Mysore Tobacco Co. Ltd. Bangalore v. Commissioner Of Income Tax, Karnataka-Ii, Bangalore

Srinivasa Iyengar, J.:— The assessee is a Public Limited Company. It had a scheme of gratuity payment styled the Mysore Tobacco Company Employees Gratuity Rules, 1957. The rules provided for two types of gratuity namely, retirement gratuity and compassionate gratuity. Every employee who had put in minimum of 5 years of service was eligible for gratuity and a maximum limit of Rs. 6,000 had been fixed as the amount of gratuity payable at the time of death or retirement of the employee. The Company however, had not created any trust or fund in this behalf.

2. In respect of the assessment for the years prior to the assessment year 1971-1972, the assessee had claimed the amount actually paid out in each of the years as deductions and such amount had been allowed in these assessments. It had not made any provision as such for gratuity liability nor claimed any such provision as allowable deduction in the earlier years.

3. Apparently, in the light of certain observations made by the Supreme Court in the case of Metal Box Company of India Ltd. v. their workmen(1) and a Circular issued by the Central Board of Direct Taxes dated September 21, 1970 (later withdrawn) the assessee got an actuarial valuation of its total gratuity liability as an 31st March 1970 and 31st March 1971 and on the basis of actuarial valuation, it claimed a deduction of a sum of Rs. 3,94,112 as a liability towards gratuity payment in the return for the assessment year 1971-1972. The Income-tax Officer called upon the assessee to, give the actuarial figure as on 31st March 1970 and the assessee accordingly furnished that information. The actuarial valuation of the liability as on 31st March 1970 was Rs. 3,63,007. The Income-tax Officer held that what was allowable was the liability relating to the previous year relevant to the assessment year and from the figures of the actuarial valuation furnished by the assessee, the liability attributable to the previous year worked out to Rs. 31,105 being the difference between the actuarial valuation of this liability, as on 31st March 1970 and that as on 31st March 1971. Accordingly, the Income-tax Officer allowed a deduction of Rs. 31,105. The assessee's appeal to the Appellate Assistant Commissioner and to the Tribunal against the disallowance in a sum of Rs. 3,63,007 did not meet with success.

4. At the instance of the assessee the following question has been referred to this Court for decision.

“Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the sum of Rs. 3,63,007 being the staff gratuity liability of the assessee actuarially ascertained, relatable to services rendered prior to the relevant previous year was not an admissible deduction in computing the total income for the assessment year 1971-1972?”.

5. The answer to the question as has been referred to this Court, in the light of the admitted facts, it appears to us can only be in one way and to a great extent, the answer is to be found in the question itself.

6. Strong reliance had been placed before the Tribunal on the decision of the Supreme Court in Metal Box Company's case. The substance of the decision in that case which arose under the Payment of Bonus Act, was whether the gratuity payable was a contingent liability or a definite ascertainable liability or a known liability which could be ascertained in a reasonable manner though payable in future. It was held “Contingent liabilities discounted and valued as necessary, can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into consideration. An estimated liability under a scheme of gratuity, if properly ascertainable and its present value is discounted, is deductible from the gross receipts while preparing the profit and loss account”.

7. The Income-tax Officer as well as the Tribunal proceeded on the basis that the actuarial valuation as had been furnished by the assessee was correct but what the Tribunal held was that the liability or expenditure which could be allowed must relate to the relevant previous year and liabilities of the earlier year which could have been claimed in those earlier years cannot be accumulated and claimed in the previous year relevant to the assessment year 1971-1972 in one lump sum. The principle is well settled that expenditure which can be claimed as a deduction in any assessment year should have been incurred in the relevant accounting year. The entire exercise in the computation and assessment of business profits is to arrive at the true profits of the year which are liable to tax. The unit of assessment is the year and the receipts and expenditure which have to be taken into account must relate to the relevant accounting year. It, therefore, follows that if the expenditure of an earlier years taken into account in later year the true profits of the later year cannot be determined and the result would be lopsided and unreal (vide Commissioner Of Income-Tax, Madras-I v. Vanguard Insurance Co. Ltd., Ltd.,(3). It had been admitted that the actuarial valuation of the liability as on 31st March 1970 was Rs. 3,63,007 and that with the accretion in respect of such liability during the accounting year the figure would be Rs. 3,94,112 as on 31st March 1971. Therefore, it was plain that even on the basis of the actuarial valuation of the liability the sum of Rs. 3,63,007 was a liability incurred by the assessee from the commencement of the scheme in the year 1957 till 31st March 1970. It was not permissible for the assessee to aggregate such expenditure which may have been claimed in the earlier years and to claim the same in a lump sum in the year of assessment under consideration. The fact that the assessee had not made such a claim in the earlier years is of no consequence. The reason given for the non-claiming of allowance on this basis in the earlier years cannot also alter the position in law. When it was admitted that the sum of Rs. 3,63,007 was the estimated liability on actuarial valuation upto 31st March 1970, it is clear that, if at all, the claim in that behalf should have been made in the earlier assessment years. The assessee having failed to make such a claim and on the other hand made a claim for deduction only on the basis of actual payment made towards gratuity and having had it allowed on that basis cannot make a claim in respect of very same amount for the subsequent year.

8. The learned Counsel for the assessee however sought to rely upon the decision of Allahabad High Court in Madho Mahesh Sugar Mills (P.) Ltd. v. Commissioner Of Income-Tax.(4), to contend that the liability towards gratuity of the earlier years can also be claimed in one single year. The contention does not get any support from the decision. In that particular case, the liability for payment of gratuity was cast upon the assessee for the first time by a notification in 1960 and the liability arose in the year of account. The learned Judges pointed out that prior to the issue of the notification there was no liability in that behalf. But, in the instant case, the liability was there even from the year 1957 and the assessee was aware of this liability but claimed allowance on the basis of actual payments made. The decision of the same High Court in SWADESHI COTTON MILLS Co., LTD. v. THE COMMISSIONER OF INCOME-TAX SPECIAL CIRCLE, ‘A’ WARD, KANPUR, followed the decision of M.M Mill's case and apparently on the basis that the facts were similar. The decision of the High Court of Bombay in India United Mills Ltd. v. Commissioner of Income-tax(5) relied on by the assessee, is also clearly distinguishable. The learned Judges held that there was an actual payment to a fund and therefore an actual incurring of expenditure relevant to the assessment year 1953-1954 and was allowable in the assessment for that year. Though a claim had been put forth that the allowance should have been made for the assessment year 1952-1953, their Lordships did not express any opinion, upon the facts and circumstances of the case. This is clear from the observation in the said judgment “In otherwards, by about 4th March 1952, a sum of Rs. 21,50,446 had been actually made over by the assessee to the trustees of the gratuity trust fund and in that sense it could said to be actual expenditure incurred by the assessee—company in the assessment year 1953-1954. This amount having irretrivably gone out of the assessee's books was not to revert back to the assessee in any form at any time in future and etc., etc.,……….”

9. The decision of the Supreme Court in Metal Box Company's case cannot be stretched to the extent of saying that a liability or expenditure which could be claimed in relation to a particular assessment year can be kept in suspense and claimed in a subsequent year of the assessee's choice as accruing or incurred in such subsequent year. The view taken by the Tribunal is therefore correct. Accordingly we answer the question in the affirmative and against the assessee. The parties shall bear their own costs.