Madras High Court
Commissioner Of Income Tax vs Bajraj Textiles Mills Limited on 17 January, 1983
JUDGMENT Balasubrahmanyan, J.
1. The assessee who figures in this income-tax reference is a textile mill in Madurai employing a number of workmen. In the assessment for 1972-73, relevant to the account year ended 30-9-1971, the assessee claimed before the ITO that it was entitled to deduct Rs. 20,861 as a provision for gratuity. The officer disallowed the claim on the ground that there was no approved gratuity fund and this amount does not represent the annual contribution of the assessee to that fund. On appeal, the assessee claimed a deduction not only for this sum of Rs. 20,861 but also for Rs. 83,477 which was claimed as a "gratuity provision relating to the earlier years." The AAC found as a fact, that during the relevant account year, the assessee and its workman had entered into as agreement executed on 3-3-1971 under the terms of which the workmen were entitled to payment of gratuity under certain circumstances and calculated at a certain basis. The AAC held that the claim made by the assessee for Rs. 20,681 as a provision relatable to the account year concerned and the amount of Rs. 83,477 as a provision relatable to the prior years must be allowed as admissible deductions. He observed that these amounts were provided for by the assessee on "scientific and actuarial principles." In that view, he allowed the claim of the assessee to deducted Rs. 20,861 as well as Rs. 83,477 in the computation of the profits of the year ended 30-9-1971 relevant to the assessment year in question.
2. On appeal by the department, the Tribunal held that there was no bar in the provisions of the IT Act, 1961 governing the computation of business profits for a deduction to be made as respect a provision for gratuity. The Tribunal, however, did not go into the question as to whether the amounts claimed by the assessee in this case as provision for gratuity were based on an actuarial reports. They apparently assumed, without investigation, that the amounts claimed by the assessee represented a provision in the proper sense of the term and were, therefore, rightly allowed by the AAC. In this view they dismissed the department's appeal.
3. It this reference taken at the instance of the department, the question of law for our consideration is as follows :
"Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the provision for gratuity of Rs. 20,861 and the provision for gratuity of Rs. 83,447 were admissible deduction in computing the total income for the asst. yr. 1972-73 ?
4. Mr. Jayaraman, ld. counsel for the revenue submitted that the Tribunal had upheld the order of the AAC without examining whether the so-called provision made by the assessee was based on any actuarial report and whether it truly reflected the present discounted value of the assessee's gratuity liability in terms of the assessee's agreement with the workman signed on 3-3-1971. Learned counsel wondered whether the assessee had not simply added up 15 days wages of all the workmen under its employment for their total completed years of service and claimed the aggregate amount as a provision for gratuity. In my case, ld. counsel submitted, the matter required further investigation.
5. We accept the submissions of Mr. Jayaraman. Our reading of the AAC's order as well as the Tribunal's order does not put us wise on the vital question whether the so-called provision for gratuity was made on the basis of an actuarial valuation or whether it is merely the sum-total of 15 days wages of all the workers for all the years of service upto-date. This matter must be further investigated, because only a provision strictly so-called can be an admissible deduction, even on well accepted principled of commercial accounting, and for provision for gratuity to be so allowed on accountancy principle it must be based on an actuarial valuation. Evan the AAC's order is ever so brief and we are not able to find out whether the essential requisites of a provision for gratuity were verified to have been fulfilled in this case.
6. In the result, we must send the case back without answering the question, one way or other. This, however, means that the Tribunal will have to institute an inquiry either directly or by means of remand. The reference is disposed of accordingly. There will be no order as to costs.