Gratuity provision for employees who already retired is an ascertained liability – HC

Brief of the Case :  Calcutta High Court held In the case of CIT vs. M/s Kamarhatty Company Ltd. that the views expressed by the tribunal are as per law. Assessee has made the gratuity provision in respect of employees who have already retired. Therefore, the liability is ascertained liability which has already accrued. Accordingly, the deletion of addition made vide clause(c) of Explanation to sec.115-JB is proper.

Facts of the Case

The following questions raised in the appeal:

• Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was justified in holding that the provision for gratuity payable amounting to Rs.2,10,48,340/- in respect of employees who retired in the earlier years was allowable although the provision represented sums that were neither actually paid nor had become payable during the period relevant to Assessment year 2004-05 and was thus disallowable in terms of the provisions of section 40A(7)(a) of the Income Tax Act, 1961?
• Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was justified in holding that the provision for gratuity payable amounting to Rs.50,16,000/- in respect of employees who retired in the earlier years was an ascertained liability for the purposes of computation of book profit under Section 115JB although the said provision was admitted by the assessee as being an estimated sum ?

 Held by ITAT

For the A.Y. 2003-04, ITAT allowed appeal of the assessee for the statistical purpose. ITAT held that it has been contended by the assessee that majority of the payment in respect of employees’ contribution towards P.F. and E.S.I. have been incorporated before the due date including the grace period. For the chart which has been incorporated in the assessment order, we find that payments have been made after the due date, but whether such payment is within grace period or not would require verification at the end of the AO. Therefore, we deem it proper to restore the matter back to the AO.

For the A.Y. 2004-05, ITAT allowed partly appeal of the assessee. ITAT held that we are unable to agree with the Revenue that the provision for liability of gratuity is unascertained liability. The assessee had made the provision in respect of employees who have already retired. Therefore, the liability is ascertained liability which has already accrued. Accordingly, the addition made vide clause (c) of Explanation to sec.115-JB in assessment year 2004-05 is deleted.

 Held by High Court

The question no. 1 which is related to A.Y. 2003-04 is yet to be answered by the AO as the matter is remanded back by tribunal to the AO for verification at their hand. Therefore, the question No.1 is premature and need not be answered.

Regarding question no. 2 which is related to A.Y. 2004-05, the tribunal rightly held that the assessee had made the provision in respect of employees who have already retired. Therefore, the liability is ascertained liability which has already accrued. Accordingly, the addition made vide clause (c) of Explanation to sec.115-JB in assessment year 2004-05 is deleted.

Accordingly, appeal dismissed.