Delhi H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in observing that if a proper scheme and rules and regulations existed under which the gratuity was payable to the employees, and the latter could enforce the same, the gratuity amount of Rs. 1,34,689 should be allowed as a permissible deduction in the previous year relevant to the asst. yr. 1972-73 ?

High Court Of Delhi

CIT vs. Dalmia Dadri Cement Ltd.

Sections 37(1), 80-I

Asst. Year 1972-73

D.K. Jain & Madan B. Lokur, JJ.

IT Ref. No. 176 of 1978

2nd January, 2003

Counsel Appeared

Sanjiv Khanna with Ms. Rashmi Chopra, for the Petitioner : None, for the Respondent

JUDGMENT

D.K. JAIN, J. :

At the instance of the Revenue, the Income-tax Appellate Tribunal, Delhi Bench-C, New Delhi (for short the Tribunal), has referred, under s. 256(1) of the IT Act, 1961 (for short the Act), the following questions for our opinion : “1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in observing that if a proper scheme and rules and regulations existed under which the gratuity was payable to the employees, and the latter could enforce the same, the gratuity amount of Rs. 1,34,689 should be allowed as a permissible deduction in the previous year relevant to the asst. yr. 1972-73 ?”

2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the assessee was entitled to the relief claimed under s. 80-I in respect of the profits and gains attributable to the limestone production business of the assessee and as such in setting aside the orders of the authorities below and restoring the matter to the file of the ITO for determining the profits and gains attributable to the said business and to work out relief to which the assessee would be entitled on the basis of its finding ?” 2. Since in our opinion answers to both the questions stand concluded by the decisions of this Court, we deem it unnecessary to state the facts in greater detail. However, in order to appreciate the issues involved, we shall briefly notice the material facts. The assessee is a manufacturer of cement. Insofar as the first question is concerned, for the previous year relevant to the asst. yr. 1972-73, it had debited a sum of Rs. 1,71,783 to its P&L a/c as provision for gratuity payable to employees. While completing assessment for the relevant assessment year, the AO disallowed a sum of Rs. 1,34,689, out of the aforenoted amount on the ground that the said amount had been claimed merely on the basis of a provision and not on the basis of actual contribution to an approved gratuity fund created under an irrevocable trust for the said purpose. Against the said disallowance, the assessee preferred appeal to the AAC but without any success. The matter was carried in further appeal to the Tribunal. Relying on its earlier decisions, the Tribunal held that in principle the assessee was entitled to deduction on account of the provision for payment of gratuity in case the valuation was done on actuarial basis. The Tribunal accordingly remitted the matter back to the AO for verification whether an approved gratuity scheme was in existence and whether the claim made by the assessee in respect thereof was based on scientific actuarial basis. As regards the second question, the assessee had claimed relief under s. 80-I r/w item No. 3 of the Sch. VI of the Act. As noted above, the assessee is in the business of manufacture and sale of cement. Upto 31st March, 1972, an industry engaged in the manufacture of cement was treated as priority industry for the purpose of the said provision. However, w.e.f. 1st April, 1972, Sch. VI was amended inasmuch as cement in Item No. 12 was deleted by Finance (No. 2) Act of 1971. In other words, relief under s. 80-I was not admissible to a cement manufacturing industry. Therefore, while completing assessment, the AO disallowed the claim made by the assessee under s. 80-I in respect of the manufacture of limestone, used by the assessee for manufacture of cement, and which continued to be in the list of items eligible for relief under the said section. The AO was of the view that the assessee being engaged in the business of manufacture of cement was not entitled to claim the said relief on manufacture of limestone because it had been used by the assessee itself. He did not accept the stand of the assessee that a part of its profits were attributable to the business of limestone, which item continued to be included in Item No. 3 of the Sch. VI. Assessee’s appeal on this issue before the AAC did not meet with any success. The assessee carried this issue also in further appeal to the Tribunal. The Tribunal took the view that the assessee was entitled to relief under s. 80-I in respect of profits and gains attributable to the limestone produced by the assessee. Accordingly, the Tribunal set aside the orders of the lower authorities and restored the matter to the file of the AO for determination of profits and gains, which were attributable to the business of the assessee in the manufacture and production of limestone.

3. On Revenue’s moving application under s. 256(1) of the Act, the aforenoted questions have been referred for our opinion. We have heard Mr. Sanjiv Khanna, learned senior standing counsel for the Revenue. There is no appearance on behalf of the assessee. As noted above, both the issues are no longer res integra, insofar as this Court is concerned. A similar issue with regard to the claim of gratuity came up for consideration of this Court in CIT vs. Ghaziabad Engineering Company (P) Ltd. (2001) 169 CTR (Del) 74 : (2001) 249 ITR 244 (Del), wherein it was held that where an amount is set apart by way of provision or by way of reserve or fund to meet the liability of gratuity as and when it becomes payable, it will not be deductible allowance or expenditure but where 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). In the said decision it has also been noted that s. 40A(7) of the Act, introduced by Finance Act of 1975, with retrospective effect from 1st April, 1973, would be applicable only from asst. yr. 1973-74. In CIT vs. Garware Synthetic Bristles (1994) 117 CTR (SC) 260 : (1994) 205 ITR 426 (SC) the apex Court has also held that s. 40A(7) of the Act would not apply to the asst. yr. 1972-73. Since in the present case we are also concerned with the asst. yr. 1972-73, s. 40A(7) of the Act will have no application. In view of the aforenoted decisions, no fault can be found with the direction given by the Tribunal to the AO to verify the claim made by the assessee in respect of the provision made for gratuity. Accordingly, the first question is answered in the affirmative i.e., in favour of the assessee and against the Revenue.

4. Regarding the second question, an identical issue was considered by this Court in CIT vs. Orissa Cement Ltd. (No. 2) (2002) 174 CTR (Del) 180 : (2002) 254 ITR 412 (Del), wherein, while distinguishing another decision of this Court in CIT vs. Dalmia Cement (Bharat) Ltd. (2001) 171 CTR (Del) 250 : (2002) 253 ITR 725 (Del), it has been held that an assessee who is producing limestone, even for captive use, is entitled to relied under s. 80-I of the Act. In the light of the said decision, with which we are in respectful agreement, the view taken by the Tribunal in remitting the matter back to the AO to determine the profits and gains attributable to the manufacture and business of limestone cannot be held to be erroneous. Consequently, the question is also answered in the affirmative, i.e., in favour of the assessee and against the Revenue. The reference stands disposed of with no order as to costs.

[Citation : 263 ITR 364]

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