Gratuity liability accrual and exclusion of borrowed funds from capital employed shaped the tax computation

Gratuity liability for past services of current employees, where the statutory obligation accrued during the relevant accounting year, was deductible in computing total income. Borrowed money, however, could not be treated as part of "capital employed" for relief under section 80J read with rule 19A, because binding authority excludes borrowed funds from that computation. The reference was therefore answered partly in favour of the assessee on the gratuity issue and partly in favour of the Revenue on the capital-employed issue.

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Issues: (i) Whether the liability for gratuity relatable to past services of current employees was an allowable deduction in computing the total income for the assessment year 1972-73. (ii) Whether borrowed money could be included in the "capital employed" for calculating relief under section 80J of the Income-tax Act, 1961 read with rule 19A of the Income-tax Rules, 1962.

Issue (i): Whether the liability for gratuity relatable to past services of current employees was an allowable deduction in computing the total income for the assessment year 1972-73.

Analysis: The gratuity legislation came into force during the relevant accounting period, and the assessee became liable to provide for gratuity not only for the current year's service but also for past service rendered by existing employees. The liability was treated as arising in the relevant year and as falling within the established judicial view that such gratuity provision was deductible.

Conclusion: The liability was an allowable deduction, and the answer was in favour of the assessee.

Issue (ii): Whether borrowed money could be included in the "capital employed" for calculating relief under section 80J of the Income-tax Act, 1961 read with rule 19A of the Income-tax Rules, 1962.

Analysis: The question was governed by the binding Supreme Court ruling that borrowed funds do not form part of "capital employed" for the purpose of section 80J relief under rule 19A.

Conclusion: Borrowed money could not be included in the capital employed, and the answer was in favour of the Revenue.

Final Conclusion: The reference was answered partly for the assessee and partly for the Revenue, with each question decided according to the governing legal position.

Ratio Decidendi: A gratuity liability arising during the relevant accounting period in respect of past services of current employees is deductible where the statutory obligation has accrued in that year, whereas borrowed funds are excluded from "capital employed" for section 80J relief.

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