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L.H. Sugar Factories & Oil Mills P. ... vs Commissioner Of Income-Tax

High Court Of Judicature at Allahabad|25 August, 1981

JUDGMENT / ORDER

JUDGMENT Rastogi, J.
1. The Income-tax Appellate Tribunal, Delhi Bench A, has referred the following questions under Section 256(1) of the I.T. Act, hereafter " the Act ", for the opinion of this court: At the instance of the assessee :
" Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduct in the computation of its business profit for the year ending September 30, 1964, the amount of increase in the present value of its future liability to pay gratuity to its employees under the scheme of November 1, 1960, as compared with the similar liability which existed as on September 30, 1963 ? "
2. At the instance of the department :
" 1. Whether the Tribunal was right in holding that the provisions of Section 40(c)(i) and 40(c)(iii) are mutally exclusive and that the expenditure by way of guarantee commission paid to directors was to be considered only in the light of Section 40(c)(i) of the Act ? and
2. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the entire claim of the guarantee commission paid to the directors was allowable as a deduction having regard to the provisions of Section 40(c)(i) of the Act ? "
3. The reference relates to the assessment year 1965-66, the previous year ending September 30, 1964. The assessee, M/s. L.H. Sugar Factories & Oil Mills (P.) Ltd., Pilibhit, is a private limited company engaged in the manufacture and sale of sugar. In the relevant year, the assessee owned two sugar mills, one at Pilibhit and the other at Kashipur. It appears that in pursuance of a notification issued under Section 3 of the U.P. Industrial Disputes Act, 1947, for giving effect to the recommendations of the wage board which recommendations included a scheme of gratuity and which came into force with effect from November 1, I960, the assessee calculated its liability for gratuity on the basis of this scheme at Rs. 7,35,000. A sum of Rs. 4,75,000 was in respect of Pilibhit unit and Rs. 2,60,000 in respect of Kashipur unit. The assessee claimed deduction of this amount from its total income. The ITO allowed a deduction of Rs. 14,189 only, on the basis of actual payments' made during this year. He further found that the assessee had not made any provision in the books for the liability of Rs. 7,35,000, nor it had debited any such amount in the profit and loss account, and that the claim had been made only on the basis of estimate at the time of filing of the computation of income for income-tax purposes. In the opinion of the ITO it was only a provision for a contingent liability and as such was not an admissible deduction.
4. On appeal, the AAC took the same view and confirmed the disallowance.
5. On further appeal it was claimed on behalf of the assessee that the assessee followed the mercantile system of accounting and though in the previous years deduction on this account had been allowed on cash basis, the position for the year under consideration was different and it was claimed that it was a statutory liability which was clearly allowable. Reliance was also placed on the valuation report of an actuary which was filed before the AAC and according to that report the assessee's present liability in respect of gratuity payable to its employees on death or retirement, for the assessment year 1965-66, had been estimated at Rs. 7,35,000.
6. The Appellate Tribunal did not accept the assessee's contention and held i " The liability of the assessee over and above the amount actually paid by the assessee towards gratuity not having been shown to have accrued to the assessee in the relevant assessment year, the authorities below were right in disallowing the claim of the assessee and we uphold the orders of the authorities below ia this regard."
7. Question No. 1 mentioned above arises out of these findings and the question for consideration is as to whether having regard to the gratuity scheme aforesaid any incremental liability had accrued during the relevant previous year. Similar question had come up for consideration before this court in the assessee's own case for the assessment year 1962-63 in L. H. Sugat Facts. & Oil Mills v. CIT [1980] 124 ITR 58 (All). The view taken was that even if the liability for payment of gratuity be treated as contingent liability, it was liable to be allowed as deduction in view of the decision of the Supreme Court in the case of Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53 ; 39 Comp Cas 410 (SC). In that case it was laid down that even in cases where liabilities are contingent they can be allowed as a business expense, if they are sufficiently certain and capable of valuation, and are claimed at a discounted value in accordance with the method of accountancy as prevailing: in commercial circles. It was laid down that the claim in question would not fail on the ground that it was a contingent liability. It would appear, therefore, that an incremental liability did accrue to the assessee during the relevant assessment year in respect of the gratuity payable by the assessee to its employees on death or retirement.
8. The next question which arises in this regard is as to what should be the quantum of such incremental liability. As noted above, the assessee had filed the valuation report of an actuary before the AAC and the attention of the Appellate Tribunal was invited to this fact. The Appellate Tribunal did not address itself to this aspect of the case and it also did not express any opinion on the admissibility or otherwise of that report. This is what the Tribunal has to say in this regard in the statement of case:
"We would only like to point out that at the present stage the Tribunal has not decided the quantum of such incremental liability but that this question would have to be considered in the event of the High Court holding that in principle the assessee is entitled to some deduction on this account."
9. On the view which we have taken about the admissibility of this liability for deduction, the Appellate Tribunal would now determine the quantum of such incremental liability for the year under consideration.
10. Coming to the other two questions, the assessee claimed to have paid guarantee commission to the directors and shareholders of the company by way of compensation for their giving personal security against the cash credit agreement with the assessee's bankers. The claim was accepted to the extent of l/5th of the salary of four of the directors who were in the employment of the assessee and the balance was disallowed. On appeal, the same view was taken by the AAC. On further appeal, the Appellate Tribunal, relying on its decision for the immediately preceding two years, accepted the assessee's claim in full and also took the view that the provisions contained in Section 40(c)(i) and (iii) of the Act are mutually exclusive and expenditure by way of guarantee commission can be considered only under Section 40(c)(i). We find that for the assessment year 1963-64 a similar question had come up for consideration before this court in Income-tax Reference No. 657 of 1974, L.H. Sugar Factories & Oil Mills (P.) Ltd, v. CIT [1979] 118 ITR 985 decided on December 1,1978. It was held that guarantee commission paid to the directors and shareholders who had stood personal security was for the legitimate business needs of the company and that the payment at the rate of 10% of the interest payable to the bankers was not excessive. It was also held that the tests laid down under Clause (c) of Section 40 are satisfied. For the year under consideration, the facts and circumstances being the same, we agree with the view taken by the Appellate Tribunal that the entire claim in this regard was allowable as a deduction under Section 40(c)(i) of the Act. In this situation question No. 2 is merely academic and also does not arise.
11. We, therefore, answer question No. 1 in favour of the assessee and against the department and the Appellate Tribunal would now determine the quantum of incremental liability for the year under consideration. Question No. 3 is answered in the affirmative, in favour of the assessee and against the department. Question No. 2 is returned unanswered. The assessee is entitled to costs which we assess at Rs. 200.
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Title

L.H. Sugar Factories & Oil Mills P. ... vs Commissioner Of Income-Tax

Court

High Court Of Judicature at Allahabad

JudgmentDate
25 August, 1981
Judges
  • S Chandra
  • R Rastogi