1970 (2) TMI 32 - HC - Income Tax

Court denies deduction claim for unmade gratuity payment, emphasizing payment or debit requirement.

The High Court held that the assessee could not deduct Rs. 41,313 from its income for the assessment year 1956-57 as the gratuity payment was not paid or ... Amount paid as gratuity - allowability - gratuity was not deductible as it was not shown as a debit in the assessee's books for the relevant year Issues Involved:1. Whether the assessee was entitled to deduct a sum of Rs. 41,313 from its income for the assessment year 1956-57.Detailed Analysis:Issue 1: Deductibility of Gratuity PaymentThe main issue in this case is whether the assessee-company could deduct Rs. 41,313 as a gratuity payment for the assessment year 1956-57. The facts reveal that an agreement on 15th July 1955 established the liability for gratuity payments under specified conditions. The assessee credited the gratuity amounts in 1956 but did not debit them in the profit and loss account for 1955, the relevant year for the assessment.The Income-tax Officer disallowed the deduction on the grounds that the gratuity was not immediately payable and no irrevocable trust was created for the gratuity fund. The Assistant Commissioner, however, allowed the deduction, reasoning that the company had deducted tax at source and credited the amounts to the employees' accounts, treating the company as a custodian of the fund.The Tribunal reversed the Assistant Commissioner's decision, stating that the gratuity was not debited in the profit and loss account for the relevant year, and thus, the deduction claim failed.Arguments by Assessee:The assessee's counsel argued that the liability was created by the 1955 agreement, and it was immaterial when the payment was made or entered in the books. He cited several cases, including Calcutta Co. Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax v. Swadeshi Cotton and Flour Mills Ltd., to support the claim that the deduction should be allowed once the liability is created, irrespective of payment or entry in the books.Arguments by Department:The department's counsel contended that the deduction was not claimable as it was neither quantified nor paid or debited in the books in the relevant year. He cited various cases, including Allahabad Bank Ltd. v. Commissioner of Income-tax, to argue that the deduction could not be claimed without proper entry or payment.Court's Analysis:The court emphasized that for a deduction to be allowed, it must be either paid or shown as a debit in the books of accounts maintained on the mercantile system of accounting. The court noted that both conditions must be fulfilled: the liability must be created and justified under the law, and the amount must be paid or debited.Under clause (x) of sub-section (2) of section 10 of the Indian Income-tax Act, 1922, the term 'paid' means actually paid or incurred according to the method of accounting. Therefore, unless the amount is paid or debited in the relevant year, it cannot be claimed as a deduction.The court also referred to the Supreme Court's judgment in Commissioner of Income-tax v. Swadeshi Cotton and Flour Mills Ltd., which held that liability is incurred when the claim is settled, not merely when it is created. The absence of entry in the books of accounts was deemed a significant factor in determining the permissible expenditure.The court concluded that the amount of gratuity must be shown as a debit in the books of accounts for the relevant year before it could be legitimately claimed as a deduction. The mere creation of liability without payment or entry does not constitute deductible expenditure.Conclusion:The court answered the question in the negative, stating that the assessee was not entitled to deduct the sum of Rs. 41,313 from its income for the assessment year 1956-57 due to the absence of payment or debit entry in the relevant year.Summary:The High Court ruled that for the assessee to claim a deduction for gratuity payments, the amount must either be paid or debited in the books of accounts in the relevant year. The mere creation of liability through an agreement without corresponding payment or entry does not suffice. The court, therefore, denied the deduction claim for Rs. 41,313 for the assessment year 1956-57.