(On appeal from the judgment of the High Court of Sindh dated 23-9-1991 passed in I.T.R. No.11 of 1985).

Income Tax Ordinance (XXXI of 1979)---

----S. 23---Income-tax Act (XI of 1922), Ss.10(2) & 2(6BB)---Gratuity payable to the employees is an allowable deduction.

Commissioner of Income-tax, Karachi v. Messrs Pakistan Security Printing Corporation 1985 P T D 413 approved.

Messrs S.J.G. Fazal Elahi Ltd. v. Commissioner of Income-tax, Central Zone, Karachi 1989 P T D 579 ref.

Commissioner of Income-tax, U.P. v. N.L. Laxmi Sugar and Oil Mills Ltd. 1989 P T D 169 distinguished.

Shaikh Haider, Advocate Supreme Court instructed by S.M. Abbas, Advocate-on-Record for Petitioner.

Nemo for Respondent.

Date of hearing: 29th December, 1991

JUDGMENT

SAJJAD ALI SHAH, J.---By this petition leave is sought to file appeal against judgment, dated 23-9-1991 of a Division Bench of the High Court, whereby question framed by Income-tax Appellate Tribunal referred to the High Court is answered in negative. Briefly the facts are that respondents are assessees and claimed deduction of gratuity for Assessment year 1979-80, which was allowed to the extent of gratuity paid and not allowed to. the extent of Rs.27,295, which was to be paid in future on happening of contingencies on retirement, termination and resignation of employees. Reason assigned by Income Tax Officer for disallowance was that liability of payment of gratuity had not yet accrued during the relevant period and, therefore, the same could not be treated as allowable deduction. Appeals of assessees before Appellate Assistant Commissioner and Appellate Tribunal failed and consequently at their request the question was framed by Appellate Tribunal and referred to the High Court as under:--

"Whether in the facts and circumstances of the case the Appellate Tribunal was justified in upholding the disallowance of the claim of gratuity payable to the employees?" .

High Court after hearing the counsel for both parties answered the question in negative following two decisions of the same High Court rendered earlier in the case reported as Commissioner of Income-tax, Karachi v. Messrs Pakistan Security Printing Corporation (1985 P T D 413) and Messrs S.J.G. Fazal Elahi Ltd. v. Commissioner of Income-tax, Central Zone, Karachi 1989 P T D 579. In fact latter reported case has followed rule laid down by former reported case in which there is detailed discussion in the light of sections 10(2) and 2(6-BB) of Income-tax Act No. XI of 1922 on description of free reserve, gratuity and trading liability'. In support of the proposition, reliance is placed upon a large number of reported cases, relevant paragraph from the aforementioned judgment in 1985 P T D 413 is reproduced as under:--

"We have quoted the relevant portion of the order of the Income-tax Officer hereinabove in para. 4, from which it is evident that every year the respondent assessee made a provision for the gratuity of the staff' on the basis of the emoluments received by them and the amount was credited to this account, on the basis of the accounting principle that the amount of gratuity is earned every year by the employees and thus it is debitable against the profits of the year in which it is earned though it is payable only when the employees retire from the service. The learned Income-tax Appellate Tribunal in its order, dated 3rd April; 1973 has held that the reserve for gratuity has been created to meet ascertained liability and, therefore, cannot partake of the nature of free reserve. In other words, it is not the actual amount of the liability incurred by the respondent assessee towards its employees ins respect of the gratuity of the years in question nor it is the case of the department that the respondent assessee was not liable to pay the above gratuity either' under the contract or under the statutory provision. Factually the case proceeded before the Income-tax Officer as well as before the learned Income-tax Tribunal on the assumptions 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 fork 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 assessees' 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 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."

Mr. Shaikh Haider contended before us that gratuity paid in the relevant year is allowable deduction but amount can be within the control of the Company for payment in future is not an allowable deduction. Secondly, that under the provisions of Labour laws, liability for payment arises only on resignation, retirement or termination, hence Income-tax authorities were justified in disallowing the same. Both these contentions stand answered in the judgment of the reported case mentioned above, relevant paragraph of which is quoted above. High Court has rightly relied upon case-law in support of answering the question negatively formulated in the reference placed before it. In support of his contentions, reliance is placed by Mr. Shaikh Haider on the case of Commissioner of Income-tax, U.P. v. N.L. Laxmi Sugar and Oil Mills Ltd. 1989 P T D 169 (Supreme Court of India), which is misplaced for the reason that the point discussed in that case is different and distinguishable from the point in issue in the instant case.

For the facts and reasons stated above, we are of the considered view that no exception can be taken to the judgment of the High Court impugned in this petition for the reason that it has answered the question correctly to the effect that claim of gratuity payable to the employees cannot be disallowed in the light of and for the reasons stated in the case-law mentioned above. No interference is warranted, as such leave is refused and petition is dismissed.

M.B.A./C-98/S??????????????????????????????????????????????????????????????????????????????????? Petition dismissed.