considered is whether the amount which was disallowed by the Income-tax Officer represented the liability of the assessed which had accrued in the respective years under reference. If the answer to this question is in the affirmative, then the fact that the assessed did not actually pay these amounts during these years but merely transferred these amounts to the Employees Gratuity Fund would not Justify the rejection of the assessed's claim in view of the fact that the assessed was following the mercantile system of accounting. According to the mercantile system of accounting as explained by the Supreme Court in Keshav Mills Ltd. v. Commissioner of Income-tax : 23ITR230(SC) , 'That system brings into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed'. The fact that the assessed continued to have the control and dominion over the amounts in question would not make any difference. This appears to be the only ground on which the Tribunal rejected the assessed's claim. The learned counsel for the Revenue has, however, supported the order of the Tribunal on other grounds to which we shall presently refer.
(20) As already stated, the assessed's case depends upon the answer to the question whether a liability has arisen to the assessed during the years under reference in respect of the amounts claimed by him. The assessed's case is that under the agreement dated 14-2-1956 the employees of the assessed were entitled to receive gratuity at the rate stipulated in the agreement and that there was a corresponding liability on the assessed to pay the gratuity as soon as the employees had completed ten years' service, although the actual payment of the gratuity was deferred to a later date, namely, when the employee left the assessed's service or when he died before leaving service. Shri Bajaj, learned counsel for the assessed, argues that like every prudent businessman, the assessed had to make provision for the payment of the gratuity to which the employees had become entitled every year and that it would throw an unnecessary heavy burden on the assessed if it were to pay the whole gratuity out of the income of the particular year in which the employee either left service or died. The learned counsel has referred to a decision of the Supreme Court in Metal Box Company of India Ltd.v. Their Workmen : (1969)ILLJ785SC . In that case, the question for consideration before the Supreme Court was whether a sum of Rs. 18.38 lakhs, being the estimated liability under two gratuity schemes framed by the assessed-company, which was deducted from the gross receipts in the profit and loss account, could be taken into account in arriving at the amount of bonus payable to the employees of the assessed-company under the Payment of Bonus Act, 1965. In 1960 the assessed-company introduced a gratuity scheme for its employees other than its officers. Under that scheme, 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 acturial 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 so far been provided in the aforesaid manner against the said liability. The practice followed by the company was that every year the company worked out the additional liability incurred by it on the employees putting in every additional year of service. Whenever an employee retired, the amount of gratuity payable to him was debited against the amount provided for as aforesaid. The amount so paid was not debited in the profit and loss account as an outgoing of expenditure but against the estimated liability provided as aforesaid. In 1964-65, the company introduced a similar gratuity scheme for its officers. According to the company, the estimated liability under this scheme was worked out at Rs. 20 lakhs. But, instead of providing the whole of it, it provided only Rs. 11.31 lakhs. It also provided Rs. 7 lakhs under the scheme for its non-officers against the liability for service put in by them in that year. Out of Rs. 18.38 lakhs so provided. the company paid as gratuity Rs. 1,31,585.00 and Rs. 87.295/ to officers and other employees who retired during 1964-65, debiting as aforesaid these amounts not as an outgoing or expenditure but against the said amounts of Rs. 11 lakhs and Rs. 7 lakhs.
(21) The company claimed that it was entitled to deduct the balance of Rs. 16 lakhs from the gross receipts in the profit and loss account while working out its net profit. The workmen contended that the company could deduct from the gross receipts only Rs. 1.31 lakhs and Rs. 87,000.00 actually paid during the year. The company, on the other hand, maintained that what it had done was legitimate and was warranted by the principles of accountancy and, thereforee, the whole amount of Ra. 18.38 lakhs was deductible in arriving at its net profits. The Supreme Court posed for itself the following two questions :- 1. Whether it is legitimate in such a scheme of gratuity to estimate the liability on an actuarial valuation and deduct such estimated liability in the profit and loss account while working out its net profits and 2. If it is, whether such appropriation amounts to a reserve or a provision ?
(22) The Supreme Court then proceeded to answer the first question as follows :-
INthe case of an assessed maintaining his accounts on mercantile system, a liability already accrued, though to be discharged 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 account.incy. 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 grains of the business.
The Supreme Court noticed the distinction between a contingent liability which did not amount to a debt under section 2(m) of the wealth-tax Act and a contingent liability under the Income-tax Act and it observed as follows :- .
THOUGHsuch a liability is a contingent liability and thereforee not a 'debt' under section 2(m) of the Wealth-tax Act, it would be deductible under the Income-tax Act while computing the taxable profits. 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 liabilities discounted and valued as necessary can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taxing them into account.
(23) The Supreme Court also quoted with approval the following observations of Lord Redcliffe in Southern Railway of Peru Ltd. v. Owen (1957) A.C. 334 'Now the question is, how ought the effects of this statutory scheme to be reflected in the appellant's accounts of the annual profits arising from its trade One way, which is certainly the simplest one, is to let the payments made fall entirely as expenses of the year of payment and ignore any question of making provision for the maturing obligation during the years of service that proceed it. . .. It has one considerable advantage; no element of estimate or valuation appears in the profits assessment and nothing is charged to profits except the actual cash outgoing. But, when this has been conceded, I think that there is the very serious disadvantage to be set against the cash basis that it affords a comparatively inefficient method of arriving at the true profits of any one year. The retirement benefit is not, obviously, paid to obtain the service-given in the year of retirement. The incidents of retirement payments must be variable from year to year, and they may inordinately depress the profits of one year just as they may in ordinately inflate the profits of another. It is not charged on the average of its annual profits. Tax rates and allowance themselves vary and, apart from that, to charge tax on a profit unduly accelerated or unduly deferred is, in my opinion, no more respectable an achievement than to admit that the annual accounts of business do in some cases require the introduction of estimates or valuations if a true statement of profit is to be secured. Another method is that which the appellant is seeking to establish with regard to its assessments for the four years 1947-1950. . . What the appellant claims the right to do is to charge against each year's receipts the cost of making provision for the retirement payments that will ultimately be thrown upon it by virtue of the fact that it has had the benefit 'of its employees' services during that year. As a corollary it will not make any charge to cover the actual payments made in the year in respect of retirement benefits. Only by such a method, it is said, can it bring against the receipts of the year the true cost of the services that it has used to earn those receipts. Generally speaking, this must, I think, be true. For, whereas it is possible that any one of its many employees may forfeit his benefits and so never require a payment, the substantial facts of the situation are that when the company has paid every salary and wage that is due for current remuneration of the year it has not by any means wholly discharged itself of the pecuniary burden which falls upon it in respect of the year's employment'.
(24) The Supreme Court concluded the answer to the first question by observing that:-
INour view, an estimated liability under gratuity scheme, such as the ones before us, even if it amounts to a contingent liability and is not a debt under the Wealth-tax Act, if properly ascertainable and its present value is fairly discounted is deductible from the gross receipts while preparing the P. & L. account.
(25) The Supreme Court then answered the second question in the following manner:-
ANamount set aside out of profits and other surpluses, not designed to meet a liability, contingency, commitment or diminution in value of assets known to exist at the date of the balance-sheet is a reserve but an amount set aside out of profit and other surpluses to provide for any known liability of which the amount cannot be determined with substantial accuracy is a provision.
(26) The Supreme Court held that it was only a reserve that could be added back while computing the gross profits but not a provision.
(27) The several observations made by the Supreme Court which we have quoted above, though made in the context of the bonus payable under the payment of Bonus Act, 1965, are, in our view, equally applicable to the question for consideration before us, namely, whether the provisions made by the assessed for the payment of gratuity under the agreement dated 14-2-1956 were in the nature of an accrued liability of the assessed and which were liable to be taken into account in computing the income of the assessed for the years under reference.
(28) The principles enunciated by the Supreme Court in the case of Metal Box Company of India Ltd. were applied by the Allahabad High Court to a case under the Income-tax Act which is in many respects similar to the case before us. In Madho Mahesh Sugar Mills (P) Ltd. v. Commissioner of Income-tax (1973) 92 Itr 503 the U.P. Government issued a notification setting out a scheme for working out the wage structure, etc., of employees in sugar industry. According to this scheme, gratuity was payable to the employees according to the rates mentioned therein on the occurrence of the following events :-
1.On death while in employment, 2. On attainment of the age of superannuation, 3. On retirement or resignation due to continued ill-health, and 4. On resignation or on termination of employment for any reason other than for serious misconduct.
(29) In pursuance of this notification, the assessed in that case set apart a total sum of Rs. 1,37,811.00 for payment of gratuity and made an appropriate entry in its books of accounts crediting the gratuity account and debiting the profit and loss account. The assessed claimed deduction of this amount in computing its income. The Income-tax authorities as well as the Tribunal disallowed the assessed's claim on the ground that the liability of the assessed for payment of gratuity in the relevant accounting period was not ascertained and it was only a contingent liability which the assessed had to meet at a future date as and when a particular event took place. The High Court, however, allowed the assessed's claim and in doing so, made the following observations :-
NOW,it cannot be disputed that every expenditure incurred by an assessed wholly and exclusively for purposes of business is to be allowed as deduction in the computation of the net profit of a business for the purposes of assessment to income-tax. It can also not be disputed that the payment of gratuity to workmen of a business concern would be an expenditure of that nature but the expendiure which is allowable in a particular year must be certain and capable of ascertainment. If the liability is uncertain and contingent, it cannot be allowed as a deduction. Under the notification aforesaid a liability was cast upon the assessed to pay gratuity to its workmen in accordance with the scale provided in that notification. The gratuity is payable when a workman dies, retires, resigns or is removed from service. These events no doubt take place in the future but they cannot be said to be uncertain. The services of every workman are bound to come to an end on account of one or the other causes nominated above. Under the scheme every employer is bound to pay gratuity to a workman for his past and future services. In the circumstances every businessman would make provision every year for his liability under the notification. Under the mercantile system of accounting an expenditure is admissible not only when it is actually paid but when the liability for the expenditure is incurred. The only question is as to whether such a liability can fairly and accurately be ascertained in a particular year.
(30) Applying the principles enunciated by the Supreme Court in Metal Box Company of India Ltd. to the facts of the case before us, we find that by virtue of the agreement dated 14-2-1956, every employee of the assessed who has completed 10 years' service is entitled to receive gratuity at the time when he voluntarily leaves the assesses service and further that even in the case of employees who have not completed 10 years' service' gratuity would be payable to their legal heirs on their death while in service. The gratuity is payable at the rate of 15 days basic pay of each year's service subject to a maximum of 10 months' basic salary. As observed by Lord Radcliffe in the case of Southern Railway of Peru Ltd., v. Owen 'the retirement benefit is not obviously, paid to obtain the services given in the year of retirement' and further that 'what the appellant claims the right to do is to charge against each year's receipts the cost of making provision for the retirement payments that will ultimately be thrown upon it by .virtue of the fact that it has had the benefit of its employees' services during that year'. In other words, the gratuity payable to an employee represents a part of the emoluments payable to him for rendering service during each year. The right to receive gratuity accrues to the employee as soon as he completes one year of service and as a corollary, the liability to pay the gratuity to the employee arises to the assesses at the end of each year. The amount of the liability is also ascertainable and there is no question in the present case of the discounted present value of the liability being not ascertainable. It is no doubt true that the actual payment of the gratuity is deferred to a later date on the happening of a certain event, namely, death or voluntarily retirement of the employee. But as observed by the Allahabad High Court, these are not uncertain events. thereforee, the provision made by the assessed for the payment of gratuity under the agreement dated 14-2-1956 is in the nature of a revenue expenditure in respect of the assessment years under reference.
(31) Shri B. N. Kirpal, learned counsel for the Revenue, contends that under the agreement dated 14-2-1956 gratuity is payable to the employees only on the happening of two contingencies, namely, death or voluntarily retirement of an employee after 10 years' service and that the gratuity is not payable under other contingencies, such as, retirement or the employee on attaining the age of superannuation, retrenchment or dismissal from service. We cannot construe the agreement as denying gratuity to an employee when he retires from service on attaining superannuation. It would be unreasonable to say that in order to become entitled to the gratuity, an employee must leave the service one day before he attains the age of superannuation. We however, agree with the construction placed by the learned counsel for the Revenue on the agreement to this extent, namely, that gratuity will not be payable to an employee if he is dismissed from service or even in cases of retrenchment. But at the same time, we cannot accept his contention that for this reason, the liability of the assessed for payment of gratuity to its employees under the agreement dated 14-2-1956 did not accrue during the years under reference. The learned counsel seeks support for his contention from the decision of the Supreme Court in the case of Indian Molasses Co. (Private) Ltd.' v. Commissioner of Income-tax : 37ITR66(SC) . In that case, H was the managing director of the assessed company, who had by 1948 served the company for 13 years and was due to retire at the age of 55 years on September 20, 1955. In implementation of an agreement to provide a pension for him after his retirement the company paid a sum of 8,208 to certain trustees and executed a trust deed on September 16, 1948, whereby it undertook to pay annually 326 for six consecutive years. The trustees undertook to hold the sums upon trust for taking out a deferred annuity policy in the name of the trustees with an insurance society on the life of H under which .720 per annum would be payable to H for life from September 20, 1955. The trust deed also provided that the trustees could, if they so desired, take out instead a deferred longest life policy in favor of H and Mrs. H for an annuity of 558 payable during their joint lives from that date, provided that if H died before he attained the age of 55 years the annuity payable to Mrs. H would be 611. Should H die before attaining the age of 55 years the trustees were to purchase with the capital value of the deferred annuity policy an annuity for Mrs. H. The trustees took out a policy providing for an annuity of 563 if both H and Mrs. H be living on September 20, 1955, an annuity of 720 if Mrs. H should die before that date and an annuity of 645 if H should die before that date leaving Mrs. H surviving him. There was a special provision in the policy which entitled the trustees to surrender that annuity for the capital sum of 10,169 after giving notice. Clause Iii of the Second Schedule to the policy provided for the return of all premiums paid to the insurance society should both H and Mrs. H die before September 20, 1955, and under clause Iv the trustees were entitled to surrender the contract any time before that date for a cash surrender value. In the assessment years 1949-50, 1950-51, 1951-52 and 1952-53, the assesses claimed deduction of the initial sum and the yearly premia from its profits under section 10(2) (xv) of the Income-tax Act. The Supreme Court disallowed the assessed's claim on the ground that as until September 20, 1955, the assessed company had dominion through the trustees over the sums paid at least in two circumstances, viz. under the special provision and clause Iii of the Second Schedule to the policy, and there was a possibility of there being a resulting trust in favor of the company, the sums paid should be treated as set apart to meet a contingency, the payment of those sums was not a paying out or away of those sums irretrievably and did not amount to 'expenditure' and a deduction could not be made in respect thereof under section 10(2) (xv). The above observations of the Supreme Court were made in the context of the special facts of that case and why the Supreme Court considered the assessed's claim to be based upon an uncertain event is clear from the following observations of the Supreme Court :--
INthe years of account the assessed company did hand out to the trustees, the sums of money for which deduction is claimed. But was the money spent in so far as the assessed company was concerned Harvey was then alive and it was not known if any pension to him would be payable at all. Harvey might not have lived to be 55 years. He might even have abandoned his service or might have been dismissed. Till September 20, 1955, the assessed company had dominion through the grantees over the premia paid at least in two circumstances, They are to be found in the special provision and the third clause of the Second Schedule of the policy.
(32) The facts of the case before the Supreme Court are clearly distinguishable from the facts of the case before us. Under the agreement, every employee was entitled to receive gratuity for every year of service rendered by him to the assessed and this gratuity was payable to the employees on the happening of events which were certain. The possibility of the gratuity not being paid at all to the employees in the event of dismissal or retrenchment of the employees is certainly too remote to be taken into account.
(33) The learned counsel for the Revenue also referred to the decision of the Supreme Court in Standard Mills Co. Ltd. v. Commissioner of Wealth-tax : 63ITR470(SC) wherein it was held that the liability of the assessed to pay gratuity to its employees on determination of employment was a mere contingent liability which arose only when the employment of the employee was determined by death, incapacity, retirement or resignation, that the liability did not exist in praesenti and that amount claimed could not be deducted as a 'debt' in computing the net wealth of the assessed. This decision will not be of any assistance to the Revenue, because this decision was actually distinguished by the Supreme Court in the case of Metal Box Company of India Ltd. and it was held that through a contingent liability may not amount to a debt for the purposes of Wealth-tax Act, it would be an expenditure for the purpose of the Income-tax Act.
(34) The learned counsel also relied upon the decision of the Madras High Court in Commissioner of Income-tax v. Indian Metal and Metallurgical Corporation : 51ITR240(Mad) which has also. been relied upon by the Tribunal for rejecting the assessed's claim. For one thing, this decision was given prior to the decision of the Supreme Court in the case of Metal Box Company of India Ltd. and for another, it is clearly distinguishable from the facts of the present case inasmuch as in the cage before the Madras High Court the amount in question was credited only to a reserve fund called the gratuity reserve fund and it was not credited to the account of each and every one of the employees concerned, whereas in the present case, the gratuity amount has been irrevocably transferred not to a reserve fund but to a gratuity fund as such and also that the amount of gratuity payable to each of the employees has been credited to their account.
(35) We, thereforee, hold that the assessed is entitled to the deduction of the full amounts for which it had made provision in the two years under reference. The second question is answered in the negative, i.e., against the Revenue and in favor of the assessed.
(36) In view of the fact that the assessed has only partly succeeded in this reference, there shall be no order as to costs.