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I . T . A . No.572/ KB of 1983-84, decided on 15th March, 1987.

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--S. 25 (c)--Gratuity--Provision of gratuity claimed as expense- Whether such provision determined liability of assessee towards employees--Validity of claim--Liability of gratuity would remain a mere provision and would not be permissible deduction except such amount of it which was actually paid during relevant assessment year--Where there was no evidence on record to show that any agreement was arrived at regarding gratuity between the workers' union and assessee, the liability of gratuity would not be determined liability and was a mere provision.

(1982) 46 Tax 4 (Trib); I.T.A. No.1000/KB of 1977-78 etc. recorded on 25th September, 1978; I . T . A No.958-A / K B of 1982-83 recorded on 8th January, 1986; I.T.A. No.993/KB of 1981-82 etc. decided on 11th July, 1985; I.T.A. No.1000/KB of 1977-78; 44 Tax 62 (Trib); I.T.A. No.993/KB of 1981-82 and I.T.A. No.958-.a/KB of 1982-83 ref.

(1981) 44 Tax 62 (Trib) distinguished.

Muhammad Farid D.R. for Appellant

I.N. Pasha for Respondent

Date of hearing: 15th March 1987.

This departmental appeal is directed against the order of learned Commissioner of Income-tax (Appeals) recorded by him on 31st May, 1983.

2. The brief facts giving rise to it are that in assessment year 1981-82, the respondent, public limited company, claimed Rs.1,89,204 as deduction in its Profit and Loss Account on account of gratuity. Since the Income Tax Officer was of the view that amount of Rs.1,89,204 was nothing but a provision for gratuity. It was not a permissible deduction. He, therefore, disallowed it and added it to the total income of the respondent. Having been aggrieved and dissatisfied the respondent went up in appeal and the learned commissioner of Income-tax (Appeals) by his impugned order ordered the deletion of aforesaid amount with the following observation:----

"But at the same time considering that the appellant follows mercantile system: of accounting he cannot be denied the privilege making for expenses that according to him became his liability during the course of a year. Under these circumstances I will be inclined to concede the contention of the assessee that the provision for gratuity be allowed to him as an expense on the basis of calculation and determined liability towards its employee"

The learned C.I.T. (Appeals), however, added that: if aforesaid provision continued as unpaid liability in three subsequent years it could be added back under section 25(c) of the Income Tax Ordinance, hereinafter referred to as "the Ordinance." This time the department felt aggrieved and has come up in second appeal before us.

3. Mr. Muhammad Farid, the learned Departmental Representative firstly relied upon a decision of Full Bench of the Tribunal reported is (1982) 46 Tax 4 (Trib.)The learned D.R. then further invited our attention to our decisions as mentioned here in below:

(i) I T A No.1000/ KB of 1977-78 etc.- recorded on 25th September,1978 ,

(ii) ITA No.958-A/KB of 1982-83 recorded on 8th January, 1986.

(iii) ITA No.993/KB of 1981-82 etc. decided on 11th July, 1985.

The learned D.R. on authority of the decisions mentioned above submitted that the learned C .I . T . (Appeals) erred in ordering the deletion of Rs.1,89;204 which was nothing but a provision for gratuity. Mr. I.N. Pasha, the learned counsel for the respondent, on the other hand, invited our attention to a Division Bench decision of this Tribunal reported as (1981) 44 Tax 62 (Trib.). He further contended that aforesaid amount reflected a determined liability and was not a mere provision for gratuity.

4. We have heard both the learned D.R. as well as learned counsel for the respondent and have also gone through the decisions of this Tribunal mentioned above. Starting with the Full Bench case which was written by Mr. Muqtada Karim, the then learned Accountant Member and concurred with by Mian Abdul Khalique, the learned Judicial Member and Mr. A.A. Dareshani, the then learned President. It appears from its perusal that the Full Bench after going through the relevant provisions of the West Pakistan (Standing Orders Ordinance), 1968 and after considering various authorities cited from Indian jurisdiction came to the conclusion that the provision made for payment of gratuity by the assessee of that case was not permissible under law. The Full Bench was of the view that since the assessee was free to deal with the amounts credited to the employees account exactly as he pleased, such liability could not be deemed to have been accrued.

5. From perusal of the decision of this Tribunal recorded in ITA No.1000/KB of 1977-78 it appears that aforesaid Full Bench was followed by a Division Bench of this Tribunal which consisted of Mr. Muhammad Mazhar Ali, the then learned Judicial Member and Mr. Muqtada Karim. In this case also it was contended that the liability shown on account of gratuity was not only under the legislative provision but was also calculated and determined in nature. It was further contended that it was made pursuant to an agreement entered into with the workers' Union, However, from perusal of the reported decision contained in 44 Tax 62 (Trib.) which was written by Mr. Muhammad Mazhar Ali, the then learned President and concurred with by Mr. Ghulam Murtaza Khan, the then learned Accountant Member. It appears that a departure was made from the Full Bench decision mentioned above. In this case the Full Bench case was distinguished on the ground that there was not only a provision in the West Pakistan (Standing Orders Ordinance) but an agreement was also arrived at between the assessee and its trade union. Moreover, in this case the difference between mercantile and cash system was also highlighted. Thus, the learned Division Bench distinguishing the Full Bench decision allowed the amount of gratuity claimed as permissible deduction. However, the matter does not rest here. From perusal of the decision of this Tribunal recorded in ITA No.993/KB of 1981-82 which was written by Mr. Ghulam Murtaza Khan, the then Chairman and concurred with by Mian Abdul Khalique, again followed the Full Bench decision mentioned above. Let us mention here that in this case also the assessee was a hundred per cent Government owned corporation. Thus, it appears that there has been conflict in approach to the problem regarding the claim of an assessee about liability of the gratuity claimed as deduction. However, it appears) that the majority of the Members hold the view that the liability of the gratuity would remain a mere provision and would not be permissible)/ deduction except that such amount of it which is actually paid during the relevant assessment year. Now as far as the decision relied upon by Mr. I.N. Pasha is concerned it does not come to his rescue for the simple reason that in his case there is no evidence on record to show that any agreement was arrived at regarding gratuity between the workers' union and the appellant which was in fact a distinguishing feature in the case relied upon by him. As such under the facts and circumstances of this appeal and in view of consensus of opinion amongst most of the learned Members of this Tribunal, we find force in this appeal.

6. Mr. Muhammad Farid, the learned D.R. invited our attention to Section 24(g) of the Income-tax Ordinance, 1979 and contended that if the respondent wants to maintain the gratuity fund it should -comply with the provisions of that section so that the amount of gratuity did not remain at its disposal according to its sweet will. We think that the submission of the learned D.R. carries much weight.

7. For the reasons given above we, therefore, allow this appeal and after vacating the order of the learned C.I.T. (Appeals) restore the order of the I . T .O. Before parting with this appeal let us point out that another decision cited by Mr. Muhammad Farid contained in ITA No.958-A/KB of 1982-83 was an authority for purposes of add back made under section 10(2A) of the repealed Income-tax Act or under section 25(c) of the Ordinance. .

8. The appeal stands disposed of accordingly.

M.B.A./426/T Order accordingly.

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