(Common Prayer: Tax Case (Appeals) are filed under Section 260A of the Income-Tax Act, 1961, against the order of the Income Tax Appellate Tribunal, Madras “A” Bench, dated 14.05.2008 in ITA No.2174 to 2176/Mds/2007 for the Assessment Years 2000-01 to 2002-03.)

Common Judgment:

Dr. G. Jayachandran J.

1. These Tax Case Appeal have been filed by the assessee, being aggrieved by the reversing judgment of the Tribunal.

2. The Tribunal’s decision contradicted the view of the appellate authority by holding that the payment of Rs.7,77,595/- towards an LIC premium, intended to ensure an annual annuity of Rs.15,000/- per month for the employee on retirement or attaining 70 years of age or on completion of 25 years of service, was not made in respect of services rendered by the partners and therefore, cannot be exempted from the payment of income tax. The Tribunal further concluded that nomenclature is not a decisive factor and that the true nature of the transaction must be examined to determine its allowability. This conclusion of the Tribunal is now challenged by the assessee.

3. This Court, while considering the appeals challenging the order of the Tribunal reversing the finding of the appellate authority, has framed the following substantial questions of law:-

                   “1.Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the payment to partners at a predetermined amount per month after their retirement for the continued use of their share of goodwill is not an allowable deduction?

                   2.Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the payment to partners was not in respect of the services rendered by the partners and as such it cannot be equated with payment of pension?”

4. The learned counsel appearing for the appellant/assessee submitted that the intent of employer/assessee is made very clear in the deed of partnership. To fulfil this contractual obligation, the assessee entered into an agreement with LIC. Pursuant to the terms of the LIC policy, annual premiums were paid to ensure that on retirement, any employee eligible under the terms of the agreement, would receive a monthly annuity of Rs.15,000/-. While so, the finding of the Tribunal that payments to partners at a predetermined amount per month after retirement are merely towards goodwill and therefore not an allowable deduction, is incorrect. Further, the Tribunal grossly erred in holding that premiums paid towards LIC policy to ensure monthly annuity of Rs.15,000/- to the retired employee cannot be equated with a business expense for tax purposes.

5. The learned counsel appearing for the Department heavily harped on the judgment of the Hon’ble Supreme Court in the case of Indian Molasses Co.(P.) Ltd. V. Commissioner of Income-tax reported in [1957] 37 ITR 66 (SC). His prime contention is that the premium paid to the LIC is based on a contingency. The expenditure, which is deductible for income-tax purpose, must be towards a liability actually existing at that time. Whereas, in this case, the liability does not exist on the date of payment of the premium. Therefore, the learned counsel submitted that even though the Hon’ble Supreme Court's judgment is nearly 70 years old, it still holds the field.

6. This Court has given its anxious consideration to the rival submissions made by the learned counsels appearing on either side.

7. The point for determination is whether the payment made towards the LIC premium to ensure a monthly annuity of Rs.15,000/- for a retired employee in terms of the agreement entered between the partners (who also happened to be the employee of the firm) should be classified as a contingent liability or as an expenditure towards a liability actually existing at the time of payment.

8. We just visualize the scenario, if the assessee fails to pay the premium to LIC, whether the employee on retirement will get monthly annuity of Rs.15,000/- as agreed by the assessee of the employee? certainly not. Therefore, the expenditure incurred is for the liability actually existing at the time of payment and is not a mere future contingency.

9. The contingency, which is pointed out by the learned counsel for the Department, is only to the fulfilment of contractual obligation to the retired partner, who is assured of annuity of Rs.15,000/- per month. The contingency of retirement or attaining 70 years or 25 years of service as pre-requisite to extend the benefits cannot be mixed up with the premium paid to the LIC under the terms of the LIC policy, which does not contemplate any contingency or an alternate method, if any contingency fail. We also find no clause in the insurance policy to indicate that the premium paid to the LIC is refundable in the event of non-fulfilment of the said contingency. Thus, the facts of the case in Indian Molasses Co.(P.) Ltd., where the trust created to ensure payment of annuity to the employee provides for an alternate if the contingency failed. Therefore, we are unable to accept the plea of the Department that the ratio in Indian Molasses Co.(P.) Ltd., applies to the facts of the present case.

10. However, we are also not oblivious to the fact that the Hon’ble Supreme Court, in the aforementioned case, observed not only the payment contingent, but the liability itself was contingent. It is a well accepted principle that an expenditure deductible for income-tax purposes toward a liability must actually exist at that time of claiming deduction. Keeping aside money to meet an expenditure on the happening of the future event does not constitute a deductible expenses. While we have no second opinion regarding the said principles, when sought to be applied to the facts of the present case, the payment of insurance premium is toward a liability actually existing at the time of payment and not a payment expecting an uncertain future event.

11. We are prompted to hold so in view of the judgment rendered by the Hon’ble Supreme Court in Bharat Earth Movers vs. CIT (2000) 245 ITR 428 (SC), wherein the Hon’ble Supreme Court, relying upon the Metal Box case (1969) 73 ITR 53 (SC), laid down the following principles:

                   “(i) For 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 accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid;

                   (ii) Just as receipts, though not actual receipts but accrued due are brought in for the income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business;

                   (iii) A condition subsequent, the fulfilment of which may result in the reduction or even extinction of the liability, would not have the effect of converting that liability into a contingent liability; and

                   (iv) A trader computing his taxable profits for a particular year may property deduct not only the payments actually made to his employees but also the present value of any payments in respect of their services in that year to be made in a subsequent year if it can be satisfactorily estimated.”

12. Therefore, we uphold the view of the Appellate Authority which is in tune with the law the reasoning given by the Tribunal for reversing the findings of the appellate authority does not find any legal or factual support. Hence, the order of the Tribunal is liable to be set aside.

13. Accordingly, these Tax Case Appeals are allowed, the order of the Tribunal is set aside and the order of the appellate authority is restored. No costs. Consequently, the connected Miscellaneous Petitions are closed.