JUDGMENT
N.V. Balasubramanian, J.
1. At the instance of the Revenue, the Tribunal has stated a case and referred the following questions of law for our consideration under s. 256(1) of the IT Act, 1961 (hereinafter to be referred to as ‘the Act’) :
“1. Whether, on the facts and in the circumstances of the case and on an interpretation of s. 40(c) r/w ss. 2(31) and 2(32) of the IT Act, the Tribunal is right in holding that the provisions of s. 40(c) are not attracted ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the sum of Rs. 5,33,755, being contribution made by the assessee to the approved gratuity fund, is an admissible deduction ?”
2. The assessee is a company carrying on business in chits. During the course of assessment proceedings for the asst. yr. 1978-79, the assessee claimed deduction for a sum of Rs. 2,50,000, being the remuneration paid to the managerial staff of the holding company under an agreement dt. 1st May, 1973 entered into for the use of service of the managing director and 4 other officers of the holding company in the business of the assessee-company. In the agreement it was stipulated that 75 per cent of the salary payable by the holding company, namely, Sudarsan Trading Co. Ltd. to the five persons viz., M/s Velayudhan, T. P. Ravindaran, V. P. Balaraman, P. Shanmugham and K. P. Balan or Rs. 2,50,000 whichever is lesser is payable by the assessee-company to the holding company for the services made available by the holding company to the assessee-company. The agreement also provided for taking over of the chit business by the assessee-company in view of the segregation of the chit business from other businesses of the holding company at the directions of the Reserve Bank of India.
3. The ITO took a view that it was not possible to quantity the services of the concerned persons to the assessee-company and further the work relating to the chit business was properly undertaken by the staff members and it cannot be stated that the directors were fully and directly involved in the chit business. He, therefore, held that the assessee was not entitled to a deduction of Rs. 2,04,000 and applying the provisions of s. 40(c) of the Act, he restricted the allowance as regards the managerial remuneration paid by the assessee- company to the above said persons.
4. The assessee preferred an appeal before the CIT(A) challenging the order of assessment regarding the disallowance of remuneration paid to the abovesaid five persons of the holding company. The CIT(A), following an order of the Tribunal, Cochin Bench in ITA No. 159/Coch/1979 dt. 10th April, 1981 rendered in the assessee’s own case for the asst. yr. 1975-76, held that the ITO was not justified in making disallowance of the remuneration paid to the managerial staff of the holding company and the disallowance made by the ITO of a sum of Rs. 2.04,000 was deleted for the asst. yr. 1978-79.
5. The Revenue carried the matter in appeal before the Tribunal and the Tribunal following the earlier order of the Tribunal, Cochin Bench, rendered in the assessee’s own case in ITA No. 159/Coch/1979 dt. 10th April, 1981 for the asst. yr. 1975-76 held that the ITO was not justified in disallowing Rs. 2,04,000 being the remuneration paid to the managerial staff of the holding company and thereby upheld the order of the CIT(A). As against that part of the order of the Tribunal, the Revenue sought for and obtained a reference and accordingly, the first question of law set out supra has been referred to.
6. In so far as the second question of law that has been referred to us is concerned, it relates to the disallowance of a sum of Rs. 5,33,755, being the contribution made by the assessee towards an approved gratuity fund. The ITO disallowed the payment to the gratuity funds on the ground that the employees of the assessee-company had not rendered a continuous service of five years to warrant a provision for gratuity. The CIT(A), on appeal preferred by the assessee, held that the contribution made towards approved gratuity funds is an allowable deduction, which view was confirmed by the Tribunal. Against that part of the order of the Tribunal, at the instance of the Revenue, the second question of law has been referred to.
7. Mr. C. V. Rajan, learned counsel for the Revenue submitted that the Tribunal was not correct in holding that the assessee is entitled to deduction for a sum of Rs. 2,04,000 as the amount was paid as extra commercial considerations and the provisions of s. 40(c) r/w s. 37 of the Act would apply. In so far as the payment made towards approved gratuity fund is concerned, he submitted that the Tribunal was also not correct in holding that the amount contributed to the approved gratuity fund is an allowable deduction.
8. Mr. Janarthana Raja, learned counsel for the assessee, supported the order of the Tribunal.
9. We have carefully considered the rival submissions of the learned counsel for the respective parties. We have noticed, the Tribunal, in the instant case, followed an earlier order of the Tribunal, Cochin Bench in ITA No. 159/Coch/1979 dt. 10th April, 1981 and as against that order of the Tribunal rendered in the assessee’s own case for the asst. yr. 1975-76, a reference was made to the High Court of Kerala and the reference came up for consideration before the Kerala High Court in the case of CIT vs. Sudarsan Chits (I) Ltd. . The Kerala High Court considered the agreement entered into between the assessee-company and the holding company and after considering the terms of the agreement, the Kerala High Court held as under :
“The payment in question was made on contractual basis and it was incurred on account of business expediency. The agreement was made bona fide and in the interest of the business. The contractual payment has not been shown as colourable or otherwise suspect. That is the finding of the CIT(A) as well as of the Tribunal. The appellate authorities also found that the apportionment is justified with reference to the gross turnover. There was nothing to suspect in the payment which was a contractual one made to another company. The Tribunal clearly found that the agreement arrived at by the parties is genuine and bona fide and it was not the case of the Revenue that the said agreement was bogus or sham. The assessee-company has an independent and legal personality distinct from its members. The corporate veil can be lifted in exceptional circumstances as indicated in LIC of India vs. Escorts Ltd. . In CIT vs. Sri Meenakshi Mills Ltd. , the corporate veil was lifted and evasion of income-tax prevented by paying regard to the economic realities behind the legal facade. No such exceptional circumstances are found in this case. Hence, we are of the opinion that s. 40(c) is not attracted on the facts of this case. The amount also has been considered as reasonable. In the circumstances of the case, we hold that s. 40(c) r/w ss. 2(31) and 2(32) of the Act is not attracted”.
The factual situation prevailing in the asst. yr. 1978-79 is same to the facts found by the Tribunal in its earlier order which was the subject-matter of consideration by the Kerala High Court in the abovesaid decision. Since there are no difference in the facts, we are of the view that the Tribunal was correct in holding that the provisions of s. 40(c) r/w ss. 2(31) and 2(32) of the Act are not attracted. It has been found by the Tribunal that the agreement was genuine and bona fide and it is not the case of the Department that the agreement was bogus or sham. The Tribunal also noticed the nature of the chit business, turnover of the chit business, compared to other businesses of the holding company and the nature of the work undertaken by the said five persons who are the employees or directors of the holding company. Considering all these aspects including the turnover of the chit business, compared to the other businesses, the Tribunal came to the conclusion that the payment was reasonable and it cannot be stated that the payment made to the holding company by the assessee was made on extra commercial considerations. The Kerala High Court has also taken the same view holding that there is nothing to suspect in the payment which was a contractual one made to another company. In the absence of any exceptional circumstance, the Kerala High Court has also taken a view that the provisions of s. 40(c) of the Act are not attracted. We are of the view, in the instant case, there are no materials to come to a different conclusion from the one that was arrived at by the Kerala High Court on the same facts. Following the decision of the Kerala High Court in the assessee’s own case (supra), we hold that the Tribunal has come to a correct conclusion in holding that the provisions of s. 40(c) of the Act are not attracted to the facts of the case. Accordingly, the first question is liable to be answered against the Revenue.
10. In so far as the second question of law is concerned, the point involved in the question was the subject-matter of consideration before us in Tax Case No. 1519 of 1986 [reported as CIT vs. Sundarsan Chit (India) Ltd. and by a judgment of even date, we held that the contribution made by the assessee towards approved gratuity fund is an admissible deduction. Following our judgment in Tax Case No. 1519 of 1986 of even date, we hold that the second question of law is liable to be answered against the Revenue.
11. Accordingly, we answer the questions of law referred to us as under :
First question : It is answered in the affirmative and against the Revenue.
Second question : 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.