THE COMMISSIONER OF INCOME-TAX, CENTRAL `B', KARACHI VS MESSRS PHILIPS ELECTRICAL CO. OF PAKISTAN LIMITED, KARACHI
1991 P T D 672
[Karachi High Court]
Before Saleem Akhtar and Muhammad Hussain Adil Khatri, JJ
THE COMMISSIONER OF INCOME-TAX, CENTRAL `B', KARACHI
versus
Messrs PHILIPS ELECTRICAL CO. OF PAKISTAN LIMITED, KARACHI
Income Tax Reference No. 60 of 1983, decided on 18/02/1991.
Income-tax Act (XI of 1922)---
----S. 10---"Free reserve"---Retirement gratuity ---Assessee, a company, claimed retirement gratuity for staff as an admissible expense---Department treated suchamount as free reserve---Income-tax Appellate Tribunal in appeal found that such a provision could not be constituted as "free reserve" as by its nature a free reserve could be utilized in any manner whereas said provision though dealt with as a reserve was clearly tied down to a particular contingency or liability-- Retirement gratuity. thus, could not be construed as "free reserve" as it was an ascertained liability and could properly be charged on profit and loss account.
Commissioner of Income-tax, Karachi v. M/s. Pakistan Security Printing Corporation Ltd., Karachi 1985 PTD 413 fol.
Owen (H.M. Inspector of Taxes) v. Southern Railway of Peru Ltd. 1953 56 TC 602 and 1969 (73) ITR 53 ref.
Sheikh Haider for Applicant.
Nemo for Respondent (called absent).
Date of hearing: 18th February, 1991.
JUDGMENT
SALEEM AKHTAR, J: --For the assessment year 1968-69 the respondent claimed retirement gratuity for the staff as an expense admissible to it. The Income Tax Officer in computing the free reserves included the provision of retirement gratuity for the staff and did not agree with the respondent that it was not a free reserve. The respondent had also pleaded that the provision was intended to fulfil definite obligations and the amount was to be calculated in a definite manner. However, the Tribunal in appeal held that such a provision cannot be constituted free reserve as by its nature a free reserve can be utilised in any manner whereas this provision though dealt with as a reserve is clearly tied down to a particular contingency or liability. At the instance of the Department the Tribunal has referred the following question:
"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the provision for retirement gratuity should not be taken into account in calculating the free reserve of the assessee-company?"
The facts and circumstances appearing from the order of the Tribunal are that the respondent had made provision for retirement gratuity for the staff which was mentioned in the balance-sheet. The only question is whether this is a free reserve and the respondent is not entitled to claim it as an expense. In this regard reference can be made to Commissioner of Income-tax, Karachi v. M/s. Pakistan Security Printing Corporation Ltd., Karachi 1985 P T D 413, where after considering a host of authorities it was observed by Ajmal Mian, J. (as he then was) as follows:--
"Factually the case proceeded before the Income Tax Officer as well as before the learned Income-tax Tribunal on the assumption that the respondent assessee's liability to pay gratuity is a legal liability and it is not an ex gratia payment by the respondent to its employees. We may place on record that Mr. Shaikh Haider, learned counsel for the appellant has fairly cited the cases which were in fact against the department, namely, the cases referred to hereinabove in paras. 5(a)(vii), (viii) and. (ix) which are the decisions of the Madras High Court and which clearly lay down that the liability of gratuity ascertained each year is a proper charge against P & L accounts though the liability to pay may accrue subsequently. Reference may also be made to the House of Lord's case Owen (H.M. Inspector of Taxes) v: Southern Railway of Peru Ltd. 1953-56 TC 602 referred to hereinabove in para. 5(b)(vi), in which it was held that provision for the payment of compensation to the assessee's employees upon termination of their services on the basis of length of service, rate of pay etc. is a proper charge on P & L upon the basis of proper principles of commercial accountancy from year to year. Further, reference may also be made to the case of the Indian Supreme Court reported in 1969(73) I T R 53 quoted hereinabove in para. 5(b)(vii), in which it has been held with reference to a scheme of gratuity that 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 business under the accepted principles of commercial practice and accountancy and that it is not necessary that the amount actually be expended or paid."
This observation will equally apply to the facts of the case with the only difference that in the present case the gratuity relates to retirement benefits which has not been disputed nor it has been found by the Tribunal that the liability is not a legal liability of the respondent. After analysing the arguments and the authorities quoted, finally, it was observed as follows:
"We are, therefore, inclined to hold that since the amounts set apart for gratuity, were intended to provide for ascertained liabilities which accrued in the financial years in question, the same were proper charge on the P & L account on the basis of the proper principles of commercial accountancy as held by the learned Income-tax Tribunal in the relevant years. Our answer to the above-quoted questions referred to hereinabove in para. 1, is that the gratuity cannot be construed as a free reserve in terms of S.R.O.No.116(R)/68 but it is an ascertained liability and therefore it is a proper charge on the P & L account for the assessment years in question on the basis of the proper principles of commercial accountancy:"
There seems to be no difference in the legal liability so far the gratuity or the gratuity for retirement is concerned. Applying these principles we reply the question in the affirmative.
Z.S./C-201/KQuestion answered in the affirmative.