1984 (12) TMI 51 - HC - Income Tax

Court affirms deductibility of actuarially calculated gratuity liabilities as business expenditures

The court ruled in favor of the assessee, affirming that actuarially calculated gratuity liabilities under the Company's Gratuity Scheme were deductible ... Business Expenditure, Gratuity Issues:Interpretation of the Income-tax Act, 1961 regarding the deductibility of gratuity payments under a Company's Gratuity Scheme for the assessment year 1972-73.Detailed Analysis:The case involved a reference under section 256(1) of the Income-tax Act, 1961, regarding the deductibility of a sum representing the actuarial valuation of gratuity payable in the future to employees under the Company's Gratuity Scheme. The Income-tax Officer initially disallowed the deduction, stating that the liability was contingent and not accrued, and the deduction was not for a contribution to an approved gratuity fund as required by the Act.Upon appeal, the Appellate Assistant Commissioner allowed the deduction based on a judgment of the Calcutta High Court in a similar case. The Income-tax Appellate Tribunal also upheld the deduction, determining that the liability accrued during the previous year and was deductible in computing the income of the assessee.The Revenue contended that the gratuity payment was not under a statutory scheme but under the Company's Gratuity Scheme, and therefore, not entitled to deduction. The Revenue relied on specific Income-tax Rules and previous court judgments to support its argument that only contributions to approved gratuity funds were deductible.The court rejected the Revenue's contentions for several reasons. Firstly, it noted that the issue of statutory liability was not raised before the Tribunal, and the key argument was about the nature of the liability and the absence of contribution to an approved fund. The court emphasized that there is no fundamental difference between liabilities arising from a contract or a statute.The court highlighted that the West Bengal Employees' Payment of Compulsory Gratuity Act, 1971, created a statutory liability for gratuity payment by the employer, but this did not prevent employers from having their own gratuity schemes as long as they were not in conflict with the statutory provisions. The court cited a previous judgment to support the deductibility of actuarially valued gratuity liabilities, even without contributions to approved funds, based on commercial expediency and business continuity.Ultimately, the court ruled in favor of the assessee, affirming that actuarially calculated gratuity liabilities were deductible business expenditures under the mercantile system of accounting. The decision was influenced by the presence of a gratuity scheme, the statutory liability under the Gratuity Act, and the commercial necessity of the payments.In conclusion, the court answered the question of law in the affirmative, supporting the deductibility of the sum representing actuarial valuation of gratuity under the Company's Gratuity Scheme for the assessment year 1972-73.