1983 (1) TMI 4

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

.... every year to every worker. The workmen in the assessee's distillery at Sheratelly were covered by the provisions of the Ordinance and, hence, the assessee was under a statutory obligation to pay gratuity to its workmen at the time of termination of their services. In the assessment year ended December 31, 1969, the assessee claimed to have made a provision towards gratuity amounting to Rs. 61,178 and charged it to profit and loss. In the relevant assessment year 1970-71, the assessee claimed this sum as an allowable deduction in the computation of its profits from Sheratelly distillery. The ITO disallowed the claim by reference to a quite inappropriate provision in the Act, namely, s. 36(1)(v), which related to the deduction of contribut....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....uction. " This decision of the AAC was objected to by the ITO in appeal before the Appellate Tribunal. The Tribunal observed that Rs. 61,178 was calculated at the rate of 15 days' wages for every completed year of service of the employees. The Tribunal regarded this sum of Rs. 61,178 as " provision ". The Tribunal further observed that a provision for gratuity was chargeable against net profits and deductible as such in the computation of taxable income under the head " Business ". However, they did not disturb the order of the AAC remanding the matter to the ITO. In this reference, at the instance of the Department, we are asked to examine the correctness of the orders of the AAC and the Tribunal on the basis of the following question of....

X X   X X   Extracts   X X   X X

Full Text of the Document

X X   X X   Extracts   X X   X X

....which alone a provision for gratuity could be made, the ITO is under duty bound to arrive at an appropriate figure and then deduct the same. This is the purport of the AACs order of remand to the ITO. We are, however, satisfied that a provision for gratuity, strictly so called, must be made, not by the officer, but only by the assessee on the basis of an actuarial valuation. The assessee alone can charge the provision for gratuity, so arrived at, to his profit and loss account and then carry it to the balance-sheet as a provision under the head " Current liabilities and provisions ". If an assessee in a given case has not done so, but merely claims an ad hoe sum not based on any actuarial valuation and not actually debited by him to the pr....