1. BALASUBRAHMANYAN, J. ---The assessee 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.
2. The issue arises this way. In the industrial establishment of each of the assessee 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 is made for gratuity, then that would have the effect of separating the amount so provided for, from the employer's own capital and reserves. So far as income-tax computation is concerned, it has now become well-settled that where an employer has gratuity scheme rendering him liable to pay gratutity to workmen, and where having regard to the liability which might arise under the scheme, the employer obtains a scientific actuarial calculation under which the present discounted value of the gratuity liability is ascertained, and where the employer charges his P & L account with the incremental value of the year and also makes a provision for that amount, then the employer will be entitled to compute his net profits after deducting the figure of incremental value.
3. The Tribunal have clearly found that each of the assessee figuring in these references has charged its P & L account with the incremental value appertaining to the account year concerned, on the basis of actuarial valuation in order to build up, little by little, an overall provision for its liability under the gratuity scheme. We, therefore, hold that the provision made was rightly allowed by the Tribunal as a deduction in the computation of the business income of the concerned account year of fhb respective assessee.
4. We, however, wish to correct an error in the Tribunal's order. The Tribunal observed that the allowance on account of provision for gratuity must be granted to the assessee under section 37 of the I. T. Act, 1961. This is a mistaken view of section 37. This section is a residuary provision for the allowance of business expenditure in the computation of taxable business profits. In terms, this section deals with an expenditure "incurred" or "laid out" by the assessee. A provision for gratuity, although it has to be charged against current profits, is not an item of expenditure strictly so- called, nor is it laid out or incurred by the assessee, in the sense that money goes out. A provision for gratuity is merely a charge against profits, and as a provision, it is merely segregated from the current profits. Courts have held that allow--ance must be made for this provision, notwithstanding that no money goes out or is spent out by the assessee during the year, because, according to sound principles of commercial accounting, net profits will not be properly ascertained, if this provision is not made and the amount is not charged against the profits of the year's trading. The Tribunal was not, therefore, correct in laying down that the provision for gratuity is deductible under section 37 (1) of the 1. T. Act.
5. Section 37 (1), we said, is the residuary provision for the allowance of an item of expenditure, that is to gay, where that item does not fall under any other express statutory provision relating to deductions. Mark the words "(not being expenditure described in sections 30 to 36)" occurring in section 37(1). There are occasions when Courts find that deduction has got to be made in the computation of an assessee's profits, but the item in question does pot fall within the description of any of the sections including the residuary section 37 (1). In such cases, Courts used to attribute the statutory basin for the deduction to section 28. There is no harm in referring to this section, but we would not be precise in doing so. For section 28 does not provide for any allowances or deductions.
6. Not a word is said about deductions or allowances, or even about the computation of business profits, in section 28. In our view, it is quite unnecessary for us to seek a statutory basis for everything connected with income or everything concerned with the computation of taxable income. It is enough that we are able to find a given deduction as warranted by sound principles of commercial accounting, if they do not fall under, or are prohibited by, any of the express provisions relating to business deductions. That is why, following the English scheme of taxation on business income, our Courts sometimes observe that all legitimate business expenses, unless prohibited by the statute, are allowable under the income-tax law. This way of stating the legal position under our taxing statute may be an over-simplification but it brings out the truth that where there is no specific statutory provision for a deduction in the computation of taxable business profits, it does not mean that the item goes without any deduction at all, but the question will have to be resolved on the basis of commercial accounting principles provided they do not go against the grain of the income---tax statute or the fiscal concept of business income. This, we suppose, is the idea behind another express computation provision in the I. T. Act itself, section 145, under which the assessee's method of accounting would always condition the computation of business profits provided the correct profits are properly deducible under that method. We, however, think that we must eschew from the present discussion any reference to section 28 or even to section 145 for upholding the claim that a provision for gratuity is a deductible item. It would, we think, be a proper way of laying down the legal position if we say that deduction of provision for gratuity has to be made on commercial principles of accounting. This is because the income-tax law has not set its face against these principles; it only modifies them, in some respects, to cater to the peculiar needs and the exigencies of taxation.
7. We now proceed to formally enter our opinions in the references. The questions of law before us are as under T. C. No. 1138 of 1979: "Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction of Rs. 57,141 being the provision made towards gratuity liability for the assessment year 1972-73?"
8. T. C. No. 1142 of 1979 "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee is entitled to the deduction of the sum of Rs. 13,731 representing provision for gratuity in the assessm ent year 1972-73?"
9. T. C. No. 1249 of 1979 "Whether, on the facts and in the circumstances of the case, the assessee is entitled to the deduction of Rs. 58,436 representing incremental liability to gratuity for the assessment year 1972- 73?"
10. For the reasons earlier stated, our answer to each of these questions is in favour of the respective assessee and against the Department. There will, however, be no order as to costs.