JUDGMENT
The Court
1. At the instance of the Department, the Tribunal referred the following question for the opinion of this Court under s. 256(1) of the IT Act, 1961, hereinafter referred to as the Act :
“Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the entire gratuity provision of Rs. 24,05,655 should be allowed as a deduction while computing the total income of the assessee for the asst. yr. 1974-75 ?”
2. The assessee is a textile mill. For the asst. yr. 1974-75 the accounting year ended on 31st March, 1974. The assessee follows the mercantile system of accounting. The Payment of Gratuity Act, 1972, had come into force in September, 1972. But the assessee made no provision in its accounts for the financial year ended 31st March, 1973, relevant to the asst. yr. 1973-74. The assessee thereafter for the financial year ended 31st March, 1974, relevant to the asst. yr. 1974-75, made a provision for gratuity for its workers in its accounts on actuarial valuation for a sum of Rs. 24,05,655. The liability as on 31st March, 1973, relevant to the asst. yr. 1973-74 based on actuarial valuation taking into consideration the number of workers, multiplied by 15 days of salary for each year and the number of years of service of each worker amounted to Rs. 17,87,330. So the incremental liability for this year came to Rs. 6,18,325 and both together came to Rs. 24,05,655 as on 31st March, 1974. The gratuity trust deed was drawn up on 27th March, 1974. On 30th March, 1974, the assessee made a deposit of Rs. 17,87,330 in the Central Bank of India. For the balance of Rs. 6,18,325 a cheque was issued on 31st Oct., 1974, to place the amount in the monthly interest deposit account. On 28th March, 1975, the assessee wrote to the CIT for approval of the fund. After some correspondence, the CIT by order dt. 25th Jan., 1978, granted approval w.e.f. 30th March, 1976.
3. Before the ITO, the assessee claimed the provision for Rs. 24,05,655 as a deduction. The ITO accepted the fact that s. 40A(7) of the Act has been duly complied with. But the ITO has held that in view of the fact that the Gratuity Act came into force from September, 1972, it cannot be said that the entire liability accrued during the accounting year 31st March, 1974. According to the ITO, for the asst. yr. 1974-75, the incremental liability relevant alone is admissible. In this view of the matter, the ITO allowed deduction of Rs. 6,18,325, being the difference between Rs. 24,05,655 and Rs. 17,87,330. Hence, the balance of Rs. 17,87,330 was not allowed as deduction. On appeal, the AAC confirmed the order passed by the ITO. Aggrieved the assessee filed an appeal before the Tribunal. The Tribunal held that on a plain reading of the provisions contained in s. 40A(7) and the provisions contained in s. 155(13) of the Act, inasmuch as, the assessee complied with the conditions prescribed under s. 40A(7) of the Act, the assessee is entitled to deduction of the entire amount claimed in the assessment year under consideration, viz., Rs. 24,05,655. Alternatively, the Tribunal also held that the assessee is entitled to the deduction of the entire amount claimed under s. 36(1)(v) of the Act.
4. Learned standing counsel appearing for the Department submitted that the assessee is entitled to claim deduction only with regard to the sum of Rs. 6,18,325, which is the incremental liability pertaining to the accounting year, relevant to the assessment year under consideration. The assessee is not entitled to claim deduction of the sum of Rs. 17,87,330, which does not relate to the assessment year under consideration. According to learned standing counsel, inasmuch as, the abovesaid sum relates to gratuity liability on the actuarial basis pertaining to the earlier assessment years that cannot be allowed as deduction in the present assessment year under consideration. In other words, according to learned standing counsel appearing for the Department, the assessee is entitled to claim deduction with regard to the gratuity liability that arose during the assessment year under consideration and nothing else. Learned standing counsel pointed out that, inasmuch as, the Gratuity Act came into force from September, 1972, the liabilities on the assessee to provide for gratuity liability to its employees arose from that date. But the assessee made no provision in its accounts for the financial year ended 31st March, 1973, relevant to the asst. yr. 1973-74. In such a case, the gratuity liability relating to earlier assessment years cannot be claimed as deduction in the present assessment year under consideration. In so far as the deduction allowed under s. 36(1)(v) of the Act is concerned, learned standing counsel pointed out that, inasmuch as, the approval by the CIT was not obtained before making deposit, the benefit under s. 36(1)(v) of the Act cannot be availed of.
On the other hand, learned counsel appearing for the assessee, while supporting the order passed by the Tribunal, submitted that, inasmuch as, the assessee complied with the conditions prescribed under s. 40A(7) of the Act, the assessee is entitled to deduction of the entire amount deposited in the present assessment year under consideration. According to learned counsel, the deposit of Rs. 24,05,655 is the initial deposit made valued on the basis of actuarial valuation. Learned counsel further pointed out that this is the gratuity liability as on 31st March, 1974. The ITO was not correct in allowing deduction only with regard to Rs. 6,18,325 being the incremental liability pertaining to the present assessment year under consideration. As per the provisions of s. 40A(7) of the Act, the assessee is entitled to create the gratuity fund for the first time in the asst. yrs. 1973-74 to 1975-76. The bar on allowance of provision made for the payment of gratuity to employees will not apply for the asst. yrs. 1973-74 to 1975-76 only if all the conditions referred to in the provisions contained in s.40A(7) are complied with. Inasmuch as, the assessee has complied with all the conditions prescribed under s. 40A(7) of the Act, the deduction claimed with regard to a sum of Rs. 24,05,655 cannot be denied in the asst. yr. 1974-75. Since the assessee is entitled to the deduction of the claim made with regard to gratuity liability under s. 40A(7) of the Act, the deduction claimed under s. 36(1)(v) is not pressed.
5. We have heard the rival submissions. The fact remains that the assessee claimed deduction of Rs. 24,05,655 in the asst. yr. 1974-75 since that was a provision made for gratuity for the workers in its accounts on actuarial valuation. This is the liability as on 31st March, 1973, relevant to the asst. yr. 1973-74. This was worked out on the basis of actuarial valuation by taking into consideration the number of workers, multiplied by 15 days of salary for each year and the number of years of service of each worker, etc. The gratuity trust deed was drawn as on 27th March, 1974. On 30th March, 1974, the assessee made a deposit of Rs. 17,87,330 in the Central Bank of India. For the balance of Rs. 6,18,325, a cheque was issued on 31st Oct., 1974, to place the amount in the monthly interest deposit account. The assessee also wrote to the CIT for approval of the fund on 28th March, 1975. By an order dt. 21st July, 1978, the approval was granted w.e.f. 30th March, 1976. The ITO allowed deduction only with regard to the incremental liability relating to the assessment year under consideration amounting to Rs. 6,18,325 only. According to the ITO, the gratuity liability relating to the earlier assessment years cannot be allowed as deduction in the present assessment year under consideration. But this view is not correct in view of the provisions contained in s. 40A(7) of the Act.
6. In order to remove uncertainty in the matter of allowing deduction with regard to the provision made for gratuity liability for the earlier years, the Finance Act, 1975, has inserted a new sub-s. (7) in s. 40A, which provides that no deduction will be allowed in the computation of taxable profits in respect of mere “provision” made by the employers in their books of account for payment of gratuity to their employees on their retirement or on termination of their employment for any reason. The amendment will not, however, affect the provisions made for the purpose of payment of sums by way of contributions towards approved gratuity funds that have become payable during the previous year, or for the purpose of making any payment on account of gratuity to employees where such gratuity has become payable during the previous year and such provisions will continue to be eligible for deduction as hitherto.
7. With a view to mitigating hardship in cases where the provisions have been made by the assessees in their accounts for the previous years relevant to the asst. yrs. 1973-74 to 1975-76 on the basis of their understanding of law and the clarification given by the Board in 1970, the new s. 40A(7) has made a saving provision. Under this provision, the prohibition regarding allowance of provisions for gratuity will not apply in relation to such amount of the provision as does not exceed an amount calculated at the rate of 8-1/3% of the salary as defined in r. 2(h) of Part A of the Fourth Schedule of each employee entitled to the payment of gratuity for each year of service in respect of which the provision is made, if certain conditions are fulfilled. These conditions are as under :
(i) The provision in the accounts for the relevant previous year is made in accordance with an actuarial valuation of the ascertainable liability of the assessee for payment of gratuity to his employees on their retirement or on termination of their employment for any reason.
(ii) The assessee sets up a gratuity fund for the exclusive benefit of his employees under an irrevocable trust before 1st Jan., 1976, and files an application to the CIT for the approval thereof before that date.
(iii) A sum equal to at least 50% of the admissible amount (i.e., an amount calculated at the rate of 8-1/3% of the salary of each employee entitled to the payment of gratuity for each year of service in respect of which the provision is made) is paid by the assessee by way of contribution to the approved gratuity fund before 1st April, 1976, and the balance of the admissible amount is so paid before 1st April, 1977. Where any amount has been utilised out of the provision made in any previous year for the purpose of the payment of any gratuity before the creation of the approved gratuity fund, the amount to be paid to the approved gratuity fund will be calculated with reference to the admissible amount as reduced by the actual payment made before the date of creating of the approved gratuity fund.
For the removal of doubts, it has been specifically provided that where any provision made by the assessee in his accounts for the payment of gratuity to his employees has been allowed as a deduction in any previous year any sum paid out of such provision by way of contribution to an approved gratuity fund or by way of gratuity to any employee will not be allowed as a deduction in computing the income of the assessee of the later previous year in which the sum is so paid.
It will be seen that the bar on allowance of provision made for the payment of gratuity to employees will not apply for the asst. yrs. 1973-74 to 1975-76 only if all the conditions referred to above are fulfilled. It is, therefore, possible that at the time the assessment for any of these assessment years is taken up by the ITO, the assessee may not have created a gratuity fund under an irrevocable trust, or having created such a fund, may not have applied for the approval thereof or may not have made payments to the approved gratuity fund as required under s. 40A(7)(b)(ii)(3) and the time for complying with any or all the aforesaid requirements may not have expired. In such cases, the ITO will complete the assessment by disallowing the provisions made by the assessee. Subsequently, if the assessee complies with all these requirements within the time allowed in respect of each one of them, the ITO will have the power to amend the original assessment order and allow the assessee necessary relief in the matter under the new sub-s. (13) of s. 155. It will be open to the ITO to make such amendment before 1st April, 1981. This is the law relating to deduction claimed with regard to gratuity liability in the asst. yrs. 1973-74 to 1975-76. In the present case, it was accepted that all the conditions prescribed under s. 40A(7) of the Act were complied with by the assessee and, therefore, the Tribunal held that the assessee is entitled to the deduction of Rs. 24,05,655 claimed in the assessment year under consideration.
8. A similar question came up for consideration before the Gujarat High Court in CIT vs. New Asarva Mills P. Ltd. . According to the facts arising in that case the assessee made a provision for gratuity of Rs. 11,09,788 as per the actuarial valuation during the previous year relevant to the asst. yr. 1973-74. The assessee’s relevant accounting period ended on 31st Dec., 1972. He made a claim for deduction of this amount. The ITO rejected the same as he found that all the necessary conditions laid down by s. 40A(7) were not till then fulfilled. He, however, observed in his order that deduction of the amount as per the Act and the Rules would be allowed under s. 155(13) when all the necessary conditions are fulfilled. The assessee had created a gratuity fund and had applied for its approval before 1st Jan., 1976. It appears that the approval was granted in 1977 and, therefore, again the ITO was moved and an order under s. 155(13) came to be passed on 29th Sept., 1977. The ITO, this time found that the increased liability during the relevant year was approximately Rs. 5,60,000. He, therefore, granted relief to that extent and did not accept the claim of the assessee that the full amount of Rs. 11,09,788 was deductible. On these facts, the Gujarat High Court held that inasmuch as the assessee complied with all the conditions prescribed under s. 40A(7) of the Act, the assessee is entitled to the deduction of the full amount of Rs. 11,09,788.
So also the Gujarat High Court had an occasion to consider the provisions of s. 40A(7) of the Act in another decision in CIT vs. Nanikram Sobhraj Mills Pvt. Ltd. , wherein the Gujarat High Court held that the allowability of contribution towards the approved gratuity fund was earlier governed by s. 36(1)(v) of the IT Act, 1961. For and from the asst. yr. 1973-74, the allowability of any such provision is governed by s. 40A(7) and not on general principles because of the fact that the provisions of s. 40A(7) have an overriding effect by virtue of the non-obstante clause. Under the new s. 40A(7) inserted by the Finance Act, 1975, with retrospective effect from 1st April, 1973, no deduction is to be allowed in the computation of profits and gains of a business or profession in respect of any provision made for the payment of gratuity to the employees on retirement or on termination of employment. This is, however, subject to certain exceptions. The restriction is not to apply in relation to any provision made for the purpose of payment of a sum by way of contribution towards an approved gratuity fund that has become payable during the previous year, or for the purpose of meeting actual liability in respect of payment of gratuity to the employees that has arisen during the previous year. The restriction is not also to apply in relation to any provision made for the previous years relevant to any of the asst. yrs. 1973-74, 1974-75 and 1975-76 to the extent the amount of such provision does not exceed the “admissible amount” if the conditions set out in s. 40A(7)(b)(ii) are fulfilled.
In the decision in CIT vs. Shreno Ltd. , the Gujarat High Court again had an occasion to consider the provisions contained in s. 40A(7) of the Act. According to the facts arising in that case the assessment of the assessee-company pertaining to the asst. yr. 1973-74 was completed by the ITO by order dt. 31st Dec., 1974. In the order he disallowed the deduction for gratuity provision on the ground that it was hit by the prohibition contained in s. 40A(7)(b) of the IT Act, 1961. However, he observed that the said finding would be rectified under s. 155(13) on fulfilment in time by the assessee of the conditions laid down in cl. (b) of s. 40A(7). Before the AAC, it was pointed out that the CIT had accorded recognition to the gratuity fund retrospectively w.e.f. 31st Dec., 1975. A statement was produced showing the computation for provision made in the books for the calendar years 1972 and 1973, the payments actually made during the calendar years 1973, 1974 and 1975 and the amount payable to the trustees as on 31st Dec., 1975. It was pointed out that 50% of the amount payable as on 31st Dec., 1975, was actually paid to the trustees of the fund on 15th March, 1975, and the remaining 50% was handed over to the trustees on 3rd Feb., 1977. In view of the aforesaid facts, the AAC held that all the conditions laid down in s. 40A(7) had been duly satisfied and accordingly directed the ITO to allow a deduction for Rs. 62,660. This was upheld by the Tribunal. On a reference, the Gujarat High Court confirmed the order passed by the Tribunal.
In the decision reported in CIT vs. Sri Ranilakshmi Ginning, Spg. & Wvg. Mills (P) Ltd. (1981) 132 ITR 360 (Mad), this Court while considering the provisions of s. 37 of the IT Act, 1961, held that when part of the provision to the extent it related to the liability incurred in the current year had been allowed by the ITO himself, there could be no valid objection to the allowance of the rest of the amount. This was a case of earlier years’ service, which was being taken note of and not any liability as such which arose in the earlier years. Consequently, the amount having been arrived at on an actuarial basis and having been provided in the accounts was allowable as a deduction.
Learned standing counsel relied on the decisions reported in CIT vs. G. T. N. Textiles Ltd. (1985) 155 ITR 5 (Ker), CIT vs. Periyakaramalai Tea & Produce Co. Ltd. (1987) 167 ITR 32 (Ker) and CIT vs. Haileburia Tea Estates Ltd. (1987) 167 ITR 254 (Ker).
In CIT vs. Haileburia Tea Estates Ltd. (supra), the Kerala High Court held that the assessee was entitled to claim deduction only to the extent of the provision made by it in accordance with the provisions of s. 40A(7)(b)(ii) of the IT Act, 1961, in relation to the accounting year 1974-75 relevant to asst. yr. 1975-76 and not in relation to the earlier years 1973-74, 1974-75 and 1975-76.
According to the facts arising in CIT vs. Periyakaramalai Tea & Produce Co. Ltd. (supra), for the asst. yr. 1975-76, relevant to the accounting year ending 31st March, 1975, the assessee claimed deduction of Rs. 32,16,950 as provision for gratuity in respect of liability which arose prior to 31st March, 1974. Since the provision was thus not relevant to the liability, which arose in the accounting year relevant to the asst. yr. 1975-76, the ITO disallowed the claim. The Tribunal held that the assessee was entitled to deduction of Rs. 11,96,413 being “incremental liability to gratuity” for the years ending 31st March, 1973, 31st March, 1974 and 31st March, 1975. On a reference, the Kerala High Court held that the Tribunal overlooked the fact that the assessee had not made any provision towards the liability for gratuity which arose in the accounting year relevant to the asst. yr. 1975-76. The Tribunal also did not take into account Expln. 1 to s. 40A(7)(b)(ii) which spoke of “admissible amounts”. Therefore, the Tribunal was not justified in allowing deduction of provision for gratuity of Rs. 11,96,413 in the asst. yr. 1975-76.
In CIT vs. G. T. N. Textiles Ltd. (supra), the Kerala High Court held that the assessee was not entitled to claim deduction under sub-cl. (i) of cl. (b) of sub-s. (7) of s. 40A, for no provision had been made during the relevant previous year, i.e., the year ending 30th June, 1972, which was the accounting year preceding the asst. yr. 1973-74. To derive the advantage of sub-cl. (ii) of cl. (b) in respect of a provision made in the accounting year ending 30th June, 1973, such provision ought to relate to the liability of that year. The provision for liability to gratuity made in the year ending 30th June, 1973, in the sum of Rs. 29,593 did not relate to the liability for the year ending 30th June, 1973, but to that of the year ending 30th June, 1972. That claim ought to have been made in that accounting year and not subsequently. Therefore, the assessee was not entitled to claim deduction of Rs. 29,593 being the gratuity liability relatable to the accounting year ending 30th June, 1972, in the asst. yr. 1974-75.
9. Thus, a careful consideration of the facts arising in these decisions rendered by the Kerala High Court would go to show that they have been rendered on the peculiar facts arising in each case. These decisions are not authority for the proposition that if the conditions prescribed under s. 40A(7) of the Act are fulfilled, the gratuity liability should not be allowed, for the asst. yrs. 1973-74, 1974-75 and 1975-76. Thus, considering the facts arising in this case, in the light of the decisions cited supra, we hold that there is no infirmity in the order passed by the Tribunal in coming to the conclusion that the assessee is entitled to deduction of the entire amount of Rs. 24,05,655 made towards gratuity liability pertaining upto the asst. yr. 1974-75. Inasmuch as, the claim made by the assessee was allowed under s. 40A(7) of the Act, the allowability of the claim under s. 36(1)(v) of the Act need not be considered. In that view of the matter, we answer the question referred to this Court in the affirmative and against the Department. No costs. Counsel’s fee Rs. 1,000 (Rupees One thousand only)
