JUDGMENT
K.S. Paripoornan, J.
1. At the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following questions of law in the two connected referred cases, for the decision of this court :
2. I. T. R. No. 527 of 1965 :
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that contributions made to group gratuity insurance scheme in excess of the statutory limit is an allowable deduction ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the assessee is entitled to the claim for export markets development allowance under Section 35B of the Income tax Act ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in finding that the commission paid to the agents in India and administrative expenses incurred in India qualify for weighted deduction under Section 35B of the Income tax Act, 1961, and that the commission on foreign sales and foreign travel expenses are to be allowed in full ? ”
3. I. T. R. No. 528 of 1985 :
“(1) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the assessee is entitled to the claim for export markets development allowance under Section 35B of the Income tax Act ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the commission paid to the agents in India and administrative expenses incurred in India qualify for weighted deduction under Section 35B of the Income-tax Act, 1961, and that the commission on foreign sales and ioreign travel expenses are to be allowed in full ?”
4. I. T. R. No. 527 of 1985 arises out of R. A. No. 63 (Coch) of 1983 and relates to the assessment year 1976-77. I. T. R. No. 528 of 1985 arises out of R. A. No. 64 (Coch) of 1983 and relates to the assessment year 1977-78. The appeals for these two years–I. T. A. 504 (Coch) of 1980 and I. T. A. 147 (Coch.) of 1981–were disposed of by the Income-tax Appellate Tribunal by a common order dated December 17, 1982. The statement of the case sent to this court by the Appellate Tribunal in the two cases is dated August 26, 1985. From the same appellate order aforesaid, the Tribunal had referred a question of law for the decision of this court which was the subject matter of I. T. Rs. Nos. 133 and 134 of 1983, disposed of on March 13, 1987. The printed records in I. T. R. Nos. 133 and 134 of 1983 were referred to to understand the respective scope of the orders as per the consent of the parties to these two referred cases.
5. We heard counsel for the Revenue, Mr. P. K. R, Menon, as also counsel for the respondent (assessee), Mr. P. Balachandran. The respondent
(assessee) is a cashew dealer. For the year 1976-77, he made a provision of Rs. 1,75,996 for payment to the approved gratuity fund. Actually he paid Rs. 1,07,596 under the L. I. C. (Group Gratuity Scheme). The Income-tax Officer held that the assessee is entitled to 8 1/3 per cent. of the salary paid to the employees and holding that the salary paid was Rs. 11,87,074 ; the 8 1/3 per cent. portion was worked out at Rs. 98,923. In other words, the Income-tax Officer made a disallowance of Rs. 8,673. In the appeal, the Commissioner of Income tax (Appeals) sustained this disallowance. He held that the claim made by the assessee exceeded the limit specified in Rule 103 of the Income-tax Rules. In the second appeal filed before the Tribunal, the assessee contended that, due to the reduction in the number of working days on account of the shortage of raw cashewnuts, the proportionate contribution had increased and the provisions having been made on actuarial valuation, the disallowance made is to be deleted. Reliance was placed by the Revenue on Rule 103 of the Income-tax Rules. Even so, the Appellate Tribunal held that the full premium has to be paid even if the employee did not work throughout the year due to loss of working days consequent upon the shortage of raw materials and, in this case, the assessee has constituted a gratuity fund which has been approved by the Commissioner of Income-tax, and the contribution has been made in accordance with the scheme. So, the Tribunal held that any contribution made in the approved manner is allowable, so long as the approval given by the Commissioner of Income-tax stands. It is against this decision that the first question for the assessment year 1976-77 has been referred by the Appellate Tribunal for the decision of this court.
6. Though there are two other questions for the assessment year 1976-77 and two questions for the assessment year 1977-78, question No. 2 for the assessment year 1976-77 and question No. 1 for the assessment year 1977-78 will be taken in by the only other question remaining to be answered in both the assessment years. That question, by and large, relates to the weighted deduction the assessee is entitled to under Section 35B of the Act. The assessee claimed that he is entitled to weighted deduction for commission paid to agents in India and administrative expenses incurred in India under Section 35B of the Income-tax Act. So also, the assessee claimed commission on foreign sales. The Tribunal has included foreign travel expenses also in question No. (3) for the assessment year 1976-77 and question No. (2) for the assessment year 1977-78. But it is seen that foreign travel expense is not one of the items which has been discussed as having been incurred or entitled to in the present case, under Section 35B of the Act, as could be seen from paragraph 11 of the appellate
order of the Tribunal dated December 17, 1982 (page 35 of the printed paper book). So, in considering the said two questions (question No. 3) for the assessment year 1976-77 and question No. 2 for the assessment year 1977-78, we should make it clear that no question of allowance under foreign travel expenses arises. And a reference to this, as if the assessee is entitled to it, is a clear error. We hold so.
7. It is agreed by both parties that we need not answer question No. 2 referred to us for the assessment year 1976-77 and question No. 1 for the assessment year 1977-78. This is recorded.
8. We now come to the adjudication of the two important aspects posed before us for both the years. The Income-tax Officer disallowed a sum of Rs. 8,673 regarding payment to the approved gratuity fund on the ground that the assessee is entitled to only 8 1/3 per cent. of the salary actually paid. The Appellate Tribunal in its appellate order proceeded to state that the plea of the assessee is that a provision has been made in accordance with the statutory provisions, taking into account the last drawn salary of each employee for the purpose of ascertaining the “incremental liability” of the assessee for the year under consideration. But, the Tribunal concluded in paragraph 9 of the order that the full premium has been made even if the employee did not work during the year due to loss of working days consequent upon the shortage of raw materials in a seasonal industry. It is also noticed that the assessee has constituted a gratuity fund which has been approved by the Commissioner of Income-tax and any contribution made in the approved manner should be allowed so long as the approval stands. Counsel for the Revenue contends that the assessee is not entitled to any provision made reckoning the “incremental liability” and so the Tribunal was in error in deleting the disallowance made by the Income-tax Officer in accordance with Rule 103 of the Income-tax Rules. On the other hand, counsel for the assessee would contend that what has been done in the instant case is only a provision made in accordance with the statutory requirements and the assessee is bound to pay the amount to the gratuity fund in accordance with the provisions of the Gratuity Act. The assessee is bound to pay the amount prescribed by the Gratuity Act which prescribes the contribution to be made by the employer towards his share at a prescribed percentage. It has to be worked out on the basis of the contract of employment and not on the basis of what was actually paid in a given month or months to the employees. Reliance was also placed on a Bench decision of the Andhra Pradesh High Court in CIT v. Super Spinning Mills Ltd. [1987] 166 ITR 518. On hearing
the rival pleas of the parties, we are of the view that the Tribunal has not made a proper approach to the question involved in adjudicating the issue. If the provision made for payment to the approved gratuity fund is an “incremental liability”, as per the decisions of this court in CIT v. Periya Karamalai Tea and Produce Co. Ltd. [1987] 167 ITR 32, and I. T. R. No. 308 of 1982 (CIT v. Chembra Peak Estates Ltd. [1990] 185 ITR 556 (Ker)) (judgment dated March 13, 1989), the assessee may not be entitled to the full allowance and the disallowance made may be proper. But, on the other hand, if the provision for payment to the approved gratuity fund only represents the contribution by the employer towards his share at the prescribed percentage under the Gratuity Act and worked out on the basis of the contract of employment, it is permissible. We do not understand Rule 103 of the Income-tax Rules to say that the deduction to be allowed should be on the basis of what was “actually paid” as salary in a given month or months to the employee. These aspects should be considered by the Tribunal bearing in mind the provision made for payment to the approved gratuity fund, the provisions of the Gratuity Act, and Rule 103 of the Income-tax Rules, as interpreted by us, concurring with the decision of the Andhra Pradesh High Court in Super Spinning Mills Ltd.’s case [1987] 166 ITR 518. It is only after coming to a finding as to whether the provision made for payment to the gratuity fund is towards the “incremental liability” of the assessee for the year or otherwise that the question of deletion of the disallowance made by the Income-tax Officer will arise. Since the Tribunal has not approached the matter in the correct perspective, we decline to answer question No. (1) referred to us for the year 1976-77. The Appellate Tribunal shall decide the appeal afresh on this aspect. The Tribunal should also bear in mind the difference between a monthly salaried employee and an employee engaged on daily rated basis.
9. The only other question is the entitlement of the assessee to weighted deduction under Section 35B of the Act. Question No. 3 for the assessment year 1976-77 and question No. 2 for the assessment year 1977-78 deal with this aspect of the matter. This court had occasion to deal with this matter on more than one occasion. Suffice it to say that a Bench of this court in I. T. Rs. Nos. 91 to 102, 203 and 211 of 1984 (CIT v. Kerala Nut Food Co. [1990] 185 ITR 150) (judgment dated June 18, 1987) and in I. T. R. No. 239 of 1982 (CIT v. Aluminium Industries Ltd. [1990] 182 ITR 172) (judgment dated January 18, 1989) has indicated the approach to be made in the matter of weighted deduction to which the assessee is entitled under Section 35B of the Act. In the light of the above Bench decisions,
we decline to answer question No. 3 for the assessment yeur 1976-77 and question No. 2 for the assessment year 1977-78, but, at the same time, direct the Income-tax Appellate Tribunal to restore the appeals to file and adjudicate the question afresh in the light of the decision of the Special Bench of the Appellate Tribunal in v. Hemchand and Co.’s case and lo the extent it was adopted or incorporated in the circular of the Central Board of Direct Taxes, dated December 28, 1981. In considering the above questions, the Appellate Tribunal shall confine the entitlement to weighted deduction on the commission paid under Section 35B of the Act and to administrative expenses incurred in India since the entitlement to commission on “foreign sales” is covered by the decision in I. T. Rs. Nos. 133 and 134 of 1983 (CIT v. K. Ravindranathan Nair [1988] 170 ITR 411 (Ker)) (judgment dated March 13, 1987) and the question of foreign travel expenses does not arise at all on a perusal of paragraph 11 of the appellate order of the Tribunal dated December 17, 1982, about which we have adverted to earlier. The Commissioner of Income-tax ( Revenue ), Trivandrum, shall place the circulars before the Income tax Appellate Tribunal when the matter is again posted for hearing. The references are answered as above.
10. A copy of this judgment under the seal of this court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.