1975 (2) TMI 22 - HC - Income Tax

Court upholds company's gratuity deduction claim under Income-tax Act, invalidates CBDT circular

Tata Iron And Steel Co. Limited Versus DV. Bapat, Income-Tax Officer, Companies Circle I (2), Bombay, And Another

Tata Iron And Steel Co. Limited Versus DV. Bapat, Income-Tax Officer, Companies Circle I (2), Bombay, And Another - [1975] 101 ITR 292 Issues Involved:1. Deductibility of actuarially evaluated gratuity liability.2. Jurisdiction and legality of the Income-tax Officer's proposed disallowance.3. Validity and impact of the Central Board of Direct Taxes' (CBDT) circulars.4. Adequacy of the remedy provided by appeal under the Income-tax Act, 1961.5. Nature of relief to be granted by the court.Issue-wise Detailed Analysis:1. Deductibility of Actuarially Evaluated Gratuity Liability:The company claimed a deduction of Rs. 2,77,52,991 based on an actuarial valuation of its gratuity liability for the accounting year ending 31st March 1973. The Income-tax Officer proposed to disallow this claim following a second circular issued by the CBDT. The court referred to several judgments, including the Supreme Court's decision in Metal Box Company of India Ltd. v. Their Workmen, which stated that 'an estimated liability under gratuity schemes, even if it amounts to a contingent liability, is deductible from the gross receipts while preparing the profit and loss account.' The court concluded that the provision for gratuity on an actuarial basis represents a real liability and is admissible as a deduction under section 37(1) of the Income-tax Act, 1961.2. Jurisdiction and Legality of the Income-tax Officer's Proposed Disallowance:The company argued that the proposed disallowance by the Income-tax Officer was 'without jurisdiction, patently illegal and contrary to the clear provisions of the Income-tax Act, 1961.' The court noted that the Income-tax Officer was bound by the second circular issued by the CBDT, which directed the disallowance of such claims. However, the court found that this circular was based on an incorrect interpretation of the Supreme Court's decisions and the provisions of the Income-tax Act. The court held that the Income-tax Officer's proposed action was indeed without jurisdiction and contrary to the law laid down by the Supreme Court.3. Validity and Impact of the CBDT Circulars:The first circular issued by the CBDT allowed the deduction of gratuity liability based on actuarial valuation, following the Supreme Court's decision in Metal Box Company's case. The second circular withdrew the first circular, citing a later Supreme Court decision in Bombay Dyeing and Manufacturing Co. Ltd. v. Commissioner of Wealth-tax, which the CBDT claimed had overruled the earlier decision. The court found that the second circular was based on an erroneous interpretation of the Supreme Court's decisions and the provisions of the Income-tax Act. The court held that the first circular was correctly issued and the second circular was invalid.4. Adequacy of the Remedy Provided by Appeal under the Income-tax Act, 1961:The company argued that the appeal process under the Income-tax Act would not be an equally efficacious or adequate remedy, given the binding nature of the second circular on Income-tax Officers. The court agreed, noting that the directions in the second circular would likely be followed by Income-tax Officers, resulting in multiple appeals and prolonged litigation. The court found that this situation warranted the issuance of a writ to provide an effective remedy.5. Nature of Relief to be Granted by the Court:The company sought a writ of mandamus directing the Income-tax Officer to allow the gratuity liability as a deduction. The court considered the exceptional nature of the case, the representative action for similarly situated companies, and the need to avoid multiplicity of proceedings. The court issued a writ in terms of the company's prayer, directing the Income-tax Officer to allow the deduction of the actuarially evaluated gratuity liability in computing the company's assessable income. The court also certified that the case involved a substantial question of law of general importance, warranting a decision by the Supreme Court.Conclusion:The court concluded that the company's claim for deduction of the actuarially evaluated gratuity liability was valid and allowable under the Income-tax Act, 1961. The second circular issued by the CBDT was found to be invalid, and the Income-tax Officer's proposed disallowance was without jurisdiction and contrary to the law. The court issued a writ directing the Income-tax Officer to allow the deduction and certified the case for appeal to the Supreme Court, recognizing the substantial question of law involved.