C. I. T. Jaipur v. Sanghi Oxygen Co. — 1992 DIGILAW 977 (RAJ)

Honble SINGHAL, J.—The Income tax Appellate Tribunal, Jaipur has referred the following two questions of law under Section 256(1) of the Income tax Act, 1961 which have arisen out of its order dated 20.12.1978 in respect of assessment year 1973 74: "(1) Whether on the facts and in the circumstances of the cas2, the Tribunal was justified in holding that the claim of the assessee in respect of gratuity payable was allowable under Sec. 37 or under Sec. 28(1) of the I.T. Act. 1961? (2) Whether on the facts and in the circumstances of the case, the claim of the assessee in respect of gratuity payable was not hit by See. 40A (7)(a) of the I.T. Act, 1961?" 2. The brief facts of the case are that the assessee is a registered partnership concern and derives its income from manufacture and sale of oxygen gas and acetylene gas etc. In the relevant previous year ending on 31.03.1973 the assessee has actually paid Rs. 4,000/- by way of gratuity to certain employees who had retired. A claim of Rs. 21,669/- was also made by the assessee as payable for gratuity. This claim was not allowed by the Income tax Officer on the ground that the conditions laid down in Section 36(1) (v) and Section 40-A(7)(a) were not satisfied. Since this amount was not debited in the profit and loss account no additions were made while disallowing the claim of the assessee. 3. The assessee has preferred an appeal to the learned Appellate Assistant Commissioner of Income-tax Central Range, Jaipur where it was contended that the assessee is maintaining the accounts on the basis of mercantile system of accounting. It was further contended that the payment of gratuity Act, 1972 was passed on 16.9.1972 and the employers were made liable to pay gratuity to its outgoing employees as per terms and conditions contained in the said Act. It was further submitted that since the assessee firm is covered by the Payment of Gratuity Act, 1972, therefore, the payment of gratuity was the statutory liability and the appellant was bound to make a provision for this accrued liability. It was further submitted that even if no provision is made in the books of accounts for deduction for liability the same has to be allowed if it is a statutory liability in order to work out the income properly and correctly. It was further submitted that even if no provision is made in the books of accounts for deduction for liability the same has to be allowed if it is a statutory liability in order to work out the income properly and correctly. The Appellate Assistant Commissioner allowed the claim in respect of the gratuity amount of Rs. 4,000/- which was actually paid. Regarding the payment of gratuity of Rs. 21,669/- the claim was rejected on the ground that the provisions of sec. 37 of the Income tax Act are residuary and since specific provisions have otherwise been made in Sec. 36(1)(v) and Sec. 40A (7) of the Act, the claim could not be allowed under Section 37. It was observed that for the for purpose of claiming the deduction under Section 37(1) it has to be shown that the claim is for an expenditure incurred during the year wholly and exclusively for the purpose of business and in the present case since it was only the claim for allowance of the provision for gratuity, the benefit of sec. 37(1) cannot be availed of. It was further observed that in order to get the benefit under Sec. 40A(7) the conditions laid down therein has to be satisfied and one of the conditions is that the assessee is required to create an approved gratuity fund for the exclusive benefit of its employees under an irrevocable trust and the application for the approval of the fund should have been made before the 1st day of January, 1976. The other conditions of sub-section 7 were also found not satisfied and, therefore, the assessee was not held entitled to the deduction claimed. 4. The matter was carried by the assessee before the Income tax Appellate Tribunal where the claim of the assessee was allowed on the ground that the assessee is maintaining its accounts on mercantile basis and the statutory liability for gratuity as accrued in the relevant previous year on the basis of the payment of Gratuity Act, 1972. The quantum of the liability was determined on actuarial basis and since the statutory liability has accrued for the first time in the previous year relevant to the assessment year 1973-74, the same is to be allowed. The quantum of the liability was determined on actuarial basis and since the statutory liability has accrued for the first time in the previous year relevant to the assessment year 1973-74, the same is to be allowed. It was held that the liability for gratuity was deductable as business expenditure in the computation of income from business if not under Sec. 37 then under Sec. 28(1) itself, since the real profits from the business could not be determined without taking into account the assessees claim in this regard. It was also held that the deduction is not prohibited by Section 40A (7) (a) since the assessee did not make any provision in the books for this liability. It was further held that the deduction is admissible on ordinarily commercial principle and hence it was allowed. 5. The submission of the learned counsel for the Revenue is that the Income tax Appellate Tribunal has erred in considering that the deduction is allowable under Section 37 or under Section 28 of the Income tax Act, 1961 and that it is not hit by the provisions of Sec. 40A (7). The Income tax Appellate Tribunal has ignored the amendment made by Section 6 of the Finance Act, 1975 with retrospective effect from 1.04.1973. It was further submitted that when there is a specific provision then the help of the general provisions cannot be taken. 6. In order to examine the submission of Shri Bapna the provisions of Section 28 (1), 36 (1) (v) 37 and 40-A (7) have to be analysed. 7. Section 28 of the Act provides "The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession"; (i) The profits and gains of any business or profession which was carried on by the assessee at any time during the previous year. 8. Section 36(1) (v) provides - (1). The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28:— (v) Any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust. 9. 9. Section 37 of the Act provides "Any expenditure (not being expenditure of the nature described in section 30 to 36 and being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". 10. Section 40 A (1) and (7) (a) reads as under: A(1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head "Profits and gains of business or profession". 7(a) Subject to the provisions of clause (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason. 7(a) Subject to the provisions of clause (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason. (b) Nothing in clause (a) shall apply in relation to- (i) any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year; (ii) any provision made by the assessee for the previous year relevant to any assessment year commencing on or after the 1st day of April, 1973, but before the 1st day of April 1976, to the extent the amount of such provision does not exceed the admissible amount, if the following conditions are fulfilled, namely :- (1) the provision is made in accordance with an actuarial valuation of the ascertainable liability of the assessee for payment of gratuity to his employees on their retirement or on termination of their employment for any reason; (2) the assessee creates an approved gratuity fund for the exclusive benefit of his employees under an irrevocable trust, the application for the approval of the fund having been made before the 1st day of January, 1976; and (3) a sum equal to at last fifty per cent of the admissible amount, or where any amount has been utilised out of such provision for the purpose of payment of any gratuity before the creation of the approved gratuity fund, a sum equal to atleast fifty per cent of the admissible amount as reduced by the amount so utilised, is paid by the assessee by way of contribution to the approved gratuity fund before the 1st day of April, 1976, and the balance of the admissible amount or, as the case may be, the balance of the admissible amount as reduced by the amount so utilised, is paid by the assessee by way of such contribution before the 1st day of April, 1977. Explanation 1 : For the purpose of sub-clause (ii) of clause (b) of this sub-section, "admissible amount means the amount of the provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of the employment for any reason, to the extent such amount does not exceed an amount calculated at the rate of eight and one third per cent of the salary (as defined in clause (h) of rule 2 of Part A of the Fourth Schedule) of each employee entitled to the payment of such gratuity for each year of his service in respect of which such provision is made. Explanation 2: For the removal of doubts it is hereby declared that where any provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity to any employee shall not be allowed as a deduction in computing the income of the assessee of the previous year in which the sum is so paid." 10. Sub-section (7) of Section 40-A was inserted by the Finance Act, 1975 (25 of 1975) with retrospective effect from 1.04.1973. From the bare perusal of sub-sec. 1 of Sec. 40-A it would be evident that the provisions of Section 40-A has overriding effect on any other provision of the Act in regard to the matters which are contained in Section 40A. Sub-section 7 of Sec. 40-A provides that no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason. Clause (7) (a) of Sec. 40-A is only subject to the provisions contained in clause (b). Clause (7) (a) of Sec. 40-A is only subject to the provisions contained in clause (b). In clause (b) two exceptions have been provided namely; The provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund or for the purpose of payment of any gratuity that has become payable during the previous year and any provision made by the assessee for the previous year relevant to any assessment year commencing on or after the 1st day of April, 1973 but before the 1st day of April, 1976, to the extent the amount of such provision does not exceed the admissible amount, if the three conditions mentioned under this sub-clause are satisfied. The matter with regard to the eligibility for deduction under Section 28 and section 37 were considered by the Apex Court in Shree Sajjan Mills Ltd. Vs. C.I.T. (1). It was held by the Apex Court that the marginal note or heading is a relevant factor to be taken into consideration in construing the ambit of this Section and accordingly the payments mentioned therein are not deductable according to the statute in certain circumstances. It was held that this is abundantly made clear by the non-obstante expression used in sub-sec. 1 of Sec. 40-A. The provisions of Sec. 40-A shall have the effect notwithstanding anything to the contrary contained in any other provision of the Act. The actual payments or provisions for payment could have been eligible for deduction or could have been deducted either under Section 28 or 37 of the Act. But the use of the non obstante expression makes it clear that if there any legislative base dealing with the provisions for gratuity then the same would be applicable in spite of and notwithstanding any other provision of the Act. It was held that the right to receive the payment accused to the employee son their retirement or termination of their services and the liability to pay gratuity become an accrued liability of the assessee when the employees retired or their services are terminated. Until then the right to receive gratuity is a contingent right and the liability to pay gratuity continues to be a contingent liability qua the employer. Until then the right to receive gratuity is a contingent right and the liability to pay gratuity continues to be a contingent liability qua the employer. An employer might pay gratuity when the employee retires or his service is terminated and claim the payment made as an expenditure incurred for the purpose of business under Section 37. He might, if he followed the mercantile system, provide for the payment of gratuity which became payable during the previous year and claim it as an expenditure on the accrued basis under Section 37 of the said Act. It was further observed that the contingent liabilities do not constitute expenditure and cannot be the subject matter of deduction even under the mercantile system of accounting. Expenditure which was deductible for income tax purposes is towards a liability actually existing at the time but setting apart money which might become expenditure on the happening of an event is not expenditure. The amounts set apart by way of provision or by way of a reserve or fund to meet the liability of gratuity as and when it becomes payable will not be deductible allowance or expenditure. Where, however, an approved gratuity fund is created for the exclusive benefit of the employees under an irrevocable trust, contribution made to the fund during the year of account will be allowed to be deducted under Sec.3 6 (1) (v).The Apex Court has also held that the claim of deduction for gratuity after the insertion of Sec. 40-A cannot be allowed on the general principles under any other provisions of the Act, namely Section 28 or Section 37 and, therefore, the judgment of the Income-tax Appellate Tribunal is not sustainable in view of the law laid down by the Apex Court. 11. The Madhya Pradesh High Court in Jiyaji Rao Sugar Co. Ltd. Vs. C.I.T. (2), Kerala High Court in C.I.T. Vs. N. Radha Bai (3) and Calcutta High Court in C.I.T. Vs. New Swadeshi Mills of Ahmedabad Mills Ltd. (4) have also taken the view that in order to claim the deduction for gratuity payment the assessee has to fulfill the conditions as laid down in Section 40-A. In C.I.T. Vs. Andhra Prabha Pvt. Ltd. (5) a line of distinction was drawn in respect of the period which relate to the assessment year before the insertion of sub-section 7 in Section 40-A and the period thereafter. 12. Andhra Prabha Pvt. Ltd. (5) a line of distinction was drawn in respect of the period which relate to the assessment year before the insertion of sub-section 7 in Section 40-A and the period thereafter. 12. Clause (iv) of Section 136 (1) provided that "any sum paid by the assessee as an employer by way of contribution towards a recognised provident fund or an approved superannuation fund, subject to such limits as may be prescribed for the purpose of recognising the provident fund or approving the superannuation fund, as the case may be; and subject to such conditions as the Board may think fit to specify in cases where the contributions are not in the nature of annual contribution of fixed amounts or annual contributions fixed on some definite basis by reference to the income chargeable under the head "Salaries" or to the contributions or to the number of members of the fund. Sub-clause (v) also provides that "any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefits of his employees under an irrevocable trust.". The assessee has neither paid any sum by way of contribution towards a recognised provident fund nor towards approved gratuity fund created by him for the exclusive benefit for his employees under an irrevocable trust and, therefore, a deduction under Section 36 (1) (iv) (v) cannot be allowed. For the purpose of computing the profit and gains for business or profession under Section 28 it has been provided under section 29 that the income shall be computed in accordance with the provisions contained in Section 30 to 43 (C). The provisions contained in Section (1), (5), (6) are specific provisions and Sections 40 A (1) is overriding section and, therefore, the Income-tax Appellate Tribunal was not justified in coming to the conclusion that the deduction can be claimed if not under Section 37 then under Section 28(1) itself. The Income-tax Appellate Tribunal was also not correct in coming to the conclusion that the provisions contained in section 40 A will not be applicable since no provision has been made in the books of accounts. This matter was also considered and the argument was negatived in Shree Sajjan Mills Ltd. vs. C.I.T. referred to above and the Honble Supreme Court observed that such an interpretation would lead to an absurd result. This matter was also considered and the argument was negatived in Shree Sajjan Mills Ltd. vs. C.I.T. referred to above and the Honble Supreme Court observed that such an interpretation would lead to an absurd result. 13. We are, therefore, of the view that the Tribunal was not justified in holding that the claim of gratuity was allowable under Section 37 or under Section 28 of the Income-tax Act. We are also of the view that the Income-tax, Appellate Tribunal was at all not justified in coming to the conclusion that the claim of the assessee is not hit by Section 40-A (7) (a) of the Income-Tax Act, The Reference is, therefore, answered in favour of the Revenue and against the assessee. No orders as to costs.