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Commissioner of Income-tax (Central), Madras Vs. Mettur Spinning Mills - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 899 of 1977 (Reference No.629 of 1977)
Judge
Reported in(1981)25CTR(Mad)76; [1983]140ITR991(Mad)
ActsIncome Tax Act, 1961 - Sections 36(1) and 37
AppellantCommissioner of Income-tax (Central), Madras
RespondentMettur Spinning Mills
Appellant AdvocateJ. Jayaraman and ;Nalini Chidambaram, Advs.
Respondent AdvocateS.V. Subramaniam, Adv.
Excerpt:
- - 5,09,661 as well......the i.t. act, 1961, and claim a deduction. the tribunal rejected this contention and held that the gratuity provision, being based on an actuarial valuation, was a proper charge against profits. as such, it has to be deducted under s. 37 of the act. in our opinion, what the tribunal has held is right. we are supported by an earlier decision of this court in cit v. andhra prabha p. ltd. : [1980]123itr760(mad) . in that case, after referring to the provisions of. 36(1)(v) of the act, the learned judges distinguished the case before them as one governed by s. 37 of the act. section 36(1)(v), they pointed out, relates to contributions made by an assessee to a gratuity fund. they held that this provision will not apply to a case where there is no gratuity fund as such, and where the assessee.....
Judgment:

Balasubrahmanyan, J.

1. Two questions are referred to us by the Income-tax Appellate Tribunal, Madras, in this case. The first question is a follows:

'Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs. 5,09,661 being the provision made for gratuity payable, but relating to the past assessment years, should be allowed as a deduction in computing the total income of the assessee for the assessment year 1971-72 ?'

2. The facts bearing on this question may be briefly stated. The assessee-firm was carrying on business in the manufacture and sale of yarn. It had a number of workers on its pay-roll. There was a settlement between the workers and the assessee under which a gratuity scheme was to be formulated and then implemented. In accordance with that gratuity scheme, the assessee made a provision of Rs. 5,80,892 in its account year ended July 31, 1970. This amount was claimed as an admissible deduction in the computation of the assessee's profits for the purpose of assessment to income-tax for the year 1971-72. The ITO held that only some part of the provision, which, according to him, was referable to the account year, could be allowed as a deduction against profits; but the rest of the amount should be disallowed. In this manner, he allowed Rs. 71,231 and disallowed Rs. 9,05,661. On appeal, the Tribunal granted a deduction to the assessee in respect of the balance of the amount of Rs. 5,09,661 as well. It was common ground before the Tribunal that the gratuity liability, for which provision was made in the aggregate sum of Rs. 5,80,892, was worked out by actuarial valuation. On this basis, the Tribunal held that the provision made was a definite obligation of the business, as such, it was a permissible outgoing or deduction in the computation of the assessee's business profits.

3. This decision of the Tribunal is wholly in accordance with the recent decision of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT : [1981]132ITR559(SC) . This decision, no doubt, was rendered directly under the S.P.T. Act, 1963, and the C.(P.) S.T. Act, 1964. But the Supreme Court had occasion to discuss, in general terms, the nature of a provision for gratuity. They held that where a portion of the profits is set aside a provision for gratuity to the employees and that provision is strictly based on an actuarial valuation of the employer's commitment towards gratuity liability, such a provision made out of current profits will be a proper charge against those profits, notwithstanding that no liability actually arises and the liability remain only contingent during the year. Adopting the principle of the Supreme Court decision, we answer the question of law in the affirmative and against the Department.

4. The second question of law, which calls for our decision in this reference is as follows:

'Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the provision for gratuity is an admissible business expenditure of the assessee under section 37 of the Income-tax Act, 1961, for the assessment year 1971-72 ?'

5. This question arises on the view held by the Department that unless a liability towards gratuity is brought within the four corners of the provisions of s. 36(1)(v) of the I.T. Act, 1961, no deduction at all is permissible, and where s. 36(1)(v) cannot be invoked by an assessee, neither can he fall back upon the residuary provisions of s. 37 of the I.T. Act, 1961, and claim a deduction. The Tribunal rejected this contention and held that the gratuity provision, being based on an actuarial valuation, was a proper charge against profits. As such, it has to be deducted under s. 37 of the Act. In our opinion, what the Tribunal has held is right. We are supported by an earlier decision of this court in CIT v. Andhra Prabha P. Ltd. : [1980]123ITR760(Mad) . In that case, after referring to the provisions of. 36(1)(v) of the Act, the learned judges distinguished the case before them as one governed by s. 37 of the Act. Section 36(1)(v), they pointed out, relates to contributions made by an assessee to a gratuity fund. They held that this provision will not apply to a case where there is no gratuity fund as such, and where the assessee does not claim a deduction in respect of any contribution to any such gratuity fund. The learned judges distinguished the case where an assessee debits the profit and loss account with an actuarially ascertained gratuity liability. In this latter kind of case, according to the learned judges, the claim for deduction has to be examined only under. 37 of the Act. Adopting the reasoning given in that case, we answer that question also against the Revenue and in favour of the assessee.

6. At the conclusion of our judgment, the learned standing counsel for the Department made an oral application for leave to appeal to the Supreme Court in this case. So far as the first question is concerned, we do not think the Department is entitled to ask for a certificate of fitness to appeal to the Supreme Court, considering that we have merely followed, to the letter, the decision of the Supreme Court on the subject in Vazir Sultan's case : [1981]132ITR559(SC) . As for the second question, the learned counsel pointed out that the decision in CIT v. Andhra Prabha P. Ltd. : [1980]123ITR760(Mad) , which we have followed, was the subject-matter of an application for leave to appeal to the Supreme Court and this court had granted a certificate as prayed for, in S.C.P.No. 22 of 1981 by order dated March 13, 1981. To be consistent, we think we must accede to this request. We accordingly grant leave to the Commissioner to appeal to the Supreme Court in so far as the second question is concerned.

7. However, there will be no order as to costs.


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