Kerala High Court
Commissioner Of Income-Tax vs Mittal Steel Re-Rolling And Allied ... on 6 July, 1984
Equivalent citations: [1985]155ITR1(KER)
Author: T. Kochu Thommen
Bench: T. Kochu Thommen
JUDGMENT Kochu Thommen, J.
1. The following questions have been, at the instance of the Revenue, referred to us by the Income-tax Appellate Tribunal, Cochin Bench :
"(1) Whether, on the facts and in the circumstances and in view of the special provision in Section 36(1)(v) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal is right in law in holding that the provision made by the assessee for gratuity is to be allowed as deduction in computing the income of the assessee for the assessment year 1971-72 ?
(2) If the answer to the first question is in the affirmative, whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the liability for gratuity that arose under the Kerala Industrial Employees' Payment of Gratuity Ordinance, 1969, and, subsequently, under the Kerala Industrial Employees' Payment of Gratuity Act, 1970, can be claimed as a deduction in the assessment year 1971-72 ?
(3) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the sum of Rs. 12,632 cannot be treated as wrongly allowed by the Income-tax Officer towards gratuity, for the assessment year 1971-72 and, hence, the assessment cannot be enhanced ?
(4) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding that the assessee is entitled to deduction towards liability for gratuity not only for the current year but for earlier years also, and thus remanding the case to the Income-tax Officer ?"
2. The first three questions are covered by the decision of this court in CIT v. Kerala Nut Food Co. [1978] 111 ITR 252 in favour of the assessee. They are accordingly answered in the affirmative, that is, in favour of the assessee and against the Revenue.
3. The last question is covered by the principle adopted by this court in a series of decisions. In CIT v. High Land Produce Co. Ltd. [1976] 102 ITR 803, this court held that the deductions were permissible in respect of liability for gratuity arising during the relevant accounting year but payable at a future date. Liability should be valued for a particular accounting year by ascertaining the present value of the liability which accrued during that year on actuarial principles. In L.J. Patel & Company v. CIT [1974] 97 ITR 152, this court held that the liability that had accrued in an earlier year could not be taken into account for computing the income of the subsequent year.
4. If the liability arose for the first, time under the statute, deduction could be claimed in respect of that accounting year when the statute was enacted as well as for the earlier years. In CIT v. Kerala Nut Food Co. [1978] 111 ITR 252, this court held that since the Kerala Industrial Employees' Payment of Gratuity Ordinance came into force in December, 1969, casting a liability upon the assessee for the first time, he was entitled to claim deduction for gratuity in respect of that year of account as well as for the earlier years. But, the claim for deduction in respect of the earlier years was disallowed in that case as the provision had not been made in the relevant accounting year, but only in the subsequent year. This is what this court stated (pp. 262-3):
"Consequently, the obligation in respect of gratuity which arose under the Ordinance was of an enduring character, and, in the absence of any contrary intention, it continued to be binding upon the assessee even after the repeal of the Ordinance...we are of opinion that the amount payable towards gratuity for the years earlier to the year of account during which the Ordinance carne into force and for the year of account should have been claimed in the year in which the liability arose under the Ordinance. In the assessment year in question, the assessee is entitled to claim as an expenditure only such amounts in respect of which a liability towards gratuity arose during the relevant accounting year. The amounts for which the liability arose in the earlier years are not deductible in the accounting year relevant to the assessment year 1971-72."
5. In CIT v. Highland Produce Co. Ltd. [1976] 102 ITR 803 (Ker), this court stated (p. 806):
"Though the right of an employee to claim gratuity in a case falling under Section 4(1)(b) will arise only after five years' of service, it is reasonable to expect that most of them will continue in service for five years and on that basis make provision for gratuity which will have to be paid at the time of their retirement, resignation, retrenchment, discharge or dismissal. The liability imposed by the Act, therefore, can generally be said to be a liability incurred from year to year and for every year an employee continues in service, he gains the right to claim a certain amount towards gratuity from the employer."
6. See also CIT v. Pratap Cashew Co. (P.) Ltd. [1979] 116 ITR 733 (Ker) and CIT v. Standard Furniture Co. Ltd. [1979J 116 ITR 751 (Ker) [FB].
7. In the present case, where the method of accounting was mercantile, it makes no difference if, for in the relevant year of account when the statute was enacted, some or all of the employees had not completed the requisite period of five years. A prudent employer ought to visualise that each of his employees is likely to complete five years in his service and would, therefore, become entitled to receive gratuity upon the happening of the event mentioned under Section 4 of the Kerala Industrial Employees' Payment of Gratuity Ordinance, 1969, or the Act of 1970, which replaced it. If the employer was not prudent enough to make deduction in the year of account in which the liability arose for the first time under the Ordinance, in respect of that year's liability as well as for the earlier years, de hors the number of years an employee may have completed in his service, it would be too late for him after the expiry of that accounting year to make any deduction for the earlier years. In the subsequent years, he can only make deduction for the relevant accounting year and not for the earlier years. That being the position, there was no need for the Tribunal to ask the ITO to reconsider the question from the point of view of the assessee's claim that none of the employees had completed five years during the year in which the statute was enacted. Whether the employees had completed five years during the year of account or subsequently would make no difference in this respect. In the circumstances, it is necessary for the Tribunal to pass an appropriate order in regard to that aspect of the matter in the light of what is stated above.
8. Question No. 4 cannot be answered in the form in which it has been cast. We, therefore, recast the question as follows;
"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in remitting the case to the Income-tax Officer for the reason stated in paragraphs 3 and 4 of its order?"
9. We answer the question, as recast, in the negative, that is, in favour of the Revenue and against the assessee. We direct the parties to bear their respective costs in these tax referred cases.
10. A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.