Allahabad H.C : Whether on the facts and in the circumstances of the case the assessee was entitled for deduction of Rs. 79,300 on account of contribution to the employees’ gratuity fund even though the gratuity fund was not approved by the CIT as required under the IT Act, 1961 for the asst. yr. 1974-75 ?

Counsel Appeared

Shekhar Srivastava, for the Applicant : Bharatji Agarwal, for the Respondent

BY THE COURT:

At the instance of the Commissioner, Tribunal, Allahabad Bench, has, under s. 256(1) of the IT Act, 1961 (the Act), referred the following question for the opinion of this Court : “Whether on the facts and in the circumstances of the case the assessee was entitled for deduction of Rs. 79,300 on account of contribution to the employees’ gratuity fund even though the gratuity fund was not approved by the CIT as required under the IT Act, 1961 for the asst. yr. 1974-75 ?”

We have heard Sri Shekhar Srivastava, learned standing counsel for the Commissioner and Sri Bharatji Agarwal, learned counsel for the assessee- respondent.

The proceedings relate to asst. yr. 1974-75, the accounting period for which had ended on 30th Sept., 1973. The assessee had claimed a deduction of Rs. 75,930 as an expenditure representing its contribution to employees’ gratuity fund. The ITO disallowed the same as had been done in the past.The matter ultimately reached the Tribunal which following its own order passed in the appeal for asst. yr. 1972-73 deleted disallowance. In its order the Tribunal reproduced the relevant portion of its order for asst. yr. 1972-73 which reads as under : “We shall first take up the appeal against the income-tax assessment order. The first ground is against disallowance of Rs. 76,930 as an allowable deduction from the income of the assessee being contribution of the assessee to the employees’ gratuity fund. In the opinion of the ITO, the claim was inadmissible and he added back this amount in the income. The AAC, on the other hand, following the decision of the Tribunal in the assessee’s own case in ITA No. 2341 of 1967-68 deleted the disallowance. That appeal related to the assessment for the asst. yr. 1964-65. In the appeals for the asst. yrs. 1967-68, 1968-69 and 1969-70 this question again came up before the Tribunal in the Department’s appeal ITA No. 647, 1360 and 1361(Alld) of 1972-73 which was decided by order dt. 20th Sept., 1974. A copy of that order has been filed by the assessee. One of us was a party to that order, the earlier decision was followed and it was held that the contribution made by the assessee to the employees’ gratuity fund was an allowable deduction from the income of the years concerned. In the present appeal as well as, we take the same view and agree with the AAC.”

As would be evident from the above extract, the dispute regarding the disallowance of contribution to gratuity fund is coming up from asst. yr. 1964-65 onwards. A copy of the Tribunal’s order for asst. yr. 1964-65 has been annexed to this reference and a perusal of the relevant discussion as contained in paragraph 21 of that order reveals that the deduction claimed by the assessee on account of contribution to gratuity fund was declined on the ground that the gratuity fund was not approved by the CIT. The Tribunal held that the deduction is admissible under s. 28 or 37(1) r/w s. 40(a)(iv) of the Act. This reasoning had been followed from year to year and as the Tribunal’s order under reference would show that it has allowed the deduction following its order for asst. yr. 1972-73 which in its turn had followed the Tribunal’s order for asst. yr. 1964-65 onwards. In the order under reference the Tribunal has not specifically mentioned that the gratuity fund was not approved by the Commissioner. Therefore, the learned counsel for the assessee contended that the question as framed by the Tribunal does not arise out of the order of the Tribunal. We have given the genesis of the controversy is sufficient details only to show that this contention is not correct. The disallowance was made only for the aforesaid reason right from asst. yr. 1964-65 and the Tribunal’s reference to the earlier orders which have been made the basis of its decision in sufficient to show that the same reason was adopted for deciding the controversy for the year under consideration. We may mention that the learned counsel for the assessee did not even contend that there was any alteration in the facts and that the aforesaid reason did not subsist in the year under consideration. For these reasons we reject the objection raised by the learned counsel for the assessee.

As regards merits of the controversy, learned standing counsel referred to s. 36(1)(v) of the Act which permits deduction of 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. Learned standing counsel contended that since the gratuity fund, to which the assessee had made the contribution in question, had not been approved, the necessary requirements of s. 36(1)(v) were not met and, therefore, the deduction was not allowable. The learned counsel for the assessee, on the other hand, relied on Madho Mahesh Sugar Mills Pvt. Ltd. vs. CIT (1973) 92 ITR 503 (All) in which this Court, while dealing with the proceedings for asst. yr. 1962-63, held that a provision for gratuity made in compliance with an order of the U.P. Government was allowable as a deduction. Reference to s. 36(1)(v) was made on behalf of the Revenue before the High Court and it was held that this section was not applicable as the amount was deductible in the computation of the gross profit itself. Reliance was also placed on CIT vs. Steel Rolling Mills of Bengal Ltd. (1987) 65 CTR (Cal) 116 : (1988) 169 ITR 430 (Cal) which is a judgment dealing with asst. yr. 1972-73 and it was held that the deduction in respect of a provision made by an assessee on account of its liability to pay gratuity to its employees was allowable under ss. 28 and 37 of the Act. Both these rulings, thus, deal with the law as it stood during the relevant assessment years.

By the Finance Act, 1975 s. 40A(7) was introduced in the Act with retrospective effect from 1st April, 1973 and the relevant portion thereof reads as under : “(7)(a) Subject to the provisions of cl. (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 cl. (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, 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 Jan., 1976; and (3) a sum equal to at least 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 at least 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.”

As stated above, we are dealing with asst. yr. 1974-75 to which the above provisions would be applicable. Sub-cl. (a) of s. 40A(7) creates an absolute bar for the allowance of any provision for payment of gratuity except in the exceptions provided in sub- cl. (b). Sub-cls. (i) and (ii) which provide for the exceptions again require that the fund to which the contribution is made should be an approved one. Sec. 40A(7) came for consideration before the Hon’ble Supreme Court of India in the case of Shree Sajjan Mills Ltd. vs. CIT (1985) 49 CTR (SC) 193 : (1985) 156 ITR 585 (SC). The Hon’ble Supreme Court was dealing with asst. yrs. 1973-74 and 1974-75 to which s. 40A(7) applied and it held that after introduction of this provision any deduction for a provision on account of gratuity could be allowed only on the terms of s. 40A(7). Dealing with the nature of a liability to pay gratuity the Hon’ble Supreme Court observed that the right to receive the payment accrued to the employees on their retirement or termination of their services and the liability to pay gratuity became the accrued liability of the assessee when the employees retired or their services were 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. The Hon’ble Supreme Court after discussing the various provisions of the Act and the various rulings observed as follows: “It would thus be apparent from the analysis aforesaid that the position till the provisions of s. 40A (7) were inserted in the Act in 1975 was 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 s. 37 of the Act. (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 or by way of reserve or fund for gratuity was not allowed as an expenditure of the year in which such sum was set apart. (4) Contribution made to an approved gratuity fund in the previous year was allowed as deduction under s. 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 s. 28 or s.37 of the Act.:

Then the Hon’ble Supreme Court discussed the intention of the legislature in enacting s. 40A(7) and concluded that this provision of law overrides all other provisions in the Act. The relevant observation of the Hon’ble Supreme Court are as below: “It was pointed out that payment of gratuity was a statutory liability created under the Payment of Gratuity Act, 1972. It could normally be said to have arisen for the carrying on of the business. However, for gratuity to be deductible under the Act, it must fulfil the conditions laid down in s. 40A(7). The deduction could not be allowed on general principles under any other section of the Act because sub-s. (1) of s. 40A makes it clear that the provisions of the section shall have effect notwithstanding anything contained in ss. 30 of the Act.” Thus, the answer to the question referred by the Tribunal is concluded by the aforesaid judgment of the apex Court and we answer the question as reproduced above in the negative, in favour of the Revenue holding that the assessee was not entitled for deduction of Rs. 79,300 on account of contribution to employees’ gratuity fund.

6. Lastly, learned counsel for the assessee contended that the assessee’s accounting period was from 1st Oct., 1972 to 30th Sept., 1973 and the provisions of s. 40A(7) having been enacted w.e.f. 1st April, 1973, they were not applicable to the whole year. This contention is not tenable. It is settled law that the law applicable to an assessment year is the law as it stands on the first day of that assessment year. We are dealing with asst. yr. 1974-75 which commenced on 1st April, 1974 Sec. 40A(7) became effective from 1st April, 1973 and, therefore, this was applicable to the assessment year in question [See Karimtharuvi Tea Estate Ltd. (1951) 20 ITR 572 (SC). This contention, therefore, has no force and is rejected.

This reference is answered as above. The Commissioner shall get his costs from the assesseerespondent.

[Citation:204 ITR 265]