JUDGMENT
N.V. Balasubramanian, J.
1. The assessee is a public limited company and the assessment year involved is 1979-80, the relevant previous year ending on 31st August, 1979. The ITO, while completing the assessment made certain disallowance under s. 40(c) of the IT Act, 1961 (hereinafter to be referred to as ‘the Act’). He held that the gratuity paid to one Krishnan, the director of the company should be taken into account for the purpose of determining the ceiling under s. 40(c) of the Act. Similarly, he took into account the provident fund contribution, pension contribution and one year term assurance contributed by the company in respect of directors amounting to Rs. 72,593. He, therefore, held that the entire sum would represent the payments made to the director and it has to be disallowed under s. 40(c) of the Act. He, therefore, disallowed a sum of Rs. 1,05,593 in the computation of the income of the assessee applying the provisions of s. 40(c) of the Act.
2. The CIT(A), on appeal, directed the ITO to exclude the payments made by the assessee-company towards gratuity, payment to an approved gratuity fund, payment to a recognised provident fund and payment to an approved superannuation fund from the value of remuneration, benefits and amenities provided by the assessee-company to the director and then, determine the ceiling limit under s. 40(c) of the Act. In so far as the payment made by the assessee towards Life Insurance Corporation for taking out an one year term assurance policy is concerned, the CIT(A) upheld the action of the ITO to include the same in the value of remuneration, benefits and amenities. The Revenue as well as the assessee, aggrieved by the order of the CIT(A) preferred appeals to the Tribunal.
3. The Tribunal upheld the view of the CIT(A) that the contributions made towards provident fund, pension fund, superannuation fund and gratuity cannot be regarded as remuneration or benefit falling within the meaning of s. 40(c) of the Act. In so far as the payment made towards one year renewable term assurance policy is concerned, the Tribunal held that under the policy, the sum assured shall become payable only in the event of death of the policyholder while in service prior to the terminal date, namely, the renewal date, and therefore, there was no amenity or benefit resulting in favour of the director. The Tribunal, therefore, following a decision of the Karnataka High Court in CIT vs. Amco Batteries Ltd. (1984) 150 ITR 48 (Kar) : TC 18R.605 held that the decision of the Karnataka High Court would apply to the facts of the case. As regards the gratuity, the Tribunal upheld the view of the CIT(A) that the amount could not be taken into account for the purpose of s. 40(c) of the Act. The ITO also made disallowance of a sum of Rs. 13,873 towards payment of gratuity to employees taken over from the amalgamated company. The ITO disallowed the claim on the ground that the amalgamated company had made a provision and out of the provision taken over from the amalgamated company, the assessee had to incur the expenditure and therefore, the same was not an allowable expenditure. The CIT(A) held that there was a liability cast on the assessee-company to pay gratuity and therefore, the said amount was allowable as expenditure. The Tribunal also held that the view of the CIT(A) was taken after following its earlier decision in ITA No. 1257/Mad/1979, dt. 17th December, 1980, rendered in the assessee’s own case for the asst. yr. 1975-76 and, therefore, the assessee was entitled to the deduction of a sum of Rs. 13,873 being the payment of gratuity to the employees taken over from the amalgamated company.
4. The Revenue has challenged the order of the Tribunal and the Tribunal has referred the following questions of law for our consideration :
“1. Whether the Tribunal was correct in law on the facts and in the circumstances of the case, in holding that for purpose of disallowance under s. 40(c), payment of gratuity, contribution made to provident fund, pension fund and premium to LIC are not includible ?
2. Whether the Tribunal was correct in law on the facts and in the circumstances of the case in holding that payment of gratuity to employees taken over from the amalgamated company is allowable as a business expenditure in the assessment of the assessee-company ?”
5. Mr. C. V. Rajan, learned counsel for the Revenue, submitted that the Tribunal was not correct in holding that the payment of gratuity, contribution made to provident fund, pension fund and premium to LIC are not includible under s. 40(c) of the Act. As far as the payment of gratuity to the employees taken over from the amalgamated company, he submitted that there was a provision towards gratuity in the amalgamated company and if the deduction is again made in the assessee’s company, it would amount to double deduction and therefore, the assessee is not entitled to deduction towards gratuity to employees taken over from the amalgamated company.
6. Mr. Janarthana Raja, the learned counsel for the assessee, on the other hand, submitted that other payments also would not fall within the scope of s. 40(c) of the Act. Learned counsel for the assessee submitted that as far as the payment towards one year renewable term assurance policy is concerned, it stands in the same footing of accident insurance policy and the decision of the Karnataka High Court in Amco Batteries Ltd.’s case, cited supra, would apply to the facts of the case.
7. We have carefully considered the rival submissions of the parties. In so far as the first question of law relating to the contribution made to provident fund and pension fund is concerned, we are of the view that the Tribunal was correct in holding that those two amounts cannot be regarded as remuneration, benefit or amenity. The CIT(A) referred to proviso to s. 40(c) of the Act and he also referred to sub-s. (5) of s. 40A of the Act and held that under the said sub-section of s. 40A of the Act, the amount paid towards contribution to provident fund and pension fund cannot be regarded as remuneration or benefit or amenity. Since the CIT(A) as well as the Tribunal has proceeded on the basis that the director is also an employee of the company, we are of the view that the proviso to sub-s. (5) of s. 40A of the Act would apply and the contribution to the provident fund and pension fund shall not be taken into account for the purpose of determining the ceiling under s. 40(c) of the Act. We are not expressing any opinion on the question when such a contribution is made in a case of a director or a person who is substantially interested in the company and who is not an employee of the company.
8. In so far as the question whether the payment of gratuity would come within the provisions of s. 40(c) of the Act is concerned, we are of the opinion that s. 40(c) of the Act would not take within its ambit one-time payment like payment of gratuity. Though the gratuity is regarded as a salary for the purposes of s. 17 of the Act, for the purpose of assessment of the same in the hands of the employee who is in receipt of the gratuity, the said amount of gratuity cannot be regarded as remuneration, benefit or amenity to the director within the meaning of s. 40(c) of the Act. The Bombay High Court had an occasion to consider the question in the case of CIT vs. Colgate Palmolive (India) P. Ltd. (1994) 210 ITR 770 (Bom) : TC 18R.336 and Mrs. Sujata Manohar, the then Acting Chief Justice of Bombay High Court (as Her Lordship then was) speaking for the Bench held that the retirement gratuity could not be regarded as a periodic payment and it is not covered by the provisions of s. 40(c) of the Act and, therefore, the ceiling provided under s. 40(c) of the Act would not apply to the payment of gratuity received by the director. The reasoning on which the Bombay High Court came to such a conclusion shows that for the purpose of salary within the meaning of s. 40(c) of the Act, it would not take within its ambit any one time payment or a payment which is not relatable to any period covered by the previous year. The emphasis that was given by the Bombay High Court is that the provisions of s. 40(c) of the Act would cover a periodic payment relating to any specific period of service and where the gratuity is paid on the basis of the entire length of service of an employee which cannot be apportioned yearwise, the payment of gratuity cannot be equated to monthly salary or yearly payment or monthly allowance within the meaning of s. 40(c) of the Act. The Bombay High Court while holding the above view held as under :
“If the computation provisions contained in s. 40(c) and s. 40A(5) do not provide for non-periodic payments not relatable to the previous year, such payments are not contemplated as being covered by these sections. Sec. 40(c) deals with any remuneration, benefit or amenity to a director or any expenditure or allowance in respect of any asset of the company which is used by that person. Clauses (A) and (B) of s. 40(c) describe and refer to such expenditure or allowances as related to a specific period during the previous year. Similarly, under s. 40A(5)(c), the expenditure which is referred to is a periodical expenditure in relation to the period comprised in the previous year or any part thereof. Sec. 40(c) does not make any reference to the word ‘salary’ nor does it contain any such definition of the word ‘salary’. Looking at the definition of ‘salary’ for the purpose of s. 40A(5) under the basic scheme of s. 40A(5), any one-time payment or a payment which is not relatable to any period covered by the previous year, cannot be taken into account for the computation of the ceiling prescribed under that section. The ceiling is to be calculated with reference to the period covered by the previous year. Including such one-time payment as forming a part of s. 40A(5) would render it impossible to calculate the ceiling prescribed in that section in connection with that payment. Such payments, therefore, cannot be considered as forming part of the expenditure which is covered by s. 40A(5). The definition of ‘salary’ under Expln. 2 to s. 40A(5) has to be considered in the light of the provisions of s. 40A(5). In the context of s. 40A(5), ‘salary’ cannot be considered as including a one-time payment in the nature of retirement gratuity. The payment of gratuity at the time of retirement of an employee-director cannot be regarded as a periodic payment falling under s. 40(c) and/or s. 40A(5). Gratuity which is paid at the time of retirement is undoubtedly paid on the basis of the entire length of service of an employee. But it cannot be apportioned yearwise.”
9. The above view of the Bombay High Court was followed by the same Court in a subsequent decision in the case of CIT vs. Century Spg. Mfg. Co. Ltd. (1994) 210 ITR 783 (Bom) : TC 17R.504 wherein the Bombay High Court reiterated that the amount of gratuity which is exempt under s. 10(10) of the Act should be excluded and only the excess can be taken into account for the purpose of disallowance under s. 40A(5) of the Act. In Sapt Textile Products (India) Ltd. vs. CIT (1996) 217 ITR 378 (Bom), the Bombay High Court followed its earlier decisions and held that the expenditure on retirement gratuity is beyond the scope and ambit of s. 40(c) of the Act. We are in complete agreement with the view expressed by the Bombay High Court that the payment of gratuity which is not relatable to a particular year of service, which would be payable on the completion of continuous years of service and which is not a periodic payment cannot be regarded as falling within the scope of s. 40(c) of the Act warranting the disallowance under the said provisions of the Act. We, therefore, hold that the Tribunal was correct in holding that the amount of gratuity paid to the director should be excluded from the expenditure which is exempt in the hands of the director.
10. The first question also refers to the premium paid to the LIC. It is seen, on the facts of the case, a Master Policy No. GI 31120 was taken and the Tribunal, on a perusal of the terms of the policy, came to the conclusion that the policy amount assured would be payable only in the event of the death of the member while in service prior to the terminal date, i.e., the renewal date. The Tribunal also found that the other clauses of the policy provided that it was for the benefit of the beneficiary, the money would be paid to the assessee-company and it would be payable in lump sum or in annuity by way of monthly instalments. The Tribunal further fund that the other clause that it is for the benefit of the beneficiary shows that if the person insured dies while in service, the amount due under the policy would become payable in the manner contemplated in the terms of the policy. Therefore, the right to receive the policy amount would accrue only in the event of the death of the person insured while in services and prior to the terminal date and if there is no death, the policy would lapse. We are of the view that this policy has the features of the accident insurance policy and the fact that the amount would become payable only in the event of the death of the person insured during the course of his employment clearly shows that it was merely a contingent interest vested in favour of the beneficiary.
11. The Karnataka High Court had an occasion to consider the question whether the premium paid towards accident insurance policy can be regarded as a benefit or remuneration or amenity to a director in the case of CIT vs. Amco Batteries Ltd. (supra). The Karnataka High Court noticed a decision of the Supreme Court in CIT vs. L. W. Russel wherein the apex Court made the following observations :
“It implies that a right is conferred on the employee in respect of those perquisites. One cannot be said to allow a perquisite to an employee if the employee has no right to the same. It cannot apply to contingent payments to which the employee has no right till the contingency occurs. In short, the employee must have a vested right therein.”
After noticing the abovesaid decision of the Supreme Court, the Karnataka High Court held that the employees have no right to claim the amount payable under the policy and it was indeed for the benefit of the assessee-company. Here also, the employee did not take the policy, but the policy was taken by the assessee-company. No doubt, the insured person in this case was the employee, but the amount would become payable to him only in the event of the death of the insured while in service and the employee has no right to claim the amount and the right created in favour of the employee is only a contingent interest and therefore, according to the plain reading of the insurance policy, we are of the view that the premium paid by the assessee-company, cannot be regarded as perquisite or amenity or remuneration to the director. The above decision of the Karnataka High Court was followed by the same Court in CIT vs. J. B. Advani & Co. (Mysore) Ltd. (1987) 163 ITR 638 (Kar) : TC 18R.607 wherein the Karnataka High Court held that the premium paid by the assessee on the insurance policy taken out in the name of its manager was not a perquisite within the meaning of s. 40A(5)(a) of the Act. It is relevant to notice that in the abovesaid decision, the policy taken was life insurance policy and we are not expressing any opinion on the question whether the provisions of s. 40(c) would apply to the payment of premium in the case of life insurance policy taken on the life of the employee-director. The above view was also reiterated by the same Court in the cases of CIT vs. Motor Industries Co. Ltd. (1988) 173 ITR 374 (Kar) : TC 17R.478 and CIT vs. Amco Batteries Ltd. (1992) 203 ITR 614 (Kar) : TC 18R. 606. The Delhi High Court in the case of CIT vs. Bharat Ram Charat Ram P. Ltd. (1986) 157 ITR 199 (Del) : TC 18R.606 has also taken a view that the insurance premium paid by a company in respect of accident insurance policy cannot be regarded as perquisite within the meaning of s. 40(c) of the Act. The Calcutta High Court in the case of Indian Oxygen Ltd. vs. CIT has also taken a similar view that the premium paid by the company to safeguard its own liability did not result in any benefit to the employees, and also did not confer any right on the employees, nor did it detract from the liability of the employer. Following the above decisions of the Karnataka, Delhi and Calcutta High Courts, we hold that the premium paid to the LIC towards a policy which is akin to the accident insurance policy cannot be regarded as benefit or remuneration or amenity to the employee-director.
12. The second question relates to the payment of gratuity to the employees taken over from the amalgamated company. The facts leading to the second question of law are that M/s J. M. Fenner & Co. (India) Ltd., a company in Calcutta was amalgamated with the assessee-company with effect from the commencement of business as on 1st December, 1973 and under the terms of amalgamation, the assets of the company amalgamated were taken over by the assessee-company and the balance sheet as on the amalgamation date included the provision for liability towards gratuity to its employees. The assessee-company has taken over the employees of the amalgamated company under the terms of the amalgamation. The assessee-company contributed certain sum through an approved gratuity fund, and the ITO disallowed the provision on the ground that it covered the employees of the amalgamated company with the assessee-company. According to the ITO, the amalgamated company already claimed deduction and so, it is not open to the assessee-company to claim deduction towards gratuity in its hands at the time of payment. The ITO, therefore, held that the amount paid and claimed by the assessee was not an allowable deduction under s. 37 of the Act. The CIT(A) held that the assessee-company took over the entire business of the amalgamated company, and when the assets and liabilities of the erstwhile company were taken over by the assessee-company, the assessee-company also took over the gratuity liability and to discharge its statutory liability, the assessee paid the sum. He, therefore, held that, since there was an actual payment, the assessee is entitled to deduction under s. 37 of the Act. The Tribunal, following its earlier order in ITA No. 1257/Mad/1979, dt. 17th December, 1980, held that since the business of the amalgamated company was taken over as a result of the amalgamation, the assessee was liable to pay the gratuity to the employees taken over and therefore, at the time of actual payment by the assessee, the assessee was entitled to deduction under s. 37 of the Act.
13. Mr. C. V. Rajan, learned counsel for the Revenue, submitted that since the provision has been allowed as deduction in the computation of business income of the amalgamated company, it is not open to the assessee to claim deduction for the same liability in its hands at the time of actual payment and it would amount to double deduction for the same liability. He, therefore, submitted that the Tribunal was not correct in allowing the deduction. Mr. Janarthana Raja, the learned counsel for the assessee supported the order of the Tribunal.
14. We have carefully considered the submissions of the learned counsel for the respective parties and we have seen that there was an amalgamation of M/s J. M. Fenner & Co. (India) Ltd. with the assessee-company on 1st December, 1973, and under the terms of amalgamation, the assessee was obliged to take over the assets and liabilities of the amalgamated company. The terms of amalgamation also stipulated that the assessee should take over the employees of the amalgamated company and when the assessee made actual payment in discharge of its liability cast upon it towards gratuity to its employees taken over, the amount paid is allowable as business expenditure. The assessee has not claimed the deduction by way of provision towards gratuity liability, but on the basis of actual payment. Secondly, the employees of the amalgamated company, by virtue of the amalgamation, became the employees of the assessee-company and at the time of their retirement after service, the assessee was liable to pay gratuity under the provisions of the Payment of Gratuity Act and to discharge the statutory liability cast on it, the assessee paid the sum to the workmen. It is not permissible to treat the employees of the amalgamated company, even after the amalgamation, as employees of the amalgamated company and in our view, they ceased to be the employees of the erstwhile company and became employees of the assessee-company. Therefore, we are of the view that the Tribunal was correct in holding that the payment made by the assessee towards gratuity to its employees taken over by virtue of amalgamation is an allowable deduction under s. 37 of the Act.
15. A similar question came up for consideration before this Court in the case of CIT vs. Pandian Roadways Corpn. Ltd. (1991) 187 ITR 121 (Mad) : TC 15R.385 wherein this Court held as under :
“Under the provisions of the Tamil Nadu Fleet Operators (Stage Carriage Acquisition) Act, the liability of the erstwhile employers to pay gratuity to the employees had been taken over by the assessee-corporation on the vesting of private transport undertakings in it and the workers had been continued in service without any break, thus preserving intact the right to receive gratuity based on the total number of years of service put in by them under the erstwhile private transport companies prior to the taking over by the assessee-corporation and under the assessee-corporation after its take over.”
In that case, under the terms of take-over, the assessee therein was bound to pay gratuity payable by the predecessor private transport companies to its employees and the Revenue contended that there should be a bifurcation and the entire payment could not be allowed as deduction in the computation of the income of the assessee therein. This Court, in that situation, held that when the assessee was bound to pay gratuity by virtue of take-over of the predecessor private transport companies, the entire amount paid was allowable as a deduction. Following the ratio held by this Court in Pandian Roadways Corpn. Ltd. case, cited supra, we are of the view, that because of the amalgamation, the assessee was obliged to pay gratuity to its employees, though the employees rendered services to the amalgamated company prior to the taking over and on that account, it cannot be said that the payment was not towards business consideration. There is also no double deduction of the same amount as the grant of double deduction postulates the double deduction in the assessment of the same person, and the assessee, though a successor of the business, is altogether a different person and there is no question of double deduction of the same amount in the hands of the assessee. As we have already held, the liability was taken over by the assessee-company and with a view to discharge the statutory obligation, the amount was paid and we are of the view that the Tribunal was correct in holding that the gratuity amount paid to the employees taken over from the amalgamated company is an allowable business expenditure. In this view of the matter, we answer the questions of law referred to us as under :
First question of law : It is answered in the affirmative and against the Revenue.
Second question of law : It is answered in the affirmative and against the Revenue.
However, in the circumstances of the case, there will be no order as to costs.