# Commissioner of Income Tax, Kanpur v. M/s Kanpur Textiles Ltd., Kanpur

- **Citation:** (2004) 2 ILRA 581
- **Court:** High Court of Judicature at Allahabad
- **Decided:** 2004-08-31
- **Case number:** Income Tax Reference No.15 of 1982
- **Bench:** R.K. Agrawal, K.N. Ojha
- **Source:** https://unisonlegal.in/judgment/allahabad-high-court/commissioner-of-income-tax-kanpur-v-m-s-kanpur-textiles-ltd-kanpur-40260
- **Pages:** 10

## Headnote

Act,
1961-S.256
(2)-
Reference-under-whether
interest
on
late payment of Income Tax is an
allowable deduction while computing
prints
and
gains
from
business
or
profession. Held; No.

Held: Para 21

We are in respectful agreement with the
principles
laid
down
in
the
aforementioned cases and are of the
considered view that interest on late
payment of income tax is not an
allowable deduction while computing the
profits and gains from business or
profession. In view of the foregoing
discussions, we are of the considered
opinion that the interest on late payment
of income tax/advance tax or selfassessment tax or any other direct tax
cannot be allowed as a deduction.
Case law discussed:
(1973) 88 ITR 234, (1995) 213 ITR 523,
(1969) 73 ITR 53 (SC), (1973) 92 ITR 503
(All), (1974) 95 ITR 151 (Del), (1975) 101 ITR
292 (Bom), 1977 U.P.T.C. 31, (1978) 114 ITR
684, (1985) 151 ITR 701, (1985) 156 ITR 585
(SC), (1948) 30 Tax Cases 496, (1976) CTR
(Pat) 227, (1987) 167 ITR 354, (1998) 229
ITR 366 (Bom), (1971) 82 ITR 363 (SC),
(1965) 57 ITR 521 (SC), (1977) 106 ITR 704
(All), (1997) 224 ITR 591 (SC), (1978) CTR
(All) 211, (1978) 112 ITR 276 (Cal), (1979)
118 ITR 976 (Cal), (1987) 163 ITR 429 (A.P.),
(1989) 180 ITR 29,31 (Punj), (1989) 180 ITR
114,166 (Punj), (1981) 129 ITR 62 (Cal),
(1993) 203 ITR 315 (Cal), (1906) AC 10, 12
(HL), 13 ITR Suppl. 23,26 (HL), 33 TC 259,
274, 282 (HL), 17 TC 59,63, (1957) 31 ITR
153 (Bom), (1960) 39 ITR 751 (Cal), (1961)
42 ITR 774 (Pat), (1965) 58 ITR 84 (Cal),
(1973) 90 ITR 373 (P&H), (1977) 108 ITR 531
(Guj), (1977) 110 ITR 577 (Cal), (1978) 13
ITR 252 (Cal), (1978) 114 ITR 654 (Bom),
(1981) 132 ITR 342 (P&H), (1983) 144 ITR
936 (Kar), (1987) 166 ITR 176 (SC), (1989)
177 ITR 222 (Bom), (1989) 180 ITR 37 (Kar),
(1989) 180 ITR 478 (Gauhati), (1994) 209 ITR
490 (Cal), (1998) 230 ITR 733 (SC).

## Text

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2 All] Commissioner of Income Tax, Kanpur V. M/s Kanpur Textiles Ltd., Kanpur
581
of the trucks and the drivers of the truck
were driving the vehicles rashly and
negligently. Both the truck drivers have
been held to be joint tort feasers.

14. The cases relied upon by the
learned
counsel
for
the
Insurance
Company have no application to the facts
of
the
present
case.
They
are
distinguishable on two grounds. Firstly,
these cases have been decided under New
Motor Vehicles Act, 1988. Secondly, in
those cases the Supreme Court was not
called upon to adjudicate the liability of
the Insurance Company in respect of the
workman traveling in goods vehicle.
Those are the cases of passengers
traveling in goods vehicles.

15. Therefore, I do not find any
merit in the appeal. The appeal is
dismissed.
---------
ORIGINAL JURISDICTION
CIVIL SIDE
DATED: ALLAHABAD 31.08.2004

BEFORE
THE HON'BLE R.K. AGRAWAL, J.
THE HON'BLE K.N. OJHA, J.

Income Tax Reference No.15 of 1982

Commissioner of Income Tax, Kanpur

...Applicant
Versus
M/s Kanpur Textiles Limited, Kanpur

 ...Respondent

Counsel for the Applicant:
Sri A.N. Mahajan

Counsel for the Respondent:
Sri R.S. Agarwal

Income
Tax
Act,
1961-S.256
(2)-
Reference-under-whether
interest
on
late payment of Income Tax is an
allowable deduction while computing
prints
and
gains
from
business
or
profession. Held; No.

Held: Para 21

We are in respectful agreement with the
principles
laid
down
in
the
aforementioned cases and are of the
considered view that interest on late
payment of income tax is not an
allowable deduction while computing the
profits and gains from business or
profession. In view of the foregoing
discussions, we are of the considered
opinion that the interest on late payment
of income tax/advance tax or selfassessment tax or any other direct tax
cannot be allowed as a deduction.
Case law discussed:
(1973) 88 ITR 234, (1995) 213 ITR 523,
(1969) 73 ITR 53 (SC), (1973) 92 ITR 503
(All), (1974) 95 ITR 151 (Del), (1975) 101 ITR
292 (Bom), 1977 U.P.T.C. 31, (1978) 114 ITR
684, (1985) 151 ITR 701, (1985) 156 ITR 585
(SC), (1948) 30 Tax Cases 496, (1976) CTR
(Pat) 227, (1987) 167 ITR 354, (1998) 229
ITR 366 (Bom), (1971) 82 ITR 363 (SC),
(1965) 57 ITR 521 (SC), (1977) 106 ITR 704
(All), (1997) 224 ITR 591 (SC), (1978) CTR
(All) 211, (1978) 112 ITR 276 (Cal), (1979)
118 ITR 976 (Cal), (1987) 163 ITR 429 (A.P.),
(1989) 180 ITR 29,31 (Punj), (1989) 180 ITR
114,166 (Punj), (1981) 129 ITR 62 (Cal),
(1993) 203 ITR 315 (Cal), (1906) AC 10, 12
(HL), 13 ITR Suppl. 23,26 (HL), 33 TC 259,
274, 282 (HL), 17 TC 59,63, (1957) 31 ITR
153 (Bom), (1960) 39 ITR 751 (Cal), (1961)
42 ITR 774 (Pat), (1965) 58 ITR 84 (Cal),
(1973) 90 ITR 373 (P&H), (1977) 108 ITR 531
(Guj), (1977) 110 ITR 577 (Cal), (1978) 13
ITR 252 (Cal), (1978) 114 ITR 654 (Bom),
(1981) 132 ITR 342 (P&H), (1983) 144 ITR
936 (Kar), (1987) 166 ITR 176 (SC), (1989)
177 ITR 222 (Bom), (1989) 180 ITR 37 (Kar),
(1989) 180 ITR 478 (Gauhati), (1994) 209 ITR
490 (Cal), (1998) 230 ITR 733 (SC).

(Delivered by Hon'ble R.K. Agrawal, J.)

1. The Income Tax Appellate
Tribunal, Allahabad has referred the
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582
following questions of law under Section
256(2) of the Income Tax Act, 1961
(hereinafter referred to as "the Act") for
opinion to this Court:-

"1. Whether on the facts and in the
circumstances
of
the
case,
the
Tribunal was in law justified in
holding that the liability of gratuity
amounting to Rs.1645092/- relating to
past years accrued in the accounting
year relevant to the Assessment Year
1972-73 and was, therefore, an
allowable
deduction
for
that
Assessment Year?
2. Whether on the facts and in the
circumstances of the case, when the
system of accounting of the assessee
was
mercantile
and
when
Dr.
Sampurnanand Award of 1961 was
extended by the U.P. Government
year after year, the Tribunal was
justified in law in holding that the
liability of Rs.1645092/- relating to
the past years arose for the first time
in the Assessment Year 1972-73?
3. Whether the Tribunal having found
that the assessee company had failed
to claim the liability for gratuity for
the past year was justified in law in
holding that it was not debarred from
claiming the liability of earlier years
in the Assessment Year 1972-73?
4. Whether on the facts and in the
circumstances of the case, when the
provisions of S.36(1)(v) of the
Income Tax Act, 1961, provisions as
contained in Part C of Schedule IV of
the Income Tax Act, 1961 and the
rules
relating
thereto
were
not
complied with, the Tribunal was in
law justified in allowing the claim of
gratuity of Rs.1645092/- in the
Assessment Year 1972-73?
5. Whether on the facts and in the
circumstances of the case, when the
provisions
of S.36(1)(v)
of
the
Income Tax Act, 1961, provisions as
contained in Part C of Schedule IV of
the Income Tax Act, 1961 and the
rules
relating
thereto
were
not
complied with, the Tribunal was in
law justified in allowing the claim of
gratuity of Rs.1245428/- in the
Assessment Year 1972-73?
6. Whether on the facts and in the
circumstances
of
the
case,
the
Tribunal was justified in law in
holding that the interest paid to the
Income Tax Department was an
allowable deduction under the Income
Tax Act?"

Briefly stated, the facts giving rise to the
present reference are as follows:-

2. The reference relates to the
Assessment Year 1972-73, the previous
year being the financial year. The
respondent assessee is a public limited
company
incorporated
under
the
Companies
Act.
It
is
engaged
in
manufacturing of cotton textile goods. A
part of its products are exported to various
countries. For the Assessment Year 197273, the respondent assessee claimed the
following amount of retirement gratuity
as deduction while computing its profit
and loss:

(i) in respect of the years prior to the
accounting year under consideration -
Rs.1645092/-;
(ii) in respect of the accounting year
under consideration - Rs.1245428/- and
(iii) actually paid and debited to the profit
and loss account - Rs.166495/-.

3. The Assessing Officer found that
the respondent assessee was making
payment of gratuity to its employees on
the basis of the Cawnpore Cotton Textiles
Industries Workmen's Gratuity Scheme
which became effective from 14th August
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2 All] Commissioner of Income Tax, Kanpur V. M/s Kanpur Textiles Ltd., Kanpur
583
1961, published by the U.P. Government
under 6(3) of the U.P. Industrial Disputes
Act, 1947, popularly known as Dr.
Sampurnanand Award. He also noticed
that the provisions of Dr. Sampurnanand
Award, 1961 was substantially the same
as
those
contained
in
the
U.P.
Government Notification No.4268, dated
19th November 1971, and the Payment of
Gratuity Act, 1972. However, he allowed
the claim of the respondent assessee only
for Rs.166495/- in respect of gratuity
actually paid and debitted to the profit and
loss account as in the earlier years. The
Assessing Officer had rejected the claim
in respect of remaining two amounts on
the ground that the liability accrued from
year to year in the past and not in the
accounting
year
under
consideration
under Dr. Sampurnanand Award of 1961.
Further, there was no approved gratuity
fund created under irrevocable trust as
laid down under the Act or the Rules
made thereunder and the conditions laid
down in Section 36(1)(v), IV Schedule
and the Income Tax Rules were not
fulfilled. He further held that the assessee
had been regularly following the system
of claiming deduction on payment basis
and no bona fide reason for deviation
there from could be established. He was
further of the opinion that not only an
irrevocable trust was to be created, the
fund has also to be invested in the manner
provided in the Income Tax Rules.

4. Further, during the Assessment
Year in question the respondent assessee
has received a sum of Rs.41490/- as
interest from the Income Tax Department.
It, however, disclosed an amount of
Rs.13030/- only. The balance amount of
Rs.28460/-
was
disallowed
by
the
Assessing Officer and was added to its
income.

5. The assessee, feeling aggrieved,
preferred an appeal before the Appellate
Assistant Commissioner. The Appellate
Assistant
Commissioner
upheld
the
disallowance of Rs.1645092/- which was
in respect of the years prior to the
previous year under consideration holding
that the method of accounting being
mercantile, the claim should have been
made in the earlier years. However, he
held that the claim of Rs.1245428/- in
respect of the previous year under
consideration was allowable as liability
for this amount accrued in the Assessment
Year under consideration. He, however,
confirmed the disallowance of interest of
Rs.28460/-.

6. Both, the Assessee and the
Revenue, preferred separate appeal before
the Tribunal. The Tribunal relying upon a
decision of the Gauhati High Court in the
case of Commissioner of Income Tax v.
Nathmal Tola Ram, (1973) 88 ITR 234,
allowed the assessee's claim in respect of
Rs.1645092/-. It also allowed the claim of
Rs.28460/-
towards
interest.
The
Tribunal,
however,
dismissed
the
Revenue's appeal regarding the sum of
Rs.1245228/-.

7. We have heard Sri A.N. Mahajan,
the learned Standing Counsel for the
Revenue, and Sri R.S. Agrawal, the
learned counsel for the assessee.

8. The learned counsel for the
Revenue submitted that as the respondent
assessee had not created a fund for the
exclusive benefit of its employees under
an irrevocable trust and had not paid any
amount by way of contribution to such
approved gratuity fund, any amount paid
towards gratuity cannot be allowed as
deduction as the same does not fall within
the purview of Section 36 (1)(v) of the
Act. He further submitted that under
Section 2 (5) of the Act 'approved
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gratuity fund' has been defined to mean a
gratuity fund which has been and
continues to be approved by the Chief
Commissioner or the Commissioner in
accordance with the Rules contained in
Part C of the IV Schedule. According to
him, as the provisions of Part C of
Schedule IV has not been complied with,
the payment of gratuity cannot be allowed
as a deduction while computing the profit
and gain of the business. Sri Mahajan
further submitted that once an item of
expenditure falls under Section 36 (1)(v)
of the Act, it cannot be allowed under the
residuary provision under Section 37 (1)
of the Act. On the question of allowability
of interest, he submitted that the amount
in question represented the interest paid
on income tax, which is not an allowable
deduction as it has not been laid out for
the purposes of carrying on business. He
relied upon a decision of Gujarat High
Court in the case of Saurashtra Cement
and
Chemical
Industries
Ltd.
v.
Commissioner of Income Tax, (1995)
213 ITR 523.

9. The learned counsel for the
respondent assessee, however, submitted
that no doubt in the earlier years the
respondent
assessee
was
claiming
deduction on account of gratuity on the
basis of actual payment but on account of
subsequent
development,
i.e.,
the
notification dated 19th November 1971
issued by the State Government, the
amount of gratuity became a statutory
liability which had accrued during the
relevant previous year. It was quantified
on a scientific basis on the actuarial report
and, therefore, it has to be allowed as a
deduction. He further submitted that
under Section 40 (a)(ii) of the Act any
sum paid on account of rate or tax levied
on the Profits or Gains of Business, is not
allowed as a deduction. The interest paid
for not depositing or paying the tax would
not come under the aforesaid provisions
and has, therefore, been rightly allowed as
a deduction by the Tribunal. He relied
upon the following decisions:-

(i)
Metal Box Company of India Ltd.
v. Their Workmen, (1969) 73 ITR
53 (SC);
(ii)
Madho Mahesh Sugar Mills (P.)
Ltd. v. Commissioner of Income
Tax, (1973) 92 ITR 503 (Alld.);
(iii) Delhi Flour Mills Co. Ltd. v.
Commissioner of Income Tax,
(1974) 95 ITR 151 (Del);
(iv) Tata Iron & Steel Co. Ltd. v.
D.V.Bapat, Income Tax Officer,
Companies Circle I (2), Bombay
and another, (1975) 101 ITR
292(Bom);
(v)
Additional
Commissioner
of
Income Tax v. M/s Lakshmi
Sugar Mills, 1977 UPTC 31;
(vi) Commissioner of Income Tax,
Lucknow v. Laxmi Sugar and Oil
Mills Ltd., (1978) 114 ITR 684;
(vii) Commissioner of Income Tax,
A.P.-I, Hyderabad v. Warner
Hindustan Limited, (1985) 151
ITR 701.

10. Having heard the learned
counsel for the parties, we find that the
Apex Court in the case of Metal Box
Company of India Ltd. (supra) had
considered the question as to whether it is
legitimate in such a scheme of gratuity to
estimate the liability on an actuarial
valuation and deduct such estimated
liability in the profit and loss account
while working out its net profits. The
Apex Court has held that in the case of an
assessee maintaining his accounts on
mercantile system, 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
his business, regard being had to the
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2 All] Commissioner of Income Tax, Kanpur V. M/s Kanpur Textiles Ltd., Kanpur
585
accepted principle of commercial practice
and accountancy. It is not as if such
deduction is permissible only in case of
amounts actually expended or paid. The
Apex Court has held that estimated
liability for payment of gratuity based on
actuarial valuation, was a permissible
deduction. It had further held that such a
liability was a liability in praesenti though
payable in future and it was ascertainable.
The Apex Court has further held as
follows :-

"But the contention was that though
Schedule VI to the Companies Act may
permit
a
provision
for
contegent
liabilities, the Income Tax Act, 1961,
does not, for, under section 36 (i)(v), the
only deduction from profits and gains
permissible is of a sum paid by an
assessee as an employer by way of his
contribution towards an approved gratuity
fund created by him for the exclusive
benefit of his employees under an
irrevocable trust. This argument is plainly
incorrect because section 36 deals with
expenditure deductible from out of the
taxable income already assessed and not
with deductions which are to be made
while making the P. & L. account. In our
view, an estimated liability under gratuity
schemes such as the one before us, even if
it amounts to a contingent liability and is
not a debt under the Wealth Tax Act, if
properly ascertainable and its present
value is properly discounted is deductible
from the gross receipts while preparing
the P. & L. Account."

11. This Court in the case of Madho
Mahesh Sugar Mills (P.) Ltd. (supra)
has held that though no part of the
gratuity may have been payable by the
assessee in any of the earlier years, the
past services of the employees had to be
taken into account merely to arrive at a
quantum of the liability which became
payable after the notification. The liability
for payment of gratuity ascertained on
actuarial
calculation
in
which
all
contingencies
are
taken
into
consideration, is a liability in praesenti
and is capable of ascertainment and,
therefore, was a permissible business
expenditure in the Assessment Year
concerned."

12. In the case of Delhi Flour Mills
Co. Ltd. (supra), the Delhi High Court
has followed the decision of the Apex
Court in the case of Metal Box Company
of India Ltd. (supra) and of this Court in
the case of Madho Mahesh Sugar Mills
(P.) Ltd. (supra) and had held that
provision made by the assessee for
payment of gratuity was an allowable
deduction.

13. Similar view has been taken by
the Bombay High Court in the case of
Tata Iron & Steel Co. Ltd. (supra); this
Court in the case of M/s Lakshmi Sugar
Mills (supra) and Laxmi Sugar and Oil
Mills Ltd. (supra) and the Andhra
Pradesh High Court in the case of
Warner Hindustan Limited (supra).

14. The Apex Court in the case of
Shree
Sajjan
Mills
Ltd.
v.
Commissioner of Income Tax, (1985)
156 ITR 585 (SC), has summarized the
position regarding allowability of the
amount of gratuity prior to the insertion of
Section 40A(7) in the Act by the Finance
Act, 1975, with effect from 1st April 1973,
as follows:-

"(1)Payments of gratuity actually made to
the employee on his retirement or
termination of his services were
expenditure incurred for the purpose
of business in the year in which the
payments were made and allowed
under section 37 of the Act.
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 INDIAN LAW REPORTS ALLAHABAD SERIES [2004
586
(2) Provision made for payment of
gratuity which would become due and
payable in the previous year was
allowed as an expenditure of the
previous year on accrued basis when
mercantile system was followed by
the assessee.
(3) Provision made by setting aside an
advance sum every year to meet the
contingent liability and gratuity as
and when it accrued by way of
provision for gratuity or by way of
reserve or fund for gratuity was not
allowed as an expenditure of the year
in which such sum was wet apart.
(4) Contribution made to an approved
gratuity fund in the previous year was
allowed as deduction under section
36(1)(v).
(5) Provision made in the profit and loss
account for the estimated present
value of the contingent liability
properly ascertained and discounted
on an accrued basis as falling on the
assessee in the year of account could
be deductible either under section 28
or section 37 of the Act."

15. It is not in dispute that Dr.
Sampurnanand Award which was made in
the year 1961 was applicable initially for
a period of one year. It was extended from
year to year by the State Government by a
separate notification. However, after 13th
September 1971, the Award was not
extended and only on 18th September
1971, the State Government had issued a
notification extending the Award from
14th September 1971. The amount of
gratuity in question is being claimed
under
the
notification
dated
19th
November
1971.
Dr.
Sampurnanand
Award under which there was the liability
for payment of the amount of gratuity,
had been in force during all the previous
Assessment
Years
on
account
of
extension by the State Government every
year and it came to an end on 13th
September 1971 as it was not extended
after 13th September 1971. However, vide
notification dated 18th September 1971, it
was made applicable from 14th September
1971. The scheme of gratuity framed
under Dr. Sampurnanand Award was an
annual affair as its operation was initially
for a period of one year and had been
extended every year whereas the gratuity
scheme enforced on 19th November 1971,
vide Notification No.4268, dated 19th
November 1971, was for a period of 3
years. The provisions of the two schemes
have been found to be similar. It may be
mentioned here that the Payment of
Gratuity Act, 1972 came into force on
16.09.1972 and, therefore, was not in
existence during the assessment year in
question.
Thus,
the
same
principle
regarding payment of gratuity would be
applicable with the exception that liability
for payment of gratuity which had
accrued during the assessment in question
but had not been paid to the employees
being a liability in praesenti, is to be
allowed as a deduction while computing
the profits and gains from business of the
respondent. However, the amount of
gratuity which relates to the earlier
assessment years, had accrued in the
earlier years and not in the assessment
year in question and, therefore, it cannot
be allowed as a deduction in this year.

16. There is a distinction between the
actual liability in praesenti and a liability
de futuro which for the time being is only
contingent. The former is taxable but not
the latter as held in Peter Merchant Ltd.
v. Stedeford (1948) 30 Tax Cas. 496;
Indian
Copper
Corporation
v.
Commissioner of Income Tax (1976)
CTR
(Pat)
227;
Commissioner
of
Income Tax v. Instrumentation Ltd.
(1987) 167 ITR 354 (Raj); Standard
Mills Co. Ltd. v. Commissioner of
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2 All] Commissioner of Income Tax, Kanpur V. M/s Kanpur Textiles Ltd., Kanpur
587
Income Tax (1998) 229 ITR 366, (Bom).

It is also settled that an assessee who
follows
the
mercantile
system
of
accounting,
is
entitled
to
claim
a
deduction even though the expenditure is
actually not expended. It is enough if the
liability for such expenditure accrues. If
in law the liability accrued, this accrual
will not be defeated or fail by a reason of
the assessee not making entries in the
books of account as held in the case of
Kedarnath Jute Mfg. Co. Ltd. v.
Commissioner of Income Tax (1971) 82
ITR 363 (SC). It is also well settled that if
a business liability has definitely arisen in
the accounting year, a deduction should
be allowed although the liability may
have to be estimated and discharged at a
future date, as held in the case of Poona
Electric
Supply
Co.
Ltd.
v.
Commissioner of Income Tax, (1965) 57
ITR 521 (SC); Kundan Sugar Mills v.
Commissioner of Income Tax, (1977)
106 ITR 704 (All) and Metal Box Co. of
India Ltd. v. Their Workmen, (1969) 73
ITR 53 (SC). At the same time, if the
liability to a particular sum has been
incurred during the accounting year and if
otherwise the sum is allowable as a
revenue expense, then whether the sum
has been actually paid or not is
immaterial; the liability so incurred has
got to be allowed as a revenue expense, as
held by the Apex Court in the case of
Haji
Lal
Mohd.
Biri
Works
v.
Commissioner of Income Tax (1997)
224 ITR 591 (SC). It is also well settled
that in the case of a statutory liability, the
accrual depends upon the term of the
statute.
The
quantification
or
ascertainment cannot postpone its accrual
to the extent of admitted liability, as held
in the case of Commissioner of Income
Tax v. L.H.Sugar Factory and Oil Mills
P.
Ltd.,
(1978)
CTR
(All)
211;
Commissioner
of
Income
Tax
v.
Swadeshi Mining and Mfg. Co. Ltd.,
(1978)
112
ITR
276
(Cal);
Commissioner
of
Income
Tax
v.
Swadeshi Mining and Mfg. Co. Ltd.,
(1979)
118
ITR
975
(Cal);
Commissioner of Income Tax v. Shri
Sarvaraya Sugars Ltd., (1987) 163 ITR
429 (AP); Commissioner of Income Tax
v. Aggarwal Rice & General Mills,
(1989)
180
ITR
29,
31
(Punj);
Commissioner of Income Tax v. Ram
Chand Kanshi Ram, (1989) 180 ITR
114, 166 (Punj). Where a statute imposes
liability with retrospective effect, such
liability, even for past years, accrues in
the accounting year wherein the statute
first comes into operation, as held by the
Calcutta High Court in the case of
Commissioner of Income Tax v. West
Ghusick Coal Co. Ltd., (1981) 129 ITR
62 (Cal). Further it is not in all cases
correct to say that a statutory liability
created in a particular year, becomes
liability for deduction in that year under
the mercantile system of accounting. It
depends on the facts and circumstances of
the case and on statutory provisions in
that regard, as held by the Calcutta High
Court in the case of Commissioner of
Income Tax v. Padmavati Raje Cotton
Mills Ltd., (1993) 203 ITR 375 (Cal). In
the aforesaid case an ordinance levying
market fees was promulgated on 15th May
1980. The demand for the market fees
relating to earlier years was made during
the accounting year relevant to the
Assessment Year 1983-84. On these facts,
it has been held that though the statutory
liability was created in the year 1980, the
said liability became real and enforceable
when the demand was made. Therefore,
the
assessee
was
held
entitled
to
deduction in respect of such demand for
the Assessment Year 1983-84.

17. Thus, applying the principles
laid down by the Apex Court in the
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 INDIAN LAW REPORTS ALLAHABAD SERIES [2004
588
aforementioned cases, the amount of
gratuity can be deducted either under
Section 28 or Section 37 of the Act.
Further, the contribution made to an
approved gratuity fund is only allowable
under Section 36(1)(v) of the Act. Thus,
the Tribunal was justified in allowing the
amount of Rs.1245428/-, being the
amount of gratuity, as deduction for the
Assessment Year in question as the said
liability has been ascertained on actuarial
calculation and it is a liability in praesenti
and
was
a
permissible
business
expenditure. However, the Tribunal was
not justified in allowing the sum of
Rs.1645092/- towards gratuity as the said
liability did not accrue in the previous
year relevant to the Assessment Year in
question and related to the earlier years
when Dr. Sampurnanand Award was in
force.

18. So far the question of allowance
of interest of Rs.28460/- is concerned, it
may be mentioned here that under Section
37 of the Act an expenditure laid out or
expended wholly or exclusively for the
purpose of business which is not of the
nature described under Sections 33 to 36
and not being in the nature of capital
expenditure or personal expenses of the
assessee, is allowable while computing
the income chargeable under the head
Profits
and
Gains
of
Business
or
Profession. Section 40(a)(ii) of the Act,
however, provides that any sum paid on
account of any rate or tax levied on the
profits or gains of any business or
profession, shall not be deducted in
computing the income chargeable under
the Profits and Gains of Business or
Profession. Section 40 of the Act opens
with a non obstante clause. It specifically
refers to notwithstanding anything to the
contrary in Sections 33 to 38. Even
otherwise, income tax is not deductible as
business expenses from the business
profit as it is merely a State share of the
profits as held in Ashton v. Att-Gen
(1906) AC 10, 12 (HL); LC v. Ollivant
13 ITR Suppl 23, 26 (HL); IR v. Dowdall
33 TC 259, 274, 282 (HL); Allen v.
Farquharson 17 TC 59, 63.

19. Interest on account of deficiency
in payment of advance tax or on account
of delay in payment of tax or in the filing
of the return of Income, on the money
borrowed for payment of income tax, is
neither deductible as business expenses
under Section 37 nor as interest on
borrowings under Section 36(1)(iii) of the
Act, as held in the case of Aruna Mills
Limited v. Commissioner of Income
Tax, Ahmedabad (1957) 31 ITR 153
(Bom); Balmer Lawrie & Co. Ltd. v.
Commissioner of Income Tax, Calcutta
(1960)
39
ITR
751(Cal);
Maharajadhiraj Sir Kameshwar Singh
v Commissioner of Income Tax, Patna
(1961) 42 ITR 774 (Pat); Mannalal
Ratanlal v. Commissioner of Income
Tax, Calcutta (1965) 58 ITR 84 (Cal);
Commissioner
of
Income
Tax
v.
Oriental Carpet Manufacturers (India)
P. Ltd. (1973) 90 ITR 373 (P&H);
Gopaldas
Dahyabhai
Lavsi
v.
Commissioner of Income Tax, Gujarat
(1977) 108 ITR 531 (Guj); Waldies Ltd.
v. Commissioner of Income Tax, West
Bengal - III (1977) 110 ITR 577 (Cal);
National Engineering Industries Ltd. V.
Commissioner
of
Income
Tax
(Central), Calcutta (1978) 113 ITR 252
(Cal);
Kishinchand
Chellaram
v.
Commissioner of Income Tax, Bombay
City - III, (1978) 114 ITR 654 (Bom);
Commissioner
of
Income
Tax,
Amritsar - I v. Om Prakash Behl (1981)
132 ITR 342 (P&H); Commissioner of
Income
Tax,
Karnataka
v.
International Instruments (P.) Ltd.
(1983) 144 ITR 936 (Kar); Panmavati
Jaikrishna
(Smt.)
v.
Addl.
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2 All] Commissioner of Income Tax, Kanpur V. M/s Kanpur Textiles Ltd., Kanpur
589
Commissioner of Income Tax, (1987)
166 ITR 176 (SC); Commissioner of
Income Tax v. Ghatkopar Estate and
Finance Corporation (P.) Ltd. (1989)
177 ITR 222 (Bom); Federal Bank Ltd.
v. Commissioner of Income Tax (1989)
180 ITR 37 (Ker); Assam Forest
Products (P.) Ltd. v. Commissioner of
Income Tax (1989) 180 ITR 478
(Gauhati); Orient General Industries
Limited V. Commissioner of Income
Tax (1994) 209 ITR 490 (Cal) and
Bharat Commerce and Industries Ltd.
v. Commissioner of Income Tax (1998)
230 ITR 733 (SC);

20. In the case of Saurashtra
Cement and Chemical Industries Ltd.
(supra), the Gujarat High Court has held
that the interest paid on late payment of
income tax is not an allowable deduction.
It has held as follows:-

"The argument apparently appears to
be facile but foes not stand scrutiny of
reason. The mere fact that the interest on
the
late
payment
of
the
tax
is
compensatory does not make it an
expense wholly or exclusively carried out
for the purpose of business. The essence
of section 37 of the Act is that such
expenses are wholly laid out or incurred
for the purpose of business, is not
allowable as expenses laid out or incurred
for the purpose of business, ordinarily the
interest paid thereon also canoe be
considered as expenses laid out or
incurred wholly for the purpose of the
business.

However, in the present case, the
interest if payable on the personal liability
of the assessee of the income tax which is
a direct tax and is not a part of the
business expenditure. In this connection,
it may further be noticed that interest on
money borrowed for the payment of the
tax was held to be not an allowable
expenditure. Reference in this connection
be made to the decision of the Supreme
Court
in
the
case
of
Panmavati
Jaikrishna (Smt.) v. Addl. CIT (1987)
166 ITR 176. The Supreme Court,
affirming the decision of this Court in
Padmavati Jaikrishna (Smt.) v. CIT
(1975) 101 ITR 153 disallowing the claim
for deduction of interest on the amounts
borrowed to pay taxes and annuity
deposits, held as under (at page 179):

"We are inclined to agree with the
High Court that so far as meeting the
liability of income tax and wealth tax is
concerned, it was indeed a personal one
and payment thereof cannot at all be said
to be expenditure laid out or expended
wholly or exclusively for the purpose of
earning income."

It may be noted that specific
provision was required to be inserted in
the form of Section 80V for the purpose
of allowing of such interest as expenditure
in the computation of profits and gains
from business. But for the special
provision made, interest on the capital
borrowed for the payment of tax is not
allowable expenditure. If that be so on the
same principle the interest paid for the
late payment of tax cannot be held
allowable expenditure as the same cannot
be held to be expenditure incurred wholly
or exclusively for the purpose of the
business."

21. We are in respectful agreement
with the principles laid down in the
aforementioned cases and are of the
considered view that interest on late
payment of income tax is not an allowable
deduction while computing the profits and
gains from business or profession. In view
of the foregoing discussions, we are of the
considered opinion that the interest on late
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 INDIAN LAW REPORTS ALLAHABAD SERIES [2004
590
payment of income tax/advance tax or
self-assessment tax or any other direct tax
cannot be allowed as a deduction.

22. In view of the foregoing
discussions, our answer to the question
nos.1 to 3 and 6 are in the negative, i.e., in
favour of the Revenue and against the
Assessee and our answer to question no.5
is in the affirmative, i.e., in favour of the
Assessee and against the Revenue. So far
question no.4 is concerned, the amount of
Rs.1645092 was not allowable in the
assessment year 1972-73. However, there
was no bar during the assessment year
1972-73 for claiming the deduction of
gratuity under Section 37 of the Act even
if the conditions of Section 36(i)(v) of the
Act have not been complied with. Thus,
our answer to question no.4 is also in the
negative, i.e., in favour of the Revenue
and against the assessee. In view of the
divided success, the parties shall bear
their own costs.
---------
APPELLATE JURISDICTION
CIVIL SIDE
DATED: ALLAHABAD 31.08.2004

BEFORE
THE HON'BLE UMESHWAR PANDEY, J.

Second Appeal No. 470 of 1981

Ram Kishan and others
...Appellant
Versus
Sri Ganeshi

 ...Respondent

Counsel for the Applicant:
Sri B. Malik
Sri V.C. Mishra
Smt. S.V. Mishra

Counsel for the Respondents:
Sri H.N. Sharma

Specific Relief Act, 1963-S. 16(C)-Suit
for Specific performance of Contractplaintiff must plead and prove that he
has always been ready or willing to
perform with part of contract-When
plaintiff himself failed to perform his
part of contract, not entitled to a decree
of Specific performance.

Held: Para 6 & 10

From the aforesaid provision of Section
16 (c), it is quite evident that a plaintiff
seeking
specific
relief
of
specific
performance of contract has to aver and
prove that he has performed or has
always been ready or willing to perform
the essential terms of the contract which
are to be performed by him under the
agreement. If on a particular date for
which notice has been given by the party
seeking relief of specific performance of
contract, he himself fails to perform his
part of the contract i.e. the payment of
sale
consideration
to
the
proposed
vendor
before
the
Sub-Registrar,
it
cannot be presumed that the plaintiff
seeking such relief has always been
ready and willing to perform his part of
contract. In this context, the legal
position is well settled.

In view of the aforesaid facts and
circumstances, I find that the plaintiffrespondent, when had failed to perform
his part of the contract in terms of
Section 16 (c) of the Specific Relief Act,
had no right to obtain a decree of
specific performance of agreement in
question
and
the
appeal
of
the
defendant-appellant should be allowed.
Case law discussed:
AIR 1928 PC 208
AIR 1967 SC 868
AIR 1995 SC 945
AIR 1980 All 52

(Delivered by Hon'ble Umeshwar Pandey, J.)

1. Heard Sri B. Malik, learned
counsel for the appellants. None has
however, appeared on behalf of the
respondent.