P L D 1984 Peshawar 214 (PLP)

INAYAT ELAHI KHAN, J.‑In this reference under section 66(2) of the Income‑tax Act, 1922 (XI of 1922) by the Commissioner of Income‑tax, Rawalpindi Zone, Rawalpindi, the following question has been referred for decision :‑‑ "Whether on the facts and in the circumstances of the case the Tribunal was justified to allow the provision of gratuity as a business expense."

2. In the assessment year of 1971‑72 the respondent made a provision of Rs. 1,50,732 on account of gratuity and claimed it as a business expenditure in the said year. The claim was disallowed by the Income‑tax Officer for the reason that gratuity was payable to employees at the time of leaving the service and, therefore, the deduction would be allowable in the year in which the payment was actually made. The company then went in appeal before the Appellate Assistant Commissioner, but its appeal was dismissed. The plea of the respondent that the provision of gratuity is to be treated as admissible under the first proviso to section 16(1)(c) of the Income‑tax Act, ifs the respondent was maintaining accounts on mercantile basis, did not prevail and it was held that even under this system of accountancy only ascertained and finally determined liability can be charged to P & L account. The respondent feeling aggrieved went in second appeal before the Income‑tax Appellate Tribunal, Peshawar Bench, Peshawar, where its contention was accepted. It was held that the respondent had adopted the mercantile system of accounting whereunder after the completion of a year's service each worker became entitled to gratuity calculated in the manner indicated above although it was payable to the worker at the time he left the company's service. The company was, therefore, liable to pay this amount and the mere fact that the payment was deferred would not make any difference.

3. In support of the reference the only point urged by the learned counsel for the department is that though the amount of gratuity was ascertainable but since the amount was not actually paid to the workers in the assessment year, the respondent was not entitled to claim deduction. However, the question whether the amount could be legally claimed by the assessee as a business expenditure is not disputed by the learned counsel. It appears that the necessary entries were made by the respondent in the books of accounts for gratuity at the rate of 20 days salary in respect of every worker who had completed one year service. It is also clear that this amount was debited to the company's account and credited to the gratuity account and whenever any worker left the service of the company he was entitled to receive the gratuity aid the company was bound to make the payment out of the gratuity fund thus created. It is not disputed that the company was maintaining mercantile system of accounting whereunder a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profit and loss of its business. It is not necessary that the deduction would be permissible only if the amount was actually paid. In our view the sum of Rs. 1,50,732 represents an estimate of an accrued liability which had to be discharged at a future date. In view of the fact that the deduction claimed by the respondent could be rightly termed as a business expenditure and the respondent was maintaining its account's on mercantile system, it was not necessary for allowing the expenditure that there should have been an actual payment to the workers.

4. For the aforesaid reasons, no fault can be found with the finding arrived at by the learned Appellate Tribunal. The question referred is, therefore, answered in the affirmative. No order as to costs. M. Z.M. Reference answered.