COMMISSIONER OF INCOME TAX Vs. SITALAKSHMI MILLS LIMITED

JUDGEMENT

(1.) THE assessees who figure in these tax cases are different. But the issue for our decision in each case is the same, and we dispose of it in this common judgment.

(2.) THE issue arises this way. In the industrial establishment of each of the assessees before us, there is a gratuity scheme for the workers and the staff. Gratuity would be payable on certain events happening, such as the employee's retirement, resignation, retrenchment or death. In this sense, the liability is said to be a "contingent liability". But owing to modern systems of actuarial valuation, it would be possible to ascertain the present discounted value of the employer's commitment to pay gratuity to his entire labour force as and when the time comes. This value, if ascertained on actuarial basis, would be possible to ascertain the present discounted value would register an increase. This actual increase is often called "increment value". According to sound principles of commercial accounting, the annual increment in the discounted value will be a proper charge which the employer can make against the year's profits. That is to say, the net profits of the year will be properly ascertained only after allowing for this charge. In the balance-sheet too, the amount will figure as a "provision for gratuity". THE Supreme Court in Vazir Sultan's case [1981] 132 ITR 559, has laid down that if a provision of this kind is made for gratuity, then that would have the effect of separating the amount so provided for, from the employer has a gratuity scheme rendering him liable which might arise under the scheme, the employer obtains a scientific actuarial calculation under which the present discounted value of the gratuity liability is ascertained, and where the employer charges his P & L account with the incremental value of the year and also makes a provision for that amount, then the employer will be entitled to compute his net profits after deducting the figure of incremental value.

(3.) FOR the reasons earlier stated, our answer to each of these questions is in favour of the respective assessee and against the Department. There will, however, be no order as to costs.