Gujarat H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was entitled to deduction of the entire amount of Rs. 1,97,472 in the previous year under consideration even though the employees of the assessee had been in service since long before the commencement of that previous year ?

High Court Of Gujarat

CIT vs. Geskets & Radiators Pvt. Ltd.

Sections 40A(7), 35B

Asst. Year 1973-74

R.C. Mankad & R.K. Abichandani, JJ.

IT Ref. No. 118 of 1979

18th June, 1991

Counsel Appeared

Shelat, i/b R.P. Bhatt & Co., for the Revenue : D.A. Mehta, for the Assessee

C. MANKAD, J.:

The assessee is a private limited company engaged in the business of manufacture and sale of radiators. The assessee- company also exports radiators for selling them abroad. In the course of income-tax assessment for the asst. yr. 1973-74, the assessee-company claimed deduction of (1) Rs. 1,97,472, being the provision made for meeting future liabilities under the Payment of Gratuity Act, 1972 ; and (2) Rs. 45,906, being the expenditure incurred on payment of salary to the staff engaged for export development. Other claims made by the assessee- company in the course of the assessment are not relevant for this reference.

2. So far as the claim for deduction of gratuity provision was concerned, the ITO held that the deduction of the amount claimed by the assessee-company was not permissible under s. 409A(7) (a) unless and until the conditions laid down in s. 40A(7)(b)(ii) are satisfied. He, however, observed that, if the conditions in the said sub-cl. (ii) of cl. (b) of s. 40A(7) are satisfied by the assessee-company, he would allow deduction to the extent admissible by way of rectification under s. 155(13) of the IT Act, 1961 (“the Act” for short). In the appeal preferred by the assesseecompany, the AAC found that all the conditions except the condition regarding 50 per cent of the total provision to be paid to the trustees before April 1, 1977, laid down in cl. (b) of s. 40A(7) were fulfilled. He, therefore, held that, since the condition regarding payment of 50 per cent. of the amount to the trustees was not fulfilled, the ITO was justified in adding back the provision made by the assessee-company. He, however, directed the ITO to allow deduction in terms of the provisions of s. 155(13) of the Act for the full provision, if the payment of the balance of the amount of 50 per cent. to the trustees was made before April 1, 1977. It is not disputed that the condition regarding the payment of 50 per cent. of the amount to the trustees has also been fulfilled inasmuch as the said amount has been paid to the trustees before April 1, 1977. The Revenue and the assesseecompany carried the matter in appeal before the Tribunal (“the Tribunal” for short). It was not disputed before the Tribunal that the conditions laid down in sub-cl. (ii) of cl. (b) of s. 40A(7) were satisfied. It was, however, urged on behalf of the Revenue that deduction of the gratuity provision was admissible only to the extent to which the liability of the assessee- company as employer increased as on December 31, 1972, in comparison to its liability in this regard as on December 31, 1971. In other words, the argument of the Revenue was that deduction for the gratuity amount payable for the past services of the employees was not admissible in the year under consideration. The Tribunal rejected this contention of the Revenue holding that, prior to the coming into force of the Payment of Gratuity Act, 1972, which came into force on September 16, 1972, the assesseecompany was not liable to pay any gratuity to its employees. According to the Tribunal, the liability to pay gratuity arose for the first time on the coming into force of the Payment of Gratuity Act on September 16, 1972, and, therefore, the assessee-company was entitled to the full deduction of the gratuity provision of Rs. 1,97,472.

3. The assessee-company spent Rs. 45,906 in paying salary to the staff engaged in the export business in the year of account relevant to the asst. yr. 1973-74. It claimed weighted deduction of the said expenditure under sub-cl. (v) of cl. (b) of s. 35B(1) of the Act. In the course of assessment for the asst. yr. 1973- 74, the ITO held that the expenditure incurred for payment of salary to staff fell under sub-cl. (iii) of cl. (b) of s. 35B(1) and, since this expenditure was incurred in India, the assessee- company was not entitled to weighted deduction. In the appeal preferred by the assessee-company, the AAC allowed deduction to the extent of 50 per cent. of the said expenses. In the further appeal to the Tribunal, the Tribunal, following the decision of the Special Bombay Bench of the Tribunal, held that the assessee-company was entitled to weighted deduction to the extent of 75 per cent. of the expenditure incurred by it for the payment of salary to the staff engaged in the export business.

4. It is in the background of the above facts that the Tribunal has referred to us, for our opinion, the following questions, under section 256(1) of the Act :

“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was entitled to deduction of the entire amount of Rs. 1,97,472 in the previous year under consideration even though the employees of the assessee had been in service since long before the commencement of that previous year ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that only a portion of the staff expenses amounting to Rs. 45,906 was covered by clause (b)(iii) of s. 35B(1) and that that portion on estimate was 25per cent (sic) of the said expenses ?

(3) Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the portion of the staff expenses amounting to Rs. 45,906 was covered by cl. (b)(v) of section 35B(1) ?

(4) Whether the expenses of Rs. 45,906 spent by the assessee on payment of salary to the staff engaged for export development is entitled to weighted deduction under sub-cl. (v) of s. 35B(1)(b) of the Act ?”

So far as the first question is concerned, it is argued on behalf of the Revenue that the assessee-company is not entitled to deduction of the entire amount of Rs. 1,97,472, inasmuch as, this amount covers the liability of the assessee-company to pay gratuity to its employees for the services rendered by them in the past. It is submitted that the assessee- company is entitled to deduction only in respect of the gratuity payable to its employees for the services rendered in the previous year relevant to the asst. yr. 1973-74. According to the Revenue, liability to pay gratuity for the services rendered prior to the previous year could not be said to have arisen in the previous year and, consequently, no deduction in respect of the said liability was admissible.

We do not find any substance in the argument of the Revenue. It is not disputed that the assessee-company was not liable to pay gratuity to its employees before the coming into force of the Payment of Gratuity Act which came into force on September 16, 1972. It is only after the Payment of Gratuity Act came into force that the assessee-company became liable to pay gratuity to its employees. Under the said Act, the assessee-company is liable to pay gratuity to its employees who have completed five years of service for the total length of their service, as provided in the said Act. The assessee-company would, therefore, become liable to pay gratuity to its employees for their past services in accordance with the provisions of the Payment of Gratuity Act. It, however, cannot be gainsaid that their liability to pay gratuity to its employees arose for the first time on the coming into force of the Payment of Gratuity Act. In other words, this liability arose for the first time on September 16, 1972, the date on which the Payment of Gratuity Act came into force. It is on the coming into force of the Payment of Gratuity Act that the assesseecompany became liable to pay Rs. 1,97,472 by way of gratuity to its employees. Therefore, so far as the liability to pay the said amount of Rs. 1,97,472 is concerned, it arose in the previous year, i.e., calendar year 1972, relevant to the assessment year 1973-74. Since, admittedly, all the conditions laid down in sub-cl. (ii) of cl. (b) of s. 40A(7) have been fulfilled, the assessee-company is entitled to deduction of the entire amount of Rs. 1,97,472, as rightly held by the Tribunal. The first question shall, therefore, have to be answered in the affirmative and against the Revenue. This takes us to the claim for weighted deduction in respect of expenditure incurred by the assessee-company for payment of salary to its staff engaged in the export business or development. The expenditure which the assessee-company had incurred for the payment of salary to its staff in the previous year relevant to the asst. yr. 1973-74 was Rs. 45,906. The assesseecompany has claimed deduction of the entire amount of Rs. 45,906 under sub-cl. (v) of cl. (b) of s. 35B(1). As pointed out above, the Tribunal, following the decision of its Special Bombay Bench, allowed weighted deduction in respect of 75 per cent. of Rs. 45,906, the deduction thereof was claimed by the assessee-company.

The decision of the Special Bombay Bench of the Tribunal on which reliance was placed by the Tribunal in partly allowing the assessee company’s claim for weighted deduction was given in the case of J. Hemchand & Co. The circular issued to all the concerned officers of the IT Department in connection with the said decision of the Tribunal was brought to our notice, wherein it is stated to the following effect: “As the Board has accepted the decision in the case of J. Hemchand & Co., it was decided that where a case is decided in favour of the assessee by the CIT (A) in conformity with the Tribunal’s decision, no second appeal to the Tribunal need be filed. Similarly, where the Tribunal in the appeal pending before it, follows the decision in the case of J. Hemchand & Co., no reference need be recommended.

It is expected that the IACs/ITO will bear in mind the aforesaid decision while dealing with the claims of the assessee, suggesting appeals, revision, etc.” This circular, it appears, was issued after the decision of the Tribunal, pronounced on October 27, 1978. It would appear that this circular was not brought to the notice of the Tribunal when a reference was made to this Court. In view of the clear circular issued by the IT authorities, there is no reason to interfere with the view taken by the Tribunal. Apart from that, the only argument which is advanced before us is that the Tribunal ought not to have interfered with the order of the AAC allowing deduction to the extent of 50 per cent. There is no material before us to hold that the ratio adopted by the Tribunal is not fair. How much expenditure was incurred for the activity covered by sub-cl. (v) of cl. (b) of s. 35B(1) is a question of fact and, if the Tribunal has, in its own wisdom, on appreciation of the evidence and material on record, come to the conclusion that the expenditure in question to the extent of 75 per cent. would fall under sub-cl. (v) of clause (b) of s. 35B(1), it is hardly a matter for this Court to interfere.

For the reasons stated above, we do not see any reason to disturb the finding of the Tribunal. We, therefore, answer questions Nos. 2, 3 and 4 in the affirmative and against the Revenue. Reference answered, accordingly, with no order as to costs.

[Citation:192 ITR 509]

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