1982 PLP (Trib (PTD)

M. KARIM (MEMBER).‑These appeals at the instance of the Department, are against the order of the A. A. C. A‑Range, Ky. As more or less common grounds of objection have been taken we shall dispose them of by a consolidated order. The most important issue involved concerns the provision of gratuity, disallowed by the I: T. O. in each year, but allowed by the A. A. C. This ground we. shall take up last. For 1972‑73 the excess perquisite calculated by the A. A. C. at Rs. 4,800 appears to be correct. As the Director's remuneration was only Rs. 500 per month. We maintain the A. A. C. order on this point. The next objection was against deletion made of the amount added back under 10(4)(e). No rules have yet been framed prescribing the limit in case of ‑the disbursing persons, and hence 10(4)(e) was impossible of application. Out of a total claim of Rs. 9,615 one of the directors was paid Rs. 6,000, the General Manager was paid Rs. 3,000 and only Rs. 615 was the entertainment expenses incurred by the company as such. The amounts paid to the employees as entertainment allowance could be treated as a perquisite if the limit had been prescribed as was to be done under 10(4)(e). As no limit has yet been prescribed 10(4)(e) will be applicable on the amounts paid to the employees. 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 was done as in the assessee's opinion a duty had been cast upon the assessee according to West Pakistan (Standing Orders) Ordinance, 1968, for making payment to the workers who may resign from service or die or whose services may be terminated by the employer. The Ordinance was in force since 1968 but the so‑called liability was created and provision made for the first time in 1972. Before we proceed we may with advantage, reproduce below the relevant subsection of the said Ordinance :‑ Subsection (6).‑Where a workman resigns from service or his services are terminated by the employer, for any reason other than misconduct he shall, in addition to any other benefit to which he may be entitled under the Ordinance or in accordance with the terms of his employ ments or any custom usage or any settlement or an award of a Labour Court under the Industrial Relations Ordinance, 1968 (XXIII of 1969) be paid gratuity equivalent to twenty days wages, calculated on the basis of the wages admissible to him in the last month of service if he is a fixed‑rated workman on the highest pay drawn by him during the last twelve months if he is a piece‑rated workman for every completed year of service or any part thereof in excess of six‑months. Provided that, where the employer has established a provident fund to which the workman is a contributor the contribution of the employer to which is not less than the contribution made by the workman; no such gratuity shall be payable for the period during which such provident fund has been in existence. Subsection (7).‑A workman shall be entitled to receive the amount standing to his credit in the provident fund, including the contribu tions of the employer to such fund, even if he resigns or is dismissed from service. Subsection (8).‑Where a workman dies while in service of the employer his dependent shall be paid gratuity in accordance with the provision of clause (6). ' The Ordinance, noted above contemplates payment of gratuity to the workman who resigns from service or whose services are terminated by the employer for any reasons other than misconduct or death of the employees during the service of the employer. In case of a worker dying during his tenure of service his dependents were to receive the gratuity. Therefore it was riot to be paid to any employee who might retire on superannuation, or whose services might be terminated on account of misconduct or who may die during the tenure of office. The gratuity was to be calculated on the basis of the highest pay drawn by him in the last twelve months of his service and, if he was a fixed‑rate workman. On the basis of the highest wages admissible to him in the last month of his service. The employee was to be paid for every completed year of service or any part thereof in excess of six months. From the above it was not difficult to see that unless one of the event took place, it was not possible even to calculate what amount of gratuity, if at all was to be paid to an employee. Although it was quite possible, that some workmen may receive the gratuity on the occurrence of one of the events, however, it was also quite possible that no workman 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. Mr. Pasha, who was at his brilliant and fascinating best cited a number of decisions of the Indian Jurisdiction in support of the assessee's case, which we shall take up in good time. For the moment suffice it t say that the Ordinance did not demand the creation of a fund or the crediting of employee's accounts. Under the Ordinance, an employee did not ‑acquire a vested right in the amount credited to his account, nor did the law expect the employer to credit the employee's account. On the one hand the employee did not acquire a vested right in the amount credited to his account, on the other, the employer does not lose control over the amounts credited. The employer was free to deal with the amounts credited to the employee's account exactly as he pleased. In such circumstances could it be said that liability had accrued 7 Surely not section 10(5) of the Income‑tax Act lays down that "In subsection W `paid' means actually `paid" o `incurred' according to the method of accounting upon the basis of which the profits or gains are computed under this section." Admittedly the assessee maintained his accounts on mercantile basis and only an accrued liability would be an admissible allowance under section 10 of the Income tax Act. We would now advert to the cases cited by Mr. I. N. P. . . the learned Advocate of the assessee. The first case cited was of M.

11. S. k. (p) Ltd. v. C. I.‑T. ((1973) 92 I T R 503). In the case the question was whether liability had accrued to 'the assessee‑Company for the payment of gratuity for the year under appeal. The assessee in that case claimed to deduct a sum of Rs. 1,37,811 in the computation of its income liable to income‑tax. The amount according to the assessee represented the sum which he would be required to pay his workman on account of gratuity. "The Authorities below disallowed the claim on the ground that no ascertained liability arose for payment of gratuity. When the matter went to the High Court, it was found necessary by the High Court to know the discounted value during the year in which the debit entry was made of the future gratuity payment. The assessee then produced a certificate from the zonal actuary of the life I. C. of I. . . . We certify that the disaccounted present value of the gratuity payment as on the last day of the accounting year would come to Rs. 1,05,200". The High Court allowed the expense. It would be of advantage to quote the Rules under which the gratuity in that case was to be paid: "Scale of gratuity.‑(1) Subject to the other provisions of this Scheme.‑ Gratuity shall be paid according to the following scale and on the occurrence of the following event‑ (a) On death while in employment irrespective of the length of service. (b) On attainment of age of superannuation. One‑half of a month's pay to a permanent and one‑fourth of a month's pay to a seasonal worker for every conti nuous year, or (c) On retirement or resignation due to continued ill‑health. Seasons of service as the case may be subject to a maximum of fifteen months pay. (d) On resignation or on termination of employment for any reason other than for serious misconduct. (i) For the period prior to the enforcement of this scheme en completion of ten but less than thirty years or seasons continuous service as the case may be one‑third of the month's pay to a permanent and one sixth of the month's pay to a seasonal workman for every continuous year or seasons of service as the case may be.‑ (ii) For the period subsequent to the enforcement of this scheme on completion of ten years' or seasons' service one‑fourth of the monthly pay to a permanent and one‑eighth to a seasonal workman for every completed year or season of service and on completion of 20 years or seasons of service, but less than 30 years, one‑third of the monthly pay to permanent and one‑sixth to a seasonal workman for every completed year of service. (iii) On completion of 30 years or seasons' continuous service as the case may be the amount payable for events mentioned in clauses (a) to (c). (2) A fraction of a year exceeding six months shall count as one full year, and six months or less shall be ignored. (3) In calculating the amount of gratuity the period of service after the implementation of the wage structure as given in this order shall be taken first and the pay for the pre‑implementation period will be the basis for the calculation of gratuity for the rest of the years. From the above the High Court came to the conclusion that a liability was cast upon the assessee to pay gratuity to its workman in accordance with the scale provided in the notification. This is what they said. "The gratuity is payable when a workman dies, retires, resigns. or is removed from services. These events no doubt take place in the future but they cannot be said to be uncertain. The services of every workman are bound to come to an end on account of one or the other causes nominated above. Under the scheme every employer is bound to pay a gratuity to a workman for his past and further services. In the circumstances every businessman would make provision every year for his liability under the notification. Under the mercantile system of accounting an expenditure is admissible not only when it is actually paid but when the liability for the expenditure is incurred. The only question is as to whether such a liability can fairly and accurately be ascertained in a particular year." Their Lordships of the A. High Court relied upon the cases of M. B. C. of L . . . L. v. Their Workman ((1969) 93 I T R 53). The Supreme Court had observed in that case as follows :‑ "In the case of an assessee maintaining his .account on mercantile system a liability already accrued though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy It is not as if such deduction is permissible only, in case amount actually expended their (account) most pertinent observation was as follows :‑ "Even if the liability is a contingent liability provided its discounted present value is ascertainable it can be taken into account. 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 profit cannot be properly estimated without taking into account." In both the cases the actual valuation seems to have turned a contingent liability into a liability of the year. Under the Indian Notification there was possibility of calculating the liability each year because it was to be at the value of pay of each year. But under the Ordinance now under consideration it was just not possible to calculate the liability even on a discounted basis, because the calculation was to be made on the basis of wages drawn in the last month of service or on the highest pay drawn by him during the last 12 months of service. The employee, was to receive gratuity equivalent to 20 days wages for every completed year of service, provided of course one of the conditions for such payment was fulfilled. In the Indian case, at least one event was bound to occur viz. retirement. Under the Pakistan Ordinance retirement was not one of the events. The occurrence of which might entitle a worker to the gratuity. Moreover, as the payment of gratuity was to be made on the basis of the highest pay drawn in the last twelve months of the year of service in which the event was to take place or on the basis of wages drawn in the last month of service the calculation of gratuity was just not possible. In the A. . . . case a discounted value was possible because it was not dependent on the highest pay or wages of the last year of service. Their Lordships of the Supreme Court of India in Metal Bux Company Limited of India v. Their Workmen ((1969) 73 I T R 53), had made the contingent liability as admissible expenses under the Bonus Act of India only when such expenses were sufficiently certain to be capable of valuation, could any one say with any amount of certainty in which year any, workman would resign, die or lose his service on account of termination by the employer ? Or could any one say what would be the highest wage or the highest pay of that year in which the event may take place ? And if the answer is in the negative . . . . It could not be in the affirmative without distortion of imagination the amount claimed could not be an admissible expense. The other case cited by Mr. Pasha was that of Sourthern Railway of Peru Limited v. Owen Inspector of Taxes. In that case; an English Company, operating a Railway Line in Peru was bound by law to pay its employees compensation on the termination cf their services, the legislative provision being incorporated into all contracts of service. The company in that case, claimed to be entitled to enlarge against each year's receipts, the cost of making provision for retirement payments, which would ultimately be thrown on it calculating the sum that would be required to be paid to each employee who might retire at the close of the year. In that case it was held that the company was not entitled to make the deduction sought to be made. It was the minority Judge Lord Cyril Redcliff, of unhappy memories in this country, who thought the amount to be admissible. The other High Court decisions cited by M. P. . . have little or no bearing on the facts of this case. The decision of The Tribunal in I. T. As. Nos. 560 and 561/KB of 1975‑76 for the assessment year 1973‑74 and 1974‑75 dated 31‑3‑1977 of course in assessee's favour. I shall plainly confess that I was unduly impressed by the learned arguments of the learned Advocate in that case. The decision of my learned brother in I. T. A. No. 3743/PB of 1973‑74 for the assessment year 1973‑74 seems to be well‑considered and correct, We were, of coarse, unaware of that decision which was taken on 27‑9-1975 when we decided the appal on 31‑3‑1977, in I. T. Rs. Nos. 560/KB and 561/KB of 1975‑76 (referred to above). Their Lordships of the Allahabad High Court in the case of Madhu Mqhesh Sugar Mills Limited v. C. I. T. (92 I T R 503) quoted with approval that Lord Redcliff had said in his dissenting judgment, in the case of Southern Railway. Peru Limited referred to above. My aplomb deserted me when I found that it was the .opinion of a minority Judge which had been favoured for question against the decision taken by the majority in that case. As is done in many cases, in this case too, commercial presence as a reason for making the provision, was urged with great vehemence anti ample flourish. One might have asked the assessee why commercial expediency or prudence did not drawn upon him in the year in which the Ordinance was passed. At best even if this contingent liability could be admissible the, only amount that could have been claimed during the assessment year could be what was payable according to each employee's 20 days' wages of that year. It was worth noticing that, although the Ordinance was in force since 1968 the provision was made for the first time only in 1972. The appellant may have been prudent in creation of a reserve for future contingency but that does not mean that he could claim the amount as an admissible expenditure under section 10 of the Income‑tax Act. If the law does not require the assessee to create the reserve it could not be said that the expenditure had been incurred. We, therefore, upheld the appeal on this point, for each of the years. Appeal allowed.