1983 (4) TMI 7 - HC - Income Tax

Assessee wins case on capital computation & gratuity deduction.

The court ruled in favor of the assessee in a case involving the inclusion of Rs. 7.22 lakhs in the computation of capital for relief under Section 80J ... Deduction U/S 80J, Gratuity, New Industrial Undertaking Issues Involved:1. Inclusion of Rs. 7.22 lakhs in the computation of capital for relief under Section 80J for the assessment year 1968-69.2. Deduction of Rs. 9,87,422 as gratuity liability for the assessment year 1972-73.Issue-Wise Detailed Analysis:1. Inclusion of Rs. 7.22 Lakhs in Computation of Capital for Section 80J Relief (Assessment Year 1968-69):The primary issue was whether the sum of Rs. 7.22 lakhs, outstanding to Messrs. Joseph Lucas (Industries) Ltd., England, should be included in the computation of capital for the purpose of relief under Section 80J. The Revenue argued that this amount represented a debt owed by the assessee-company to the supplier and should be excluded from the capital computation. The assessee contended that the agreement specified payment through the allotment of shares, not cash, thus it should not be considered a debt.The court examined the agreement dated November 27, 1960, between the assessee-company and the supplier, which stipulated that the cost of plant and machinery would be satisfied by issuing equity shares to the supplier. The court held that the assessee-company was not a debtor to the supplier for the Rs. 7.22 lakhs, as the liability was to allot shares, not to pay money.The Revenue's reliance on regulation 18 of the Regulations for Management of a Company Limited by Shares, which allows companies to receive advances for shares and pay interest, was dismissed by the court. The court noted that the provision for interest does not automatically convert an advance into a debt.The court referenced the Supreme Court decision in Bombay Steam Navigation Co. (1953) Private Ltd. v. CIT, which held that an amount cannot be considered a debt merely because interest is paid on it. Similarly, in Addl CIT v. Bangalore Soft Drinks P. Ltd., the Karnataka High Court ruled that advances received for share allotment, even if delayed, do not constitute a debt.Applying these principles, the court concluded that the Rs. 7.22 lakhs should be included in the computation of capital for Section 80J relief, as it was not a debt owed by the assessee-company.2. Deduction of Rs. 9,87,422 as Gratuity Liability (Assessment Year 1972-73):The second issue was whether the gratuity amount of Rs. 9,87,422, provided in the accounts, should be allowed as a deduction. The ITO allowed only Rs. 4,65,944, representing the accrued liability for the assessment year, and disallowed the balance. The Tribunal found that the entire claim was based on actuarial calculations of the present discounted value of future gratuity liabilities.The court referenced the Supreme Court's ruling in Metal Box Co. of India Ltd. v. Their Workmen, which allowed the deduction of liabilities ascertainable on an actuarial basis, even if contingent. This principle was followed by the court in CIT v. Andhra Prabha P. Ltd. and CIT v. Sri Ranilakshmi Ginning, Spinning & Weaving Mills (P.) Ltd., where provisions for future payments calculated scientifically were deemed allowable.The court further cited the Supreme Court's decision in Vazir Sultan Tobacco Co. Ltd. v. CIT, which stated that appropriations towards future liabilities, if based on scientific methods, constitute a provision for a known and existing liability for the relevant year.Based on these precedents, the court held that the actuarial basis used by the assessee-company to claim the gratuity liability deduction was valid. Therefore, the entire amount of Rs. 9,87,422 should be allowed as a deduction.Conclusion:The court answered both questions in the affirmative and against the Revenue. The sum of Rs. 7.22 lakhs should be included in the computation of capital for Section 80J relief, and the gratuity liability deduction of Rs. 9,87,422 should be allowed. The Revenue was ordered to pay the costs of the assessee, with counsel's fee set at Rs. 500.