ISHWAR INDUSTRIES LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference is at the instance of the assessee which is a company manufacturing and selling refractories. A gratuity scheme was introduced on March 31, 1970, w.e.f. January 1, 1970, which applied only to such employees who were not entitled to the benefit of provident fund or bonus. The ITO disallowed the gratuity relating to earlier years, but allowed the gratuity relating to the assessment year in question. On appeal, the AAC held that the liability for Rs. 1,55,997 had accrued before the beginning of the accounting year ; hence, the ITO was justified in disallowing that amount.

(2.) ON appeal to the Tribunal, it was urged that though the scheme was introduced from March 31, 1970, it was to operate from January 1, 1970. The Tribunal noted that the actuarial valuation was made on May 24, 1972, and, hence, the account must have been kept open and antedated. It was observed that the liability which was ascertained on May 24, 1972, could not be provided for in the accounting year ending on December 31, 1970, on the reasoning that the liability did not accrue in the previous year, and hence, the deduction could not be allowed. The liability was discounted when the actuary made the actuarial valuation. It was also held that the amount was not set apart and handed over to any trustees and the dominion and the control over the funds continued to be vested in the management. The liability was: therefore, of a contingent nature. For various reasons, the deduction was disallowed.

(3.) THE learned counsel for the assessee referred to the Supreme Court's decision in Calcutta Co. Ltd. vs. CIT (1959) 37 ITR 1 (SC), to submit that it was there held that in the mercantile system of accounting, any liability to be discharged at a future date was an allowable expenditure. It was urged that once the gratuity scheme came into operation, there was an accrued liability which should be determined and debited to the period in question. Hence, the liability under the gratuity scheme should not have been disallowed.