Law: Income Tax Act, 1961

Section: 37

Income tax---Business expenditure No specific statutory provision for deduction of certain items in computation of taxable business profits-Such deduction can be allowed on commercial accounting principles if there is no express prohibition in statutes Provision for gratuity Incremental liability charged to profit and loss account and provision made for gratuity Held, allowable on the principles of commercial accounting notwithstanding that no money actually goes out or is spent out by assessee during relevant year. Vazir Sultan Tobacco Co. Ltd. v. C.I.T. (1981) 132 I T R 559 (S C) ref. J: Jayaraman and Nalini Childambaram for the Commissioner. JUDGMENT BALASUBRAHMANYAN, J. 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. 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 progressively increasing every year, even if the strength of the workmen and staff remains constant. As between one year and the next, the figure of discounted value would register an increase. This actuarial increase is often called "incremental value". According to sound principle 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. '!"bat 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 I R T 559, has laid down that if a provision of this kind…

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