1975 (12) TMI 22 - HC - Income Tax

Court rules liabilities for gratuity must be claimed in the year they arise, not in subsequent years.

Commissioner Of Income-Tax, Kerala Versus Kerala Nut Food Co.

Commissioner Of Income-Tax, Kerala Versus Kerala Nut Food Co. - [1978] 111 ITR 252, 1976 CTR 92 Issues Involved:1. Entitlement to deduction in respect of gratuity for earlier years under the Kerala Industrial Employees' Payment of Gratuity Act.2. Claim of deduction of gratuity in the assessment year 1971-72 for liabilities arising in earlier years.Issue-Wise Detailed Analysis:1. Entitlement to Deduction in Respect of Gratuity for Earlier Years:The assessee, a registered firm engaged in manufacturing and selling cashew kernels, claimed deductions for gratuity under the Kerala Industrial Employees' Payment of Gratuity Act, 1970, for both the relevant accounting year and earlier years. The Income-tax Officer disallowed the claim for earlier years on the ground that the provision made for a contingent liability like gratuity was not on a scientific or actuarial basis. The Appellate Assistant Commissioner upheld this view, stating that liabilities of earlier years must be debited to the accounts of those respective years and not to a later year's books on ordinary mercantile principles.The Tribunal, however, allowed the claim for both the relevant accounting year and earlier years, stating that the liability arose in 1970 when the Act came into force. The Tribunal's reasoning was that the Kerala Industrial Employees' Payment of Gratuity Ordinance, 1969, which preceded the Act, was a temporary enactment. Therefore, with its expiry, all rights and obligations under it also expired, and a new liability was enforced by the Act in 1970.The High Court, however, disagreed with the Tribunal's reasoning. It referenced previous judgments, such as Commissioner of Income-tax v. High Land Produce Co. Ltd. and L.J. Patel & Company v. Commissioner of Income-tax, which established that liabilities arising in earlier years could not be taken into account for computing the income of a subsequent year. The Court concluded that the liability for gratuity should have been claimed in the year it arose under the Ordinance, and not in the assessment year 1971-72.2. Claim of Deduction of Gratuity in the Assessment Year 1971-72 for Liabilities Arising in Earlier Years:The High Court examined whether the liability which arose under the Ordinance continued beyond its life. It cited several cases, including Stevenson v. Oliver and State of Orissa v. Bhupendra Kumar Bose, to discuss the enduring nature of rights and obligations under temporary statutes. The Court concluded that the liability for gratuity, being of a permanent nature, endured beyond the life of the Ordinance and should have been claimed in the relevant accounting year when it arose.The Court also referred to section 4 of the Kerala Interpretation and General Clauses Act, which preserves rights and obligations unless a different intention appears in the repealing enactment. The Court found that section 13(2) of the Act did not express a contrary intention that would oust the operation of section 4. Consequently, the obligation in respect of gratuity which arose under the Ordinance continued to bind the assessee even after its repeal.The Court concluded that the assessee could not claim deductions for gratuity liabilities of earlier years in the assessment year 1971-72. The deductions were only allowable for liabilities that arose during the relevant accounting year.Conclusion:The High Court answered both questions in the negative, ruling in favor of the department and against the assessee. It directed that the costs be borne by the respective parties. The judgment emphasized that liabilities for earlier years must be claimed in the year they arose and cannot be carried forward to a subsequent year for deduction purposes.