High Court Of Madras
CIT vs. Coimbatore Premier Corporation (P) Ltd.
Sections 37(1), 40A(7)
Asst. Year 1976-77
R. Jayasimha Babu & Mrs. A. Subbulakshmy, JJ.
Tax Case No. 2111 of 1984
2nd September, 1998
S.V. Subramaniam for C.V. Rajan, for the Revenue : Mrs. Aparna Nandakumar, for the Assessee
R. JAYASIMHA BABU, J. :
The omission to seek the approval of the CIT for a group gratuity scheme, though the scheme adopted by the assessee would have received such approval if it had been sought for, the scheme being one formulated by the Life Insurance Corporation of India which has been adopted by a large number of the assessees, has led to thisreference. The Revenue is aggrieved by the order of the Tribunal holding that notwithstanding the absence of such approval, the contribution made to the scheme which remains unapproved till today is allowable as an item of expenditure under s. 37 of the IT Act, 1961. The assessment year is 1976-77. The assessee had adopted the group gratuity scheme formulated by the Life Insurance Corporation of India and it had paid premium to the said Corporation is a sum of Rs. 62,556 during the relevant previous year. The deduction sought for that payment was disallowed by the ITO under s. 36(1)(v) r/w s. 40A(7) of the Act. The CIT to whom the assessee preferred an appeal as also the Tribunal to whom the ITO carried the matter in further appeal were of the view that the deduction was allowable under s. 37 of the Act and deduction has been allowed accordingly. It is submitted by learned senior counsel for the Revenue that this view of the Tribunal is wholly untenable, having regard to the relevant statutory provisions and the decision of the Supreme Court in the case of Shree Sajjan Mills Ltd. vs. CIT (1985) 49 CTR (SC) 193 : (1985) 156 ITR 585 (SC) : TC 18R.685. Attention was invited to s. 2(5) of the Act which defines the approved gratuity fund, to s. 36(1)(v) of the Act, which provides that any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund for the exclusive benefit of his employees under an irrevocable trust is to be allowed as a deduction and s. 40A(7) of the Act, which provides that no deduction shall be allowed in respect of any provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason, unless such payment is covered by any one of the other sub- clauses under s. 40A(7)(b) of the Act.
All these statutory provisions refer to an “approved gratuity fund”. The approval referred to in the provisions is the approval of the CIT, which is required to be obtained in terms of the rules contained in Part C of Sch. IV to the Act, which deals with “approved gratuity fund”. Rule 4(1) provides for an application being made for approval. Rule 6 provides that if a gratuity fund for any reason ceases to be an approved gratuity fund, the trustees of the fund shall nevertheless remain liable to tax on any gratuity paid to any employee. The conditions for approval are set out in r. 3. The approval is to be granted by the Chief CIT or the CIT, who has been vested with that power under r. 2(1) of Part C of Sch. IV. The statutory position, therefore, is that the provision made for gratuity payments to employees in future years is not to be allowed as deduction at all, unless it is by way of contribution made to an approved gratuity fund created under an irrevocable deed of trust. It is therefore not sufficient to have made a provision or to have made a payment by way of premium to a scheme of gratuity, even if it is under an irrevocable deed of trust. What is required further is the approval of the Chief CIT or the CIT. In the absence of any such approval, the fund cannot be treated as an approved gratuity fund. The provision made for the payment of gratuity to the employees, but not actually paid during the year, cannot qualify as a deduction under s. 37 of the Act, in view of the prohibition of allowability of the provision as deduction contained in s. 40A of the Act. Unless s. 40A of the Act is strictly complied with, an assessee will not be entitled to claim the amount or payment of premium or contribution to any gratuity fund as a deduction.
5. The Supreme Court in the case of Shree Sajjan Mills Ltd. vs. CIT (supra) has held that for gratuity to be deductible, the conditions laid down in s. 40A(7) had to be fulfilled. The deduction cannot be allowed on general principles under any other section of the Act, because sub-s. (1) of s. 40A of the Act makes it clear that the provisions of the section had effect notwithstanding anything to the contrary contained in any other provisions of the Act, relating to the computation of income under the head “Profits and gains of business or profession”. The Tribunal was, therefore, clearly in error in holding that what was not allowable as a deduction under s. 40A(7) of the Act was nevertheless to be allowed as deduction under s. 37 of the Act. In doing so, it has not taken note of the overriding effect given to s. 40A of the Act. The question referred to us must therefore, be answered in favour of the Revenue and against the assessee, and we answer that question accordingly.
6. Counsel for the assessee submitted that as the scheme adopted by the assessee is one which has been found by the CIT in respect of other assessees, who have adopted similar schemes, to be one which merits approval, as the scheme satisfies all the conditions required to be met for securing such approval, the assessee may be permitted to apply to the authorities concerned for approval, and if such approval is granted, to have the benefits of the approval for this assessment year also. We cannot direct the CIT to either grant or withhold the approval. We, however, permit the assessee to apply for such approval and depending upon the result of its application, it will become entitled to such benefits, as it may be able to claim on the strength of such approval. Any such application shall be made if the assessee is desirous of making it within a period of thirty days from today.
[Citation : 246 ITR 626]