SWAN MILLS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) BY this reference under S. 256(1) of the IT Act, 1961, made at the instance of the assessee, the Tribunal, Bombay Bench "A", Bombay, has referred the following question of law to this Court for opinion :

(2.) THE assessee is a company and this reference pertains to asst. year 1977 78. In the asst. yr. 1972 73, the assessee had claimed and was allowed a deduction of Rs. 1,19,564 as gratuity liability on the basis that the amount represented the assessee's liability for gratuity for that year on accrual basis. Sec. 40A(7) was introduced in the IT Act, 1961 ("the Act") with effect from asst. yr. 1973 74. As the assessee did not comply with the requirements of the provisions of the newly inserted sub s. (7) of S. 40A, no claim was made by the assessee for deduction on account of gratuity liability on accrual basis in computation of its income for the asst. year 1973 74 and onwards. In the previous year relevant to the asst. year 1977 78, the assessee wrote back the aforesaid amount of Rs. 1,19,564 being the provision for gratuity liability claimed and allowed as a deduction in computation of its income for the asst. year 1972 73 and credited it to the P&L account. This was done as the assessee had decided to follow cash system of accounting with regard to its gratuity liability. The ITO being of the view that the writing back the liability of Rs. 1,19,564 and crediting the amount thereof to P&L appropriation account by changing its method of accounting in respect of gratuity liability from mercantile to cash system resulted in cessation of liability within the meaning of S. 41(1) of the Act and, hence, the value of such liability was includible in the computation of the assessee's income for the said assessment year.

(3.) THE contention of the learned counsel for the assessee is that the provisions of S. 41(1) of the Act have no application to the facts and circumstances of the present case, inasmuch as, there was no cessation of liability to pay gratuity. According to the learned counsel for the assessee, though the liability was written back by the assessee in its books of account and the amount appearing on the liability side of its balance sheet as a "provision for gratuity" credited to the P&L account because of change of method of accounting as regards its gratuity liability made by it, there was no cessation of liability within the meaning of S. 41(1) of the Act. According to him, the liability for gratuity accrued from year to year and continued despite the provisions being written back and the amount credited to the profit and loss appropriation account. Reliance was placed in support of this contention on the decision of the Supreme Court in the case of Shree Sajjan Mills Ltd. vs. CIT (1985) 49 CTR (SC) 193 : (1985) 156 ITR 585 (SC). In support of his contention that there was no cessation of liability, counsel relied on the decisions of this Court in the case of J.K. Chemicals Ltd. vs. CIT (1966) 62 ITR 34 (Bom), in CIT vs. Sadabhakti Prakashan Printing Press (P) Ltd. (1980) 125 ITR 326 (Bom) and in CIT vs. Bennet Colman and Co. Ltd. (1993) 113 CTR (Bom) 391 : (1993) 201 ITR 1021 (Bom).