Mental Box Co. Of India Ltd vs Their Workmen on 20 August, 1968
In Metal Box Company of India Ltd. Vs. Their Workmen
(1969) 73 ITR 53 the appellant company estimated its
liability under two gratuity schemes framed by the company
and the amount of liability was deducted from the gross
receipts in the P&L account. The company had worked out on
an actuarial valuation its estimated liability and made
provision for such liability not all at once but spread over
a number of years. 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. The gratuity was payable on the
termination of an employees service either due to
retirement, death or termination of service - the exact time
of occurrence of the latter two events being not
determinable with exactitude before hand. A few principles
were laid down by this court, the relevant of which for our
purpose are extracted and reproduced as under :- (i) For an
assessee 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
accountancy. It is not as if such deduction is permissible
only in case of amounts actually expended or paid; (ii)
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 gains of the business; (iii) A
condition subsequent, the fulfillment of which may result in
the reduction or even extinction of the liability, would not
have the effect of converting that liability into a
contingent liability; (iv) A trader computing his taxable
profits for a particular year may properly deduct not only
the payments actually made to his employees but also the
present value of any payments in respect of their services
in that year to be made in a subsequent year if it can be
satisfactorily estimated.