Delhi H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the transfer of the assessee’s rights as allottee stood completed on 5th Jan., 1971, and not on 13th April, 1971, when the lease dt. 22nd March, 1971, was got registered and thus the assessee was not liable to capital gains tax ?

Counsel Appeared

Sanjiv Khanna with Ajay Jha, for the Revenue : None, for the Assessee

JUDGMENT

ARIJIT PASAYAT, C.J. :

At the instance of the Revenue, the following questions have been referred for the opinion of this Court by the Income-tax Appellate Tribunal, Delhi Bench-E (“the Tribunal” in short), under s. 256 (1) of the IT Act, 1961 (in short “the Act”) :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the transfer of the assessee’s rights as allottee stood completed on 5th Jan., 1971, and not on 13th April, 1971, when the lease dt. 22nd March, 1971, was got registered and thus the assessee was not liable to capital gains tax ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the assessee’s claim for deduction of Rs. 3,74,738 on account of the provisions for staff gratuity was admissible under s. 37(1) of the IT Act, 1961 ?”

The dispute relates to the asst. yr. 1972-73 for which the previous year ended on 31st Oct., 1971. The factual position, filtering out unnecessary details are as follows :

The assessee is a limited company. A return was filed by it wherein deduction was claimed for a sum of Rs. 3,74,738 stating that the said amount constituted provision made for payment of gratuity to the employees as and when their services came to be terminated in future. Additionally, a sum of Rs. 2,29,511, which related to certain gains from transfer of plots, was claimed to be not taxable. The Inspecting Assistant Commissioner (“the IAC” in short), held that the claim of gratuity was not allowable as s. 36(1)(v) of the Act, which related to approved gratuity fund, had no application to the facts of the case and that s. 37 of the Act had no application to the facts of the case. So far as the capital gains question is concerned, it was held that the transfer took place on 13th April, 1971, and, therefore, tax was leviable on the gains made from the transfer of land. The matter was carried in appeal by the assessee before the Commissioner of Income-tax (Appeal) [in short, the “CIT(A)”]. Both the claims of the assessee as regards leviability of amount relatable to gratuity and the gains from transfer of land were accepted by the said authority. The Revenue carried the matter in further appeal before the Tribunal. It affirmed the view of the first appellate authority.

On being moved for reference the questions as set out above have been referred for the opinion of this Court.

We have heard learned counsel for the Revenue. There is no appearance on behalf of the assessee in spite of service.

Learned counsel for the Revenue submitted that there was no actual payment of gratuity. In fact, s. 37 had no application to the facts of the case and only when the circumstances enumerated in s. 36(1)(v) are fulfilled the deduction can be allowed. Similarly, it was submitted that the date which had to be reckoned was the date of registration of the document, i.e., 13th April, 1971, and not any anterior date. Therefore, according to him, the Tribunal’s views on both the aspects were erroneous.

So far as the first question is concerned, a few dates need to be noted. On 1st Oct., 1970, the assessee wrote a letter to Harsha Tractors Ltd. (in short “HTL”) offering to sell three contiguous plots of land identified as plots 1, 2 and 29 in the records of the U.P. State Industrial Corporation (in short “Corporation”). These plots belonged to the Corporation originally. HTL accepted the offer by its letter dt. 3rd Oct., 1970. The assessee wrote to the Corporation on 6th Oct., 1970, seeking their consent to the transfer of land to HTL. In turn, HTL, on 8th Oct., 1970, wrote to the Corporation confirming its agreement to take over the three plots from the assessee. The Corporation vide its letter dt. 7th Dec., 1970, approved the transfer of plots in favour of HTL. Certain conditions were stipulated by the Corporation. Fulfilling the conditions, the assessee made over possession of the three plots and structures thereon to HTL on 1st Nov., 1970, and the agreement of transfer was executed between the assessee and HTL on 5th Jan., 1971. The Corporation executed the lease deed on 22nd March,1971, in favour of HTL in respect of the plots which was registered on 13th April, 1971. So far as the building, tubewells, etc., are concerned, a registered sale deed was executed by the assessee with HTL on 12th June, 1972. The question that emerges for consideration is as to on which date the transfer became operative. It is well established that a document so long as it is not registered is not valid, yet once it is registered, it takes effect from the date of its execution [see Ram Saran Lall vs. Mst. Domini Kuer, AIR 1961 SC 1747 and Thakur Kishan Singh (Decd.) vs. Arvind Kumar AIR 1995 SC 73]. Sec. 47 of the Indian Registration Act, 1908, provides that a registered document shall operate from the date it would have commenced to operate if no registration thereof had been required or made and not from the date of its registration. That being the position, the deed of transfer is operative from 22nd March, 1971. Therefore, s. 47(iv) of the Act has to be applied w.e.f. 22nd March, 1971, when the lease deed was executed and not from 13th April, 1971, when it was in fact registered. That being the position, the Tribunal was justified in its conclusion and capital gains tax was not leviable though it erroneously took the view that the effective date was 5th Jan., 1971, when the agreement between the assessee and HTL was executed.

Coming to the second question, guidelines as to when gratuity can be allowed have been laid down by various judgments of the apex Court. Payment of gratuity as commonly understood is the payment made to the employee by the employer on his retirement or termination of his service for any reason. It is made voluntarily by the employer as a regular practice or pressure of trade or business either under an agreement with the employees or on the understanding of the trade and after the enactment of the Payment of Gratuity Act, 1972, which came into force on 16th Sept., 1972, as a statutory liability under the said Act. Although payment of gratuity is made on retirement or termination of service, it was not for the service rendered during the year in which the payment is made but it is made in consideration of the entire length of service and its ascertainment and computation depend upon several factors. 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. 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 s. 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 accrued basis under s. 37 of the said Act. Since the amount of gratuity payable in any given year would be a variable amount depending upon the number of employees who would be entitled to receive the payment during the year, the amount being a large one in one year and a small one in another year, the employer often finds it desirable and/or convenient to set apart for future use, a sum every year to meet the contingent liability as a provision for gratuity or a fund for gratuity. He might create an approved gratuity fund for the exclusive benefit of his employees under an irrevocable trust and make contributions to such fund every year. 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 purpose 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. [See in this connection, the observations of the apex Court in Indian Molasses Co. (P) Ltd. vs. CIT (1959) 37 ITR 66 (SC) : TC 16R.205]. A distinction is often made between an actual liability in praesenti and a liability de futuro, which for the time being is only contingent. The former is deductible but not the latter. 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 s. 36(1)(v). This position has been laid down by the apex Court in Shree Sajjan Mills Ltd. vs. CIT (1985) 49 CTR (SC) 193 : (1985) 156 ITR 585 (SC) : TC 18R.685. In fact, we have culled out and extracted the principles from the said judgment.

The position was again considered by the apex Court in CIT vs. Andhra Prabha (P) Ltd. (1986) 54 CTR (SC) 313 : (1986) 158 ITR 416 (SC) : TC 16R.168. It has to be noted that the assessment year involved is prior to the introduction of s. 40A(7) of the Act by the Finance Act, 1975, with retrospective effect from 1st April,1973. That being the position, the Tribunal was justified in holding that the assessee’s claim was admissible under s. 37(1) of the Act. The second question, therefore, is answered in the affirmative, in favour of the assessee and against the Revenue.

The reference is, accordingly, disposed of.

[Citation : 249 ITR 244]