COMMISSIONER OF INCOME TAX Vs. JAWAHAR MILLS LIMITED

JUDGEMENT

(1.) AT the instance of the Department, the Tribunal referred the following questions for the opinion of this Court under s. 256(1) of the IT Act, 1961, hereinafter referred to as the 'Act' :

(2.) THE assessee had established a gratuity fund known as Jawahar Mills Ltd., Employees Gratuity Fund from 1st Dec., 1972. THE approval was asked for and obtained for Group Gratuity cum Life Assurance Scheme as can be seen from the copy of the order of the CIT in C. No. 207(44)-73 dt. 3rd Dec., 1973. THE trust deed provides that the intention is to provide for payment of gratuity by taking insurances on the lives of employees. In pursuance of this provision, the Group Insurance Scheme was entered into. THE Scheme covers the gratuity payable to persons whose services are terminated or on death, resignation or retirement of employees during the period covered by the policy. THE amount of premium is only a fraction of the incremental liability towards gratuity. THE policy covers death, resignation, retirement or termination during the year while the incremental liability takes into account the discounted value of the expected future liability of all the employees. THE ITO allowed in the asst. yrs. 1975-76 and 1976-77 the actual payment of gratuity and payment of premium under s. 36(1)(v) of the Act and did not allow the incremental liability since he was of the opinion that the assessee did not have a larger liability than the premia paid by it. He, therefore, allowed the premium. He also allowed actual gratuity payment which were neither covered by the policy nor had been allowed on provision basis in the past. Aggrieved, the assessee filed an appeal before the first appellate authority. THE assessee pointed out that the incremental liability had been determined on an actuarial basis.

(3.) ON the other hand, the learned counsel appearing for the assessee submitted that it is no doubt true that the assessee has not made any provision in the books of account for payment of incremental gratuity liability based on actuarial valuation. According to the learned counsel, the incremental liability is allowable as deduction under s. 36(1)(v) of the Act. It was further submitted that even if no provisions were made, it would be allowable under s. 36(1)(v) which authorises the allowance of any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of its employees, under an irrevocable trust. The learned counsel further submitted that the assessee was following mercantile system of accounting under which 'paid' includes 'payable'. To support this view he relied upon s. 43(2) of the Act. According to the learned counsel the gratuity liability is both statutory and contractual in assessee's case and since the assessee is maintaining accounts on mercantile basis, there was no doubt that incremental liability was a charge on assessee's profits, whether provision as such is made or not. According to the learned counsel such a charge would constitute a provision made within the meaning of s. 40A(7)(b)(i) of the Act. Therefore, according to the learned counsel for the assessee the incremental liability is allowable as a deduction both under s. 40A(7) as well as under s. 36(1)(v) of the Act.