1981 PLP (Trib (PTD)

3. Mr. A. G. M., F. C. A. the learned authorised Representative of the appellant at the out set stated that similar claim for Rs. 4,48,111, made in the immediately preceding assessment year 1974‑75, was disallowed by the assessing Officer and, ultimately, upheld by the Appellate Tribunal vide its order dated 20th November, 1978, in I. T. A. No. 166/KB of 1978‑

79. The only distinguishing feature, in his submission, is that the assessee's appeal to the A. A. C. had succeeded last year and he had ordered the deletion of the add back by accepting the appellant's contention that the liability was created on the basis of statutory provision and some settlement reached with the workers of the Employees' Union. The counsel, however, strenuously urged that the Tribunal vide its aforesaid order allowed the departmental appeal by following a Full Bench's decision of the Appellate Tribunal in I. T. As. Nos. 609/KB & 610 KB1976‑77 dated 18‑1‑1978, without scrutinising, recording and appreciating the distinguishing facts of the appeals before it. The counsel, therefore, urged for a full hearing notwithstanding the decision of the Appellate Tribunal against the assessee its appeal for the charge year 1974‑

75. After going through our order dated 20‑11‑1978 (supra), we found it to be conducive to justice and fair-play to concede to his request. The learned counsel stated that the provision for gratuity amounting to RS. 8,51,171,' was strictly made in terms of the mutual agreement arrived at between the appellant and the Indus Chemical and Alkalis Workers' Union, Bargaining Agent to Sind Alkalis Limited vide Memorandum of Settlement No. 5 dated 2‑5‑1973 (made effective from 1st April, 1973, for a period of two years, i. e. up to 31‑3‑1975) and a similar agreement male with the Officers of the company. Requisite Resolutions dated 28‑7‑1969 and 5‑9‑1972 were passed by the then Board of Directors of 'the appellate‑Company with regard to the Officers, and another Resolution dated 30th April, 1973, in respect of other staff of the Company. The counsel then drew our attention to the Full Bench's decision of the Appellate Tribunal (supra) to contend that the facts of that case were patently different than the facts of the instant case. In that case, the learned counsel maintained, the assessee had credited the accounts of the employees with certain sums and created a provision for gratuity under an impression that it was under the West Pakistan (Standing Orders) Ordinance, 1968, for making payment to the workers, who resign their services or die or whose services may be terminated by the employers. The Tribunal was influenced by the fact that the said Ordinance was in force since 1968, but the so‑called liability was created and provision was made for the first time in May, 1972. The Tribunal further allowed itself to be impressed by the fact that there was no provision in the enactment in regard to the payment of gratuity to an employee who might retire on superannua tion, or whose Service might be terminated on account of misconduct, or might not die during the tenure of office. The learned counsel however, maintained that the appellant before us is obliged to make the payment of gratuity in terms of the agreements arrived at with the employer and the employee (i. e. the Company and its Officers, workmen and workers). At this stage he produced the copies of the aforesaid three revisions in support of his contention that notwithstanding the legal requirements the appellant‑Company was under contractual obligation to pay the agreed amount of gratuity to all members of the staff and Officers, in all cases, except in the case of dismissal for misconduct in the case of workman that was no question of forfeiture ever on dismissal for misconduct. He urged with vehemence that in any case the exact amount payable to an employee in respect of gratuity can be infallibly calculated on the basis of the last pay drawn and the number of years of service. It is, therefore, in his opinion, as ascertained and quantified- liability and only the payment was to be made at a stipulated time. He then invited our attention to a Circular dated 13th September, 1973, issued by the Institute of Chartered Accountants of Pakistan, to contend that under principle of accountancy the making of provision for gratuity in the accounts of a company was imperative. It reads as under:‑- "A point has come under consideration of the Council whether or not a provision for gratuity must be made in the accounts of a company and where no such provision is made whether or not the fact has to be specifically stated in the report of the auditors. The Council held the view that the right course is that a provision for gratuity be made in the accounts of a Company every year as being a calculated liability notwithstanding that the same is allowed or not as a business expense under the Income‑tax Act and if no such provision is made the auditors must give a clear notice to that effect in their report and must state not only the reasons advanced by the Manage ment but also the impact of this liability on the profits or loss, disclosed by a Company." The learned Departmental Representative, in his turn, heavily relied upon the Full Bench's decision of the Appellate Tribunal as well as upon the fact that similar claim trade by the assessee in the immediately preceding year had also been disallowed by the Tribunal, by following the said Full Bench's decision. He also attempted to argue that the use of the amounts of provision for gratuity is not certain in certain circumstances inasmuch as it is not known as to what would happen to this amount when the industry becomes sick or is wound up. Before we proceed to deal with the contentions of the parties represen tatives, we deem it proper first to state certain facts relevant to the preceding assessment year 1974‑

75. In that year the assessee had in the Balance Sheet provided for gratuity at Rs. 17,68,111, as against Rs. 13,20,000, of the preceding year. Thus a fresh provision for Rs. 4,48,111, was made in that year. For the same reasons as given herein while making the disallowance in question, the Assessing Officer added back the sum of Rs. 4,48,111, in 1974‑

75. When the matter reached the learned A. A. C. in appeal, he held the claim to be admissible and consequently directed the I.‑T. O. to allow the same for computation of business income. The assessee's stand before him, it may be stated, was that the gratuity was an ascertained and confirmed statutory and/or negotiated liability based on terms of settlement with workers Union, and hence it was admissible under section 10(2)(xvi) of the repealed Income‑tax Act, 1922. Aggrieved by the order of the A. A. C. in this respect the Department came up in second appeal before the Appellate Tribunal, vide I. T. A. No. 166/KB of 1978‑

79. The Departmental Represen tative remained absent when the appeal was called on for hearing. It was, however, decided on merits after hearing the counsel for the assessee respondent (Mr. A. G. M., F. C: A.) while narrating the facts of the case, the Tribunal in its order dated 20th November, 1978, passed in the aforesaid appeal, stated: "That the dispute related to a sun of Rs. 48,111 (actually it is Rs. 4,48,111), which was claimed as provision for gratuity but was disallowed by the Assessing Officer for the reason that this represented contingent liability. The facts were then stated with regard to the first appeal having been allowed by the learned A. A. C. Thereafter, the Tribunal, without recording the contentions raised by the counsel for the ‑assessee‑respondents straightaway proceeded to state as follows:‑ "This question had come up in appeal before us in several other cases and a Full Bench of the Tribunal decided it in favour of the Depart ment by holding that the provision for gratuity is a contingent liability. We therefore, need not take long to Vacate the order of the learned Appellate Assistant Commissioner and to Restore the treatment meted out by the Assessing Officer." We are thus satisfied that the appellant above‑named cannot be shut out on the short plea that its claim for gratuity as made in the preceding assessment year 1974‑75, bad been disallowed by the Appellate Tribunal.

5. Now from the facts stated above. It is manifestly clear that the assessee, who is admittedly maintaining its books under Mercantile System of accounting had claimed the allowance for gratuity as being statutory and/or contracted and ascertained. The Income‑tax Officer did root deal with this aspect of the case at all and held the claim to be inadmissible on the plea that the cash provision had been debited in the Profit & Loss Account, the full details whereof bad not been given. The learned A. A. C. as it is evident from his order reproduced above held it to be a contingent liability without any discussion and confirmed the order of the Income‑tax Officer, particularly in appreciation of the fact that similar add‑back made in the last year was confirmed by the Income‑tax Appellate Tribunal. The case of the appellant was thus unfortunately, at no stage, examined in the right perspective. At this juncture, it seems appropriate to reproduce the following excerpts, concerning the facts of the above‑quoted Full Bench's case from the order of the Tribunal itself, as the assessee appeal for the preceding charge year has been decided by following the same :‑-- "This brings us to the main objection which is against disallowance of gratuity. The facts of the case are that for the first time in 1971, the assessee credited the accounts of the employees with certain sums and created a provision for gratuity. This done as in the assessee's opinion a duty had been cast upon the assessee according to West Pakistan (Standing Orders) Ordinance, 1968 (sic), for making payment to the workers who may resign from service or die or whose services may be terminated by the employees. The Ordinance was in force since 1968, but the so‑called liability was created and provision made for the first time in 1972. From the above it was not difficult to see that, unless one of the events took place, it was not possible, that some workmen may receive the gratuity on the occurrence of one of the events however it was also quite possible that no workmen may have to be paid, for the simple reason that none of the events may occur in the case of a single employee. Therefore, whatever, the assessee might be providing for, could at best be a mere provision for an unknown contingency." Since all the relevant facts were not explicitly borne out from this order, we, therefore, with a view to collect further facts of that case, deemed it necessary to refer to and carefully peruse the orders of the two Officers below. The Assessing Officer in that case had disallowed claim for gratuity without assigning any reasons" under the caption "Add‑back inadmissibles". On appeal the learned Appellate Assistant Commissioner passed the following order: "

4. Gratuity.--‑The Assessing Officer disallowed gratuity with the remarks Provision for gratuity Rs. 41,626'. The learned Authorised Represen tative argued as under:‑ 'Payment was provided in regard to eight employees who were entitled to gratuity as provided in terms of subsection (6) of section 12 of the West Pakistan Industrial Commercial Employment (Standing Orders) Ordinance (VI of 1968). In Income‑tax Appeals Nos. 1294 and 1329/KC/A/74, the learned Income tax Appellate Assistant Commissioner of Income‑tax, A‑Range, Karachi, has allowed such provisions vide his detailed and exhaustive order dated 4‑9‑1975. In view of my earlier order on the subject vide Appeal No. 1294 and 1329/KC/A/74, dated 4‑9‑1975, addition of Rs.41,626, is hereby deleted." It is thus evident that the facts of that case were not similar to the facts of the instant case and hence the Full Bench's decision is not applicable on all fours to the facts of this case. And it would therefore, be not proper on our part to blindly follow that decision. The main emphasis of the learned authorised Representative of the appellant was, and which could not be repelled by the learned Departmental Representative with reference to any material available on record, that the amount of provision for gratuity was strictly worked out in conformity with the relevant resolutions, referred to above. It was, therefore, ascertained liability of the assessee‑appellant company and it could not be disallowed simply because the ultimate user of the amount was uncertain. It is a well‑settled proposition by authorities that when a provision for a definite and ascertained amount is made, that it has to be allowed notwithstanding the fact that the amount of provision has not been actually disbursed or spent. If the assessee did incur the liability in terms of the arrangements made between, the assessee and the workmen or Officers, or in pursuance of some definite provisions of law, then. Notwithstanding the fact that it has been shown as a provision in the books of accounts, it would be considered and treated as an accrued liability and allowed as such while working out the gains and profits of business for Income‑tax purposes. If the claim is allowed, only when the actual payment of gratuity is made to an employee, then there would be left no difference between the Cash System and the Mercantile System of Accounting. The assessee cannot be compelled to maintain its accounts in respect of a particular item say the gratuity in the instant case, on cash basis notwithstanding its regular method of accounting being mercantile system. In our opinion, the provision for gratuity amounting to Rs. 8,51,171, for the year under appeal should be considered to be the expense incurred in the accounting yea on the basis of the regularly employed method of assessee's accounting on the bass of which its income, profits and gains are computed under section 13 of the Act. The important consideration for allowance of claim in question is that the liability was incurred in the recovering account year. We would, therefore even at the cost of reputation, observe that the system of accounting employed by the appellant being Mercantile, the provision for ascertained amount of gratuity, for which legal contractual liability had accrued, was correctly claimed as an expense notwithstanding the fact that the expenditure had not been actually disbursed. This liability had, we are satisfied, arisen during the year under appeal and it has to be allowed in this year, though it may have to be discharged at some future date, or, ultimately, it may not b discharged or discussed at all. In that case it may be observed in passing, it will be open to the tax authorities to charge this amount to tax by invoking the provision of section 10(2‑A) of the Income‑tax Act.

6. For the foregoing reasons, the appeal succeeds and the orders of both the Officers below are reversed. In our opinion, it would, in the facts and circumstances of this case, be fit and proper if the Income‑tax Officer is directed to verify and ascertain from the assessee's books of account the correctness or otherwise of the claim in question and allow it to the extent it is ascertainable and definite in terms of the agreements/resolutions, or, in the context of the relevant provisions of law, if any, applicable to the facts of this case. Appeal allowed.