Calcutta H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the sum of Rs. 57,643 representing a provision made for gratuity payable to the employees was an allowable deduction in computing the profits and gains of the assessee’s business ?

High Court Of Calcutta

CIT vs. Steel Rolling Mills Of Bengal Ltd.

Sections 40A(7), 28, 37(1)

Asst. Year 1972-73

Dipak Kumar Sen & Shyamal Kumar Sen, JJ.

IT Ref. No. 166 of 1978

11th June, 1987

Counsel Appeared

R.N. Bajoria as amicus curiae : A.N. Bhattacharji, for the Assessee

DIPAK KUMAR SEN, J.:

The facts on record which are material and the proceedings leading up to this reference are, shortly, that Steel Rolling Mills of Bengal Ltd., the assessee, was assessed to income-tax for the asst. yr. 1972-73, the relevant accounting year ending on July 31, 1971. In the said assessment year, the assessee originally filed its return on May 18, 1972. Subsequently, the assessee filed a revised return on September 30, 1974, which was accepted. The assessee claimed deduction on account of a provision made for payment of gratuity to its employees of Rs. 57,643 on the basis of actuarial calculation supported by a certificate of an actuary. During the relevant assessment year, the West Bengal Employees’ Payment of Compulsory Gratuity Ordinance, 1971, was promulgated and came into force on June 14, 1971. The said Ordinance was replaced by the West Bengal Employees’ Payment of Compulsory Gratuity Act, 1971, which was promulgated some time in August, 1971, with retrospective effect from June 14, 1971. The ITO disallowed the claim of the assessee for deduction on account of the aforesaid provision for gratuity.

Being aggrieved, the assessee preferred an appeal from the said assessment before the AAC. It was contended on behalf of the assessee before the AAC that the liability in respect of payment of gratuity accrued on the last day of the accounting period relevant to the assessment year involved. The AAC held, following the decision of the Bombay High Court in Official Liquidator, Sakseria Cotton Mills Ltd. vs. CIT (1971) 81 ITR 528(Bom), that liability in respect of gratuity was allowable on the basis of actuarial and scientific calculation. The AAC accepted the certificate of the actuary furnished by the assessee that the present discounted liability for payment of gratuity to the various employees of the assessee retiring in future amounted to Rs. 57,643. Following the decision of the Bombay High Court in Tata Iron & Steel Co. Ltd. vs. D. V. Bapat, ITO (1975) 101 ITR 292(Bom) and an unreported decision of the Calcutta High Court in Civil Rule No. 555(W) of 1975, the AAC held further that the assessee was entitled to deduction of the said amount of Rs. 57,643 on the basis of the West Bengal Employees’ Payment of Gratuity Act, 1971, as ascertained on actuarial principles. The AAC directed the ITO to allow deduction of the said amount of Rs. 57,643 in computing the total income of the assessee.

Being aggrieved, the Revenue preferred an appeal from the order of the AAC to the Tribunal. It was submitted on behalf of the Revenue before the Tribunal that liability for payment of gratuity even under the provisions of the West Bengal Employees’ Payment of Compulsory Gratuity Act, 1971, was only a contingent liability. It was submitted further that the assessee did not create any approved fund under s. 36(1)(v) of the IT Act, 1961. It was contended that the assessee was not entitled to any deduction on account of provision for payment of gratuity.

The Tribunal noted that the West Bengal Employees’ Payment of Gratuity Act, 1971, came into force during the relevant assessment year. The liability of the assessee for payment of gratuity to its employees on the basis of actuarial calculation was accepted to be Rs. 57,643, Following the decision of the Bombay High Court relied on by the AAC and also a decision of the Allahabad High Court in Madho Mahesh Sugar Mills (P.) Ltd. vs. CIT (1973) 92 ITR 503,ALL the Tribunal held that the assessee was entitled to claim deduction of the amount found to be payable to its employees on account of gratuity as ascertained by the actuary as accruing in the year under consideration. The Tribunal affirmed the order of the AAC and dismissed the appeal of the Revenue.

5. On an application of the Revenue under s. 256(1) of the IT Act, 1961, the Tribunal has referred the following question, as a question of law arising out of its order, for the opinion of this Court : “Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the sum of Rs. 57,643 representing a provision made for gratuity payable to the employees was an allowable deduction in computing the profits and gains of the assessee’s business ?”

6. At the hearing, the learned advocate for the Revenue submitted that under the IT Act, 1961, an assessee was entitled to claim deduc tion on account of gratuity only under s. 36(1)(v) which provided as follows: ” 36. (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 s. 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.”

7. Learned advocate submitted further that the assessee was not entitled to claim deduction on account of only a provision for gratuity under s. 37 of the said Act of 1961 by reason of the aforesaid specific provision of s. 36. It was also faintly submitted that as the West Bengal Employees’ Payment of Compulsory Gratuity Act, 1971, was promulgated only in August, 1971, after the close of the accounting year, the assessee could not have provided for gratuity as payable under the statute in its accounts. In support of his contentions, the learned advocate for the Revenue cited the following decisions: (a) CIT vs. Carborundum Universal Ltd. (1977) 110 ITR 621 (Mad). In this case, the assessee in the relevant assessment year had contributed to a foreign company superannuation fund and claimed the amount contributed as an allowable deduction under s. 28 of the IT Act, 1961. The assessee could not claim such deduction under s. 36(1)(iv) of the said Act as the said fund was not a recognised provident fund or approved superannuation fund within the meaning of the said section. A Division Bench of the Madras High Court held that the said section, 36(1)(iv), of the said Act specifically provided for deduction of such contributions and if a particular contribution was found ineligible under the said section, it could not be claimed as a deduction under the general provision, viz., s. 28 of the IT Act, 1961. Any other construction will render a specific provision contained in the said s. 36(1)(iv) of the Act of 1961 nugatory. Once a payment was found to be of the nature expressly dealt with in a particular provision of the statute and did not qualify for deduction thereunder, the same could not be allowed as a deduction under the general provisions of the said Act for ascertaining the profits and gains of a business. (b) Shree Sajjan Mills Ltd. vs. CIT (1985)49CTR(SC)193: (1985) 156 ITR 585 (SC). In this case, the question before the Supreme Court was whether an assessee would be entitled to deduction of a provision made by it towards its liability for payment of gratuity to its employees under s. 37 of the IT Act, 1961, in the asst. yr. 1973-74, when s. 40A(7) of the said Act had come into force. The Supreme Court decided the aforesaid controversy in favour of the Revenue. The Supreme Court in its judgment laid down the law as it stood before s. 40A(7) was inserted in the IT Act, 1961, including the non obstante clause of sub-s. (1) of the said section, w.e.f. the 1st April, 1973. The Supreme Court 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 1973 was as follows: (1) Payments of gratuity actually made to the employee on his retirement or termination of his services were expenditure incurred for purposes 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 the mercantile system was followed by the assessee. (3) Provision made by setting aside an advance sum every year to meet the contingent liability for 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 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. ” (c) D. V. Bapat, ITO vs. Tata Iron & Steel Co. Ltd. (1986) 54 CTR (SC) 314:(1986) 159 ITR 938 (SC). In this case, in the asst. yr. 1973-74, the assessee claimed a deduction of an amount on the basis that the same represented its liability for payment in future on account of gratuity on an actuarial valuation. The ITO rejected the said claim on the basis of a circular issued by the CBDT. The assessee moved the Bombay High Court under Art. 226 of the Constitution against the decision of the ITO successfully. On appeal, it was held by the Supreme Court that during the relevant assessment year, s. 40A(7)(b)(ii) of the IT Act, 1961, had come into force and unless the provisions of the said section had been complied with, the assessee was not entitled to deduction on account of its liability for gratuity. The judgment of the High Court was set aside and the matter was remanded for being considered afresh in the light of the principles laid down by the Supreme Court in Shree Sajjan Mills Ltd. vs. CIT (supra). (d) CIT vs. Khandelwal Brothers (P) Ltd. (1986) 57 CTR (Cal) 78:(1986) 158 ITR 207 (Cal). In this case, in the asst. yr. 1971-72, the assessee made a provision for payment of gratuity to its employees and claimed a deduction of the amount so provided. The ITO and the AAC disallowed the claim but the claim was allowed by the Tribunal. On a reference, it was held by a Division Bench of this Court that in the assessment year involved, the West Bengal Employees Payment of Compulsory Gratuity Act, 1971, had not come into force and as such there was no statutory liability of the assessee to make any provision for gratuity in the year involved. The decision of this Court in CIT vs.Eastern Spinning Mills Ltd.’s case (1980) 58 CTR (SC) 51:(1980) 126 ITR 686 (Cal), it was held, did not apply to the facts as, in the said case the statute had come into force in the assessment year involved. It was held that the amount provided for payment of gratuity by the assessee was not an allowable deduction in the assessment year involved but might be allowed as deduction in the subsequent assessment year when the statute came into force. (e) CIT vs. Vanaz Engineering P. Ltd.(1986)58CTR(SC)51: (1986) 162 ITR 876 (SC). In this case, the assessee in the asst. yr. 1971-72 formulated and put into operation a gratuity scheme and on the basis of an actuarial report, provided in its accounts an amount for payment on account of gratuity. In making the assessment for the said assessment year, the ITO disallowed a part of the amount provided. The AAC and the Tribunal accepted the case of the assessee and allowed the entire amount provided. An application for reference from the order of the Tribunal was rejected both by the Tribunal and by the High Court. The Revenue preferred an appeal before the Supreme Court from the order of the High Court rejecting the application for reference. The Supreme Court noted its earlier decision in Shree Sajjan Mills Ltd.’s case (supra) On concession by the parties that the matter should be disposed of as in the case of D. V. Bapat, ITO vs. Tata Iron & Steel Co. Ltd. (supra), the matter was remanded to the High Court.

As no one had appeared on behalf of the assessee, we invited Mr. R. N. Bajoria, learned advocate of this Court, to act as amicus curiae in this proceeding. Mr. Bajoria drew our attention to a number of decisions of the Supreme Court as also of other High Courts.

8. According to Mr. Bajoria, the controversy raised in this proceeding stood concluded by the said decisions which are considered hereafter. (a) Tata Iron & Steel Co. Ltd. vs. D. V. Bapat. ITO (1975) 101 ITR 292 (Bom). This judgment of the Bombay High Court was set aside by the Supreme Court in D. V. Bapat vs. Tata Iron & Steel Co. Ltd. (1986) 159 ITR 938, which we have considered earlier. In that view, this decision need not be considered further. (b) CIT vs. Eastern Spinning Mills Ltd. (supra). In this case, the assessee, in the asst. yr. 1972-73, made a provision for payment of gratuity. The ITO held that the amount in the said assessment year payable on account of gratuity and actually paid was less than the amount provided for and disallowed the amount provided for in excess. In the said assessment year, the West Bengal Employees’ Payment of Compulsory Gratuity Act, 1971, had come into force and the assessee had provided for payment of gratuity on actuarial basis. The AAC and the Tribunal, however, accepted the claim of the assessee and allowed the deduction of the entire provision. On a reference, it was held by a Division Bench of this Court presided over by Sabyasachi Mukharji J., that as in the relevant year, the liability had accrued for the first time under the statute, the assessee was entitled to make a prudent estimate of its liability which had accrued for the payment of gratuity. It was held further that it was possible to estimate the liability created by the statute of 1971 and provide therefor. The estimate made was not excessive and unreal and as the relevant statute came into operation for the first time in the relevant assessment year, in arriving at the true profit of the assessee under s. 37 of the IT Act, 1961, the provision made for gratuity was a permissible deduction.

The fact that the assessee had also contributed an amount to an approved gratuity fund for the exclusive benefit of its employees which was deductible under s. 36(1)(v) of the Act did not affect the position. The assessee was entitled to claim deduction of the provision for gratuity as a special liability created for the first time in 1971. The fact that the assessee had dominion over the amount provided and the contingency of misuse would not alter the position. (c) CIT vs. New Swadeshi Mills of Ahmedabad Ltd.(1984) 39 CTR (Cal) 228: (1984) 147 ITR 163 (Cal). In this case, in the asst. yr. 1973-74 when the Payment of Gratuity Act, 1972, was in force, the assessee made an estimate on actuarial basis of its liability for payment of gratuity and claimed a deduction of the same under s. 28 or 37 of the IT Act, 1961. On these facts, it was held by a Division Bench of this Court on a reference that in the relevant assessment year, s. 40A(7) of the IT Act, 1961, had come into force w.e.f. April 1, 1973, and had been made applicable to the said asst. yr. 1973-74. Unless the conditions laid down in the said s. 40A(7)(b) were fulfilled by the assessee, inter alia, by creation of an approved gratuity fund for the exclusive benefit of its employees under an irrevocable trust and by making payment of the prescribed amount to such fund within the prescribed time, the assessee would not be entitled to claim any deduction merely on the basis of an estimate on actuarial basis. (d) CIT vs. Andhra Prabha (P) Ltd. (1986) 54 CTR (SC) 313: (1986) 158 ITR 416 (SC). In this case, in the asst. yr. 1969- 70, the assessee which followed the mercantile system of accounting, provided for payment of gratuity to its employees, the liability for which arose under the Working journalists (Conditions of Service and Miscellaneous Provisions) Act, 1955, and in the case of nonworking journalists under an agreement dated March 13, 1968. It was held by the Tribunal that the liability for payment of gratuity accrued in the year of account and the claim for deduction of such liability would be admissible provided the same was estimated on a legal and scientific basis and the Tribunal directed the ITO to enquire further into the matter and allow the deduction of the provision if it was found that the same had been calculated on a legal and scientific basis. The decision of the Tribunal was affirmed by the High Court on a reference. On a further appeal before the Supreme Court, it was held that the assessment year being 1969-70, s. 40A(7) of the IT Act, 1961, had not come into force and as such the law as it stood before the incorporation of s. 40A(7) was applicable. Following its earlier decision in Shree Sajjan Mills Ltd. (supra), the Supreme Court affirmed the decision of the High Court in favour of the assessee. (e) CIT vs. Remington Rand India Ltd. (supra). In this case, in the asst. yr. 1972-73, the assessee claimed deduction of a provision made for payment of gratuity to its employees under the assessee’s gratuity scheme. The provision was made on the basis of actuarial valuation. The claim was disallowed by the ITO but allowed by the AAC. The Tribunal affirmed the decision of the AAC. On a reference, a Division Bench of this Court noted that the provisions of the West Bengal Employee’s Payment of Compulsory Gratuity Act, 1971, had come into force in the relevant assessment year. It was held further that a liability was created under the statute for payment of gratuity by the employers. It was held that the statute did not preclude an employer from framing its own scheme for payment of gratuity to its employees as long as such scheme was not inconsistent with or repugnant to the provisions of the statute. The assessee was liable to pay the gratuity to its employees either under the scheme or under the statute. Following the earlier decision of this Court in Eastern Spinning Mills Ltd. (supra), it was held that the assessee was entitled to deduction of the said amount provided for payment of gratuity. (f) CIT vs. Canning Mitra Phoenix (P) Ltd. (1986) 162 ITR 836 (SC). In this case, in the asst. yr. 1972-73, the assessee claimed a deduction on account of provision made by it towards gratuity payable to its employees. The amount claimed was estimated on actuarial valuation. The claim was disallowed by the ITO but allowed by the AAC. The decision of the AAC was affirmed by the Tribunal. An application for reference was rejected by the High Court.

On an appeal before the Supreme Court, it was held that the law relating to the controversy had been laid down by the Supreme Court in respect of the assessment year involved, in its earlier decision in Shree Sajjan Mills Ltd. (supra). The appeal was rejected. (g) CIT vs. Pearey Lal & Sons (P) Ltd. (1987)59 CTR (SC) 281:(1986) 162 ITR 838 (SC). In this case, the assessee claimed a deduction on account of a provision made by it for payment of gratuity to its employees for the asst. yr. 1972-73. The claim was allowed by the Tribunal. An application of the Revenue for a reference on the order of the Tribunal was rejected by the High Court. On further appeal, it was held by the Supreme Court that the law on the controversy which arose in the said assessment year was covered by its earlier decision in Shree Sajjan Mills Ltd. (supra) . The appeal of the Revenue was dismissed.

In the instant case, we are concerned with the asst. yr. 1972-73, the relevant accounting year ending on July 31, 1971. In the said accounting year, the West Bengal Employees’ Payment of Compulsory Gratuity Ordinance, 1971, came into effect and was followed by the West Bengal Employees’ Payment of Compulsory Gratuity Act, 1971. The assessee was, therefore, liable to pay gratuity to its employees under the said statute in the said year. Such liability payable in future has been computed on actuarial principles, and the assessee claims deduction of the amount provided for. It cannot be disputed that s. 40A(7) did not come into force in the relevant assessment year and the said section cannot be a bar to the assessee making a claim for such deduction. The law relevant to the controversy in the instant case has been laid down by the Supreme Court clearly in Shree Sajjan Mills Ltd. (supra). The Supreme Court has followed and applied its decision in Shree Sajjan Mills Ltd. in subsequent cases, viz., Canning Mitra Phoenix (P) Ltd. (supra) and Pearey Lal & Sons (P) Ltd. (supra) . The same view was taken by the Supreme Court also in Andhra Prabha (P) Ltd. (1986) 54 CTR (SC) 313: (1916) 158 ITR 416 (SC).

It is clear from the aforesaid that prior to the coming into operation of s. 40A(7) of the IT Act, 1961, and the non obstante clause therein, on and from April 1, 1973, an assessee was entitled at law to claim deduction in respect of a provision made by it on account of its liability to pay gratuity to its employees under ss. 28 and 37 of the IT Act, 1961. This Court has also proceeded on the aforesaid basis in Eastern Spinning Mills Ltd. (supra). The law, in our view, appears to be settled and the decisions of the Supreme Court and also the earlier decisions of this Court referred to hereinbefore are binding on us.

The decision of the Supreme Court in Vanaz Engineering (P) Ltd. (supra), in our view, does not advance the case of the Revenue as in that case the matter was remanded to the High Court on a concession. It was not held by the Supreme Court that the law laid down by its earlier decision in Shree Sajjan Mills Ltd. (supra) was being reconsidered nor was it laid down that s. 40A(7)(b)(ii) which came into effect from April 1, 1973, would apply in the assessment years covering periods prior thereto.

For the reasons as aforesaid, we are unable to accept the contentions raised on behalf of the Revenue and we answer the question referred in the affirmative and in favour of the assessee.

In the facts and circumstances, there will be no order as to costs. We record our appreciation of the able assistance rendered by Mr. R. N. Bajoria as amicus curiae.

SHYAMAL KUMAR SEN, J:

I agree.

[Citation : 169 ITR 430]

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