Commissioner of Income Tax vs Jay Shree Tea and Industries Ltd.

Sen, J.—The Tribunal has referred the following questions of law u/s 256(1) of the income tax Act, 1961 (''the Act'') to this Court:

Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal was justified in deleting the sum of Rs. 2,91,134 being the provision for gratuity liability ?

Whether, on the facts and in the circumstances of the case, the income tax Appellate Tribunal was justified in law in deleting the addition of Rs. 3.50,846 representing gratuity liability allowed earlier by holding that it was outside the purview of section 41(1) 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 law in holding that Government subsidy received by the assessee could not form a part of the sale price of the commodities and, hence, the same should not be added to the value of the closing stock ?

In this proceeding the assessment year involved is 1978-79 for which the relevant year of account is the year ended on 31-3-1978.

The first two questions are relating to the assessee''s liability to pay gratuity. So far as the first question is concerned, elaborate argument has been made on behalf of the revenue. Having regard to the facts found by the Tribunal and the direction given by the Tribunal, we find no difficulty in upholding the order of the Tribunal.

The facts found by the Tribunal are as under :

The assessee is a limited company deriving income from business of tea and shipping. The assessee sold one of its tea estates during the previous year under consideration as a going concern for a net consideration of Rs. 16 lakhs. In addition, the purchaser took over the assessee''s liability to pay gratuity to the extent of Rs. 6,43,500. Taking these two amounts together, the sale proceeds can be said to be Rs. 22,43,500. During the year under consideration the assessee claimed the balance of the sum of Rs. 2,91,134 (being the balance of the sum of Rs. 6,43,500 after considering the amount of Rs. 3,50,846 already allowed) as liability accrued against the assessee up to the date of sale. The case of the assessee was that it was liable to pay the amounts in respect of the services rendered to it up to the date of sale and so, it claimed the deduction as stated above before the ITO. The ITO disallowed the claim of Rs. 2,91,134 on the ground that clause 8 of the deed of sale dated 5-8-1977 stated that the gratuity due to the staff in respect of the services up to the date of sale became the liability of the purchaser. According to the ITO the purchaser agreed to pay the said liability of the assessee without any reference to the sale proceeds. In addition to the above disallowance the ITO added back the sum of Rs. 3,50,846 which had been allowed in the earlier years on the ground that the liability in respect of the said amount ceased to exist and so became taxable u/s 41(1) of the Act. The assessee appealed to the Commissioner (Appeals), who held that this was not a case of cessation of liability and even deleted the addition of Rs. 3,50,846. However, he agreed with the ITO that the sum of Rs. 2,91,134 is not admissible as deduction as the purchaser had taken over to discharge that liability. The assessee appealed to the Tribunal against the disallowance of Rs. 2,91,134. On the other hand, the department appealed to the Tribunal against the deletion of Rs. 3,50,846 by the Commissioner (Appeals) from the total income of the assessee. The Tribunal considered both the grounds together and held as below:

We have considered the contentions of both the parties as well as the facts on record. In our opinion, the CIT (Appeals) has intended fallen into an error of reasoning inasmuch as he has been inconsistent. On going through the agreement for sale dated 5-8-1977 as a whole, we are convinced that the assessee agreed to sell the assets enumerated therein in consideration of not only the net cash payment of Rs. 16 lakhs but also the agreement of the purchaser to discharge the gratuity liability to the employees in respect of the services rendered to the assessee. If that be so, there was no cessation of liabilities; nor was there any take over of the liabilities of the assessee. The assessee''s liability to pay remained intact. The purchaser merely undertook to pass on the amount that was received from the assessee by way of constructive payment to the creditors of the assessee when the occasion would arise in future. Clause 8 of the said agreement which has been taken by the ITO as spelling out the cessation of liability of the assessee, actually makes the purchaser a conduit pipe to receive the money in one hand and hold it till payment to the assessee''s creditors when the occasion would arise in future. Hence, the CIT (Appeals) was quite correct in his decision that the sum of Rs. 3,50,845 was outside the purview of section 41(1) as the assessee never got back that amount. We uphold the decision of the CIT (Appeals) on this point. On the same reasoning the liability of the assessee for the balance sum of Rs. 2,91,134 also arose to the assessee and was not passed on to the purchaser in the sense in which the ITO and the CIT (Appeals) have understood it. Even for that balance amount, the purchaser has merely acted as an agent to the assessee. According to the finding of the CIT (Appeals) that the entire sum of Rs. 6,43,500 was constructively paid by the assessee to the purchaser with which we agree, the balance sum of Rs. 2,91,134 also becomes a deductible expense subject to the provisions of section 40A(7). We find force in the argument raised for the assessee that as far as it was concerned the amount became payable during the previous year by virtue of the aforesaid agreement dated 5-8-1977 and, consequently, it came within the exception of section 40A(7)(b)(i) of the Act. For the above reasons we delete the sum of Rs. 2,91,134. However, we direct that the sale-proceeds be taken at Rs. 22,43,500 as offered by the assessee and any amount that becomes assessable under the law on the said date should be brought to tax by the ITO."

It is important to bear in mind for the purpose of this case the direction of the Tribunal to take the sale proceeds at the figure of Rs. 22,43,500 as offered by the assessee. The figure has been arrived at by taking the sale price of the tea garden at the net consideration of Rs. 16,00,000 actually paid as also the additional sum of Rs. 6,43,500 being the amount of the assessee''s liability to pay gratuity, which was taken over by the purchaser. By taking these two amounts together the sale proceeds have been arrived at the figure of Rs. 22,43,500. The order of the Tribunal cannot be disturbed in any way. The purchaser has agreed to discharge the assessee''s liability. In fact he has taken over the assessee''s liability to pay off gratuity and has paid a sum of Rs. 6,43,500 on account of gratuity apart from the cash consideration given.

Strictly speaking, the provision of section 41(1) does not apply to this case. Section 41(1) reads as follows :

"Profits chargeable to tax. -(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains of business or profession and accordingly chargeable to income tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not.

The assessee is under a statutory liability to pay gratuity. The statutory liability does not come to an end by virtue of an agreement between the parties. A purchaser may have undertaken to take care of the assessee''s statutory liability, but this will not prevent the authority concerned from proceeding against the assessee, in case there is a failure to make payment in accordance with law. Be that as it may, in view of the direction given by the Tribunal and after going into the facts of the case and considering a number of decisions that were cited, we answer Question Nos. 1 and 2 in the affirmative and in favour of the assessee. So far as Question No. 3 is concerned, the same is concluded by a judgment of this Court delivered on 25-12-1989 in the assessee''s own case for the earlier assessment year being income tax Reference No. 95 of 1984. Following that judgment Question No. 3 is also answered in the affirmative and in favour of the assessee.

There will be no order as to costs.

Banerjee, J.

I agree.