{"id":233233,"date":"1985-10-08T00:00:00","date_gmt":"1985-10-07T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/shree-sajjan-mills-ltd-vs-commissioner-of-income-tax-m-p-on-8-october-1985"},"modified":"2016-11-13T05:14:27","modified_gmt":"2016-11-12T23:44:27","slug":"shree-sajjan-mills-ltd-vs-commissioner-of-income-tax-m-p-on-8-october-1985","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/shree-sajjan-mills-ltd-vs-commissioner-of-income-tax-m-p-on-8-october-1985","title":{"rendered":"Shree Sajjan Mills Ltd vs Commissioner Of Income Tax, M.P. … on 8 October, 1985"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Shree Sajjan Mills Ltd vs Commissioner Of Income Tax, M.P. … on 8 October, 1985<\/div>\n
Equivalent citations: 1986 AIR 484, \t\t 1985 SCR Supl. (3) 593<\/div>\n
Author: S Mukharji<\/div>\n
Bench: Mukharji, Sabyasachi (J)<\/div>\n
           PETITIONER:\nSHREE SAJJAN MILLS LTD.\n\n\tVs.\n\nRESPONDENT:\nCOMMISSIONER OF INCOME TAX, M.P. BHOPAL AND ANR.\n\nDATE OF JUDGMENT08\/10\/1985\n\nBENCH:\nMUKHARJI, SABYASACHI (J)\nBENCH:\nMUKHARJI, SABYASACHI (J)\nTULZAPURKAR, V.D.\nMISRA RANGNATH\n\nCITATION:\n 1986 AIR  484\t\t  1985 SCR  Supl. (3) 593\n 1985 SCC  (4) 590\t  1985 SCALE  (2)737\n CITATOR INFO :\n RF\t    1987 SC1143\t (8)\n R\t    1987 SC1770\t (3)\n\n\nACT:\n     Income Tax Act 1961, ss. 40A (7), 36 (1) (v) and 37 (1)\nDeduction -  Payment of\t Gratuity - Whether deduction can be\nclaimed under  any other  provision under the head \"business\nor profession\" without complying with the requirements of s.\n40A (7)\t (b) -\tDistinction between  an actual\tliability in\npraesenti and a liability de futuro explained.\n     Interpretation  of\t  statutes  -\tTaxing\tstatutes   -\nPrinciple of reasonable construction - Applicability of -\n     Words and Phrases - \"Provision\" - Meaning of.\n\n\n\nHEADNOTE:\n     The appellant-assessee is a public limited company. The\nrelevant assessment  year in  C.A. No. 4222 of 1984 is 1973-\n74. With  the coming  into force  of the Payment of Gratuity\nAct, 1972  with effect\tfrom 16th September 1972 a statutory\nliability was created on the assessee to pay gratuity to its\nemployees  and\t the  appellant\t  arranged   for   actuarial\ndetermination of  its liability.  Pending  determination  of\nsuch an\t actuarial valuation,  the assessee made a provision\nof Rs. 20 lacs against the total accruing liability till the\ndate of the preparation of the balance sheet. At the time of\nfiling of  the return  of income for the assessment 1973-74,\nthe  assessee\tadded  back   this  provision  for  gratuity\namounting to  Rs. 20 lacs and claimed deduction of the total\nliability  of\tRs.  48,59,431\t which\twas   the  actuarial\ndetermination of liability on the ground that the provisions\nof s.40A (7) of the Income Tax Act 1961 were not applicable.\n       The  Income-Tax Officer\tdisallowed the\tclaim on the\nground that  there was\tnon-compliance with the requirements\nof section 40A (7) of the Act, and allowed deduction only to\nthe extent  of actual  payment\twhich  came  to\t Rs.  24,366\ntowards payment\t of gratuity  to the  employees\t during\t the\nrelevant accounting year.\n594\n     Against the  aforesaid order of the Income-tax Officer,\nan appeal  was\tpreferred  before  the\tAppellate  Assistant\nCommissioner who held that provisions of section 40A (7) did\nnot constitute\tany bar to the assessees claim for deduction\nu\/s 37 of the Act as the assessee had not made any provision\nin its books in respect of the amount of gratuity determined\nactuarially and\t the provision\tof Rs. 20 lacs had also been\nadded  back  in\t the  statement\t of  income.  The  Appellate\nAssistant Commissioner,\t however, allowed  deduction of\t Rs.\n30,25,662 on  this head\t which according  to him constituted\nthe assessees liability for the relevant accounting year.\n     The Revenue  appealed to  the Tribunal  which held that\nthe sum\t of Rs.\t 20 lacs  could not be allowed as deduction,\nbut, the balance of Rs. 28,59,431 for which no provision was\nmade in\t the books  was allowable under section 37(1) of the\nAct.\n     In the reference to the High Court under section 256(1)\nof the\tAct at the instance of the Revenue, it was held that\nthe tribunal  was not justified in allowing the deduction of\nRs. 28,59,431  under section  37 of the Act out of the total\nRs. 48,59,431  made by\tthe assessee  towards liability\t for\ngratuity on  the ground\t that in  view of  the\tnon-obstante\nclause\tin   section  40A  of  the  Act,  no  deduction\t was\npermissible under  section 37  for the\tassessee's liability\nfor payment  of gratuity  to its employees without complying\nwith the  provisions of sub-section (7)(a) of Section 40A of\nthe Act. A similar question of law arose in the other appeal\nwhere the appellant - assessee is the same.\n     Dismissing the appeals to this Court,\n^\n     HELD: l(i)\t Payment of  gratuity as commonly understood\nis the\tpayment made  to the employee by the employer on his\nretirement or  termination of his service for any reason. It\nis made voluntarily by the employer as a regular practice or\npressure of trade or business either under an agreement with\nthe employees or on the understanding of the trade and after\nthe enactment  of the  Payment of  Gratuity Act,  1972 which\ncame into  force on  16th September,  1972  as\ta  Statutory\nliability under\t the said  Act. Although payment of gratuity\nis made\t on retirement or termination of service, it was not\nfor the\t service rendered  during  the\tyear  in  which\t the\npayment is  made but  it is  made in  consideration  of\t the\nentire\tlength\t of  service   and  its\t  ascertainment\t and\ncomputation depend upon several factors. [608 H; 609 A-B]\n     1(ii) The\tright to  receive the payment accrued to the\nemployees  on  their  retirement  or  termination  of  their\nservices\n595\nand  the  liability  to\t pay  gratuity\tbecame\tthe  accrued\nliability of the assessee when the employees retire or their\nservices were  terminated. Until  then the  right to receive\ngratuity is  a contingent  right and  the liability  to\t pay\ngratuity continues  to be  a contingent\t liability  qua\t the\nemployer. Since\t the amount of gratuity payable in any given\nyear would be a variable amount depending upon the number of\nemployees who  would be\t entitled  to  receive\tthe  payment\nduring the  year, the  amount being  a large one in one year\nand a small one in another year, the employer often finds it\ndesirable and\/or  convenient to\t set apart  for future use a\nsum every  year\t to  meet  the\tcontingent  liability  as  a\nprovision for  gratuity or  a fund  for gratuity.  He  might\ncreate an  approved gratuity  fund for the exclusive benefit\nof  his\t employees  under  an  irrevocable  trust  and\tmake\ncontributions  to   such   fund\t  every\t  year.\t  Contingent\nliabilities do\tnot constitute expenditure and cannot be the\nsubject matter of deduction even under the mercantile system\nof accounting.\tExpenditure which  was deductible for income\ntax purposes is towards a liability actually existing at the\ntime but  setting apart money which might become expenditure\non the happening of an event is not expenditure. [609 C-G]\n     1(iii) The\t position till\tthe  provisions\t of  section\n40A(7) were inserted in the Act in 1973 was as follows :-\n     1. Payments  of gratuity  actually made to the employee\non  his\t retirement  or\t termination  of  his  service\twere\nexpenditure incurred for the purpose of business in the year\nin which the payments were made and allowed under section 37\nof the Act.\n     2. Provision  made for  payment of gratuity which would\nbecome due  and payable\t in the previous year was allowed as\nan expenditure\tof the\tprevious year  on accrued basis when\nmercantile system was followed by the assessee.\n     3. Provision made by setting aside an advance sum every\nyear to\t meet the  contingent liability\t and gratuity as and\nwhen it\t accrued by  way of provision for gratuity or by way\nof reserve  or fund  for gratuity  was\tnot  allowed  as  an\nexpenditure of the year in which such sum was set apart.\n     4. Contribution  made to  an approved  gratuity fund in\nthe previous  year was\tallowed as  deduction under  section\n36(1)(v).\n     5. Provision  made in  the Profit\tand Loss Account for\nthe  estimated present\tvalue of  the  contingent  liability\nproperly\n596\nascertained and discounted on an accrued basis as falling on\nthe assessee  in the  year of  account could  be  deductible\neither under  Section 28 or section 37 of the Act. [610 E-H;\n611 A]\n     1(iv)  As\t there\twere   several\tmethods\t  which\t the\nassesseeight choose to adopt in meeting his liability to pay\ngratuity, the  treatment which\the would  receive under\t the\nIncome-tax Act\twould depend upon the method adopted by him.\nThe assessee  is only  under an\t obligation to\tpay gratuity\nwhen it became due ant payable. The other methods adopted by\nthe assessee  for meeting  the liability for gratuity as and\nwhen it\t arose are provisions or arrangements mate by him at\nhis option.  It is  not obligatory  on him  to make any such\nprovision and if no such arrangement or provision was  made,\nno question arose to consider its deductibility or allowance\nunder the Act. [611 B-C]\n     2(i) On  a plain  construction of\tclause (a)  of\tsub-\nsection (7)  of section\t 40A  of  the  Act,  it\t means\tthat\nwhatever is  provided for  future use by the assessee out of\nthe gross  profits of  the year\t of account  for payment  of\ngratuity  to   employees  on  their  retirement\t or  on\t the\ntermination of\ttheir  services\t would\tnot  be\t allowed  as\ndeduction in  the computation  of profits  and gains  of the\nyear of\t account. The  provision  of  clause  (a)  was\tmade\nsubject to  clause (b).\t The embargo  is  on  deductions  of\namounts provided  for future  use in the year of account for\nmeeting the  ultimate  liability  to  payment  of  gratuity.\nClause (b)(i)  excludes from  the operation  of\t clause\t (a)\ncontribution  to   an  approved\t gratuity  fund\t any  amount\nprovided for  or set  apart for\t payment of  gratuity  which\nwould be  payable, during  the year  of account.  Clause (b)\n(ii) deals  with a situation that the assessee might provide\nby the\tspread over  method and provides that such provision\nwould be  excluded from the operation of clause (a) provided\nthe three  conditions  laid  down  by  the  sub-clauses\t are\nsatisfied. [612 E-H]\n     2(ii) The\texpression 'provision'\tin clause (a) of the\nsaid sub-section  has not been defined in the Act and is not\nused in\t any artificial\t sense but  in its ordinary meaning.\nThis is\t clear from  the words (whether called as such or by\nany other name) occurring in sub-section. 'Provision' in its\nordinary sense\tmeans 'something  provided for\tfuture use'.\n[612 D]\n     2(iii) Section  40A is  in Chapter\t IV which deals with\ncomputation of\ttotal income.  It is  with the marginal note\nunder the  heading \"expenses  or payments  not deductible in\ncertain circumstances\".\t The heading  of this  section is  a\nclear indication\n597\nthat certain  payment and  expenses which would be otherwise\ndeductible  would   not\t be  deductible\t except\t in  certain\ncircumstances indicated\t in the\t section. This is abundantly\nmade clear  by the  non-obstante  expression  used  in\tsub-\nsection (1)  of section\t 40A. The  provision of\t section 40A\nshall have  effect notwithstandinganything  to the  contrary\ncontained in  any other\t provision of  the Act.\t Payments or\nprovisions  for\t deduction  could  have\t been  eligible\t for\ndeduction or  could have  been deducted either under section\n28 or  under section  37 of the Act. But the use of the non-\nobstante expression  makes it  clear that  if there  is\t any\nlegislative base  dealing with\tthe provisions\tfor gratuity\nthen  the   same  would\t  be  applicable  in  spite  of\t and\nnotwithstanding any other provision of the Act. [608 B-E]\n     2(iv) Read\t with the  marginal notes of section 40A the\nnon-obstante clause of sub-section (1) of section 40A has an\noverriding effect  over the provisions of any other section.\nExpenditures or\t allowances which  are deductible  under any\nother  provision   relating  to\t  the  head   'Business\t  or\nprofession' will  be disallowed\t in  cases  to\twhich  these\nprovisions of  the section  apply.  The\t submission  of\t the\nappellant-assessee  that  if\tprovision  is  made  by\t the\nassessee for gratuity, still the same will be deductible and\n8. 40A(7)  will have  no application,  would defeat the very\npurpose and object of s. 40A(7) and render it nugatory. [608\nE-G]\n     3.\t The   principle  that\tfiscal\tstatutes  should  be\nstrictly construed  does not rule out the application of the\nprinciples of  reasonable construction to give effect to the\npurpose\t or   intention\t of  any  particular  provisions  as\napparent from  the scheme  of the Act with the assistance of\nsuch external aids as are permissible under the law. [614 G]\n     Webster's English Dictionary referred to.\n     Vazir Sultan  Tobacco Co Ltd. Etc. Etc. v. Commissioner\nof Income  Tax, Andhra\tPradesh, Hyderabad,<\/a>  [1982] 1 S.C.R.\n789 at\t800 & 804 = 132 I.T.R. 559 at 568, Metal Box Company\nof India  Ltd. v.  Their workmen, 73 I.T.R. 53 at 67-68. and\nIndian Molasses\t Co. (P) Ltd. v. Commissioner of Income Tax,\nWest Bengal,<\/a> 37 I.T.R. 66 at pages 76 & 80. relied upon.\n     Peoples Engineering  & Motor Works Ltd. v. Commissioner\nof  Income   Tax,  West\t  Bengal-II,  130   I.T.R.  174\t and\nCommissioner  of   Income-tax  Central-V,  Calcutta  v.\t New\nSwadeshi Mills of Ahmedabad Ltd<\/a>\" 147 I.T.R. 163 approved.\n598\n     Tata Iron\t& Steel\t Co. Ltd.  v. D.V. Bapat, Income Tax\nOfficer, Companies  Circle I<\/a> (2) Bombay and Anr., 101 I.T.R.\n292 and\t C.I.T. Kerala\tv. High\t Land Produce  Co. Ltd.,<\/a> 102\nI.T.R. 803 distinguished.\n     Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income-<\/a>\ntax (Central),\tCalcutta , 82 I.T.R. 363 and Commissioner of\nIncome Tax,  Madras (Central)  v. Andhra  Prabha P. Ltd.<\/a> 123\nI.T.R. 760  at 772  and Swadeshi  Cotton Mills\tCo. Ltd.  v.\nI.T.O., 1978 112 I.T.R. 1038 (All) referred to.\n\n\n\nJUDGMENT:\n<\/pre>\n
     CIVIL APPELLATE  JURISDICTION : Civil Appeal Nos. 4221-
\n22 (NT) of 1984.\n<\/p>\n
     From the  Judgment and  Order dated  29.11.1982 of\t the
\nMadhya Pradesh\tHigh Court  in Misc. Civil Case No. 240, 263
\nof 1980.\n<\/p>\n
     Soli J.  Sorabjee, P.H.  Parekh, P.K.  Manohar  and  S.
\nGanesh for the Appellant.\n<\/p>\n
     V.S. Desai, Gauri Shankar ant Miss A Subhashini for the
\nRespondents.\n<\/p>\n
     The Judgment of the Court was delivered by
\n     SABYASACHI MUKHARJI,  J. These appeals by special leave
\narise from  the Judgment  and order  of the  High  Court  of
\nMadhya Pradesh dated 29th November, 1982, in reference under
\nSection 256(1)\tof the\tIncome-tax  Act,  1961\t(hereinafter
\nreferred to  as the ‘Act’). The assessee is a public limited
\ncompany. The  related assessment  year in  Appeal No 4221 of
\n1984 is\t 1974-75. In  Appeal No 4222 of 1984, the assessment
\nyear is 1973-74. The relevant accounting years ended on 31st
\nMarch, 1974 and 31st March, 1973 respectively.\n<\/p>\n
     For the  assessment year  1974-75, the assessee company
\nsought to deduct a sum of Rs.18,37,727 towards the amount of
\ngratuity  payable   to\tits   employees\t  and\tworked\t out
\nactuarially. The  break up of this liability was as follows:\n<\/p>\n
– for  periods ending  on 31st March, 1972, 31st March, 1973
\nand 31st March, 1974, assessee’s liability was worked out at
\nRs. 64,31,286.\tOut of\tthis amount, provision had been made
\nduring\tthese  years  to  the  tune  of\t Rs.  45,93,559.  No
\nprovision had  been made  for  the  balance  amount  of\t Rs.
\n18,37,727. The\tclaim for deduction was set up on the ground
\nthat this liability was ascertained by actuarial
\n599<\/span>
\nvaluation and was deductible under section 37(1) of the Act.
\nThe Income-tax Officer allowed the deduction of a sum of Rs.
\n2,65,872 only  which was  actually paid\t by the assessee and
\nthe rest was disallowed on the ground of non-compliance with
\nthe provisions\tof section  40A(7) of  the Act. The assessee
\npreferred an  appeal but  the  same  was  dismissed  by\t the
\nCommissioner   of   Income-tax\t (Appeals).   The   assessee
\nthereafter preferred  a second\tappeal to  the Tribunal. The
\nTribunal, for  the reasons  mentioned,\theld  that  for\t the
\nassessment year relating to 1973-74, actuarially ascertained
\nliability for  gratuity especially arising under the Payment
\nof Gratuity  Act,  1972\t was  an  allowable  detection.\t The
\nTribunal had  consistently taken  the view that the assessee
\nwould not  be eligible\tfor deduction  under section  37  in
\nrespect of  such liability  to the  extent of  the provision
\nmade by\t the assessee  in its account without simultaneously
\nconforming to  the requirements\t of  section  40A(7).  Where
\nhowever,  the\tactuarially  determined\t liability  was\t not
\nprovided for  or was  in excess of the provision made by the
\nassessee in  the books of account, the relevant amount could
\nbe allowed  as liability  under Section 37 as the provisions
\nof section 40A(7) would not reach it.\n<\/p>\n
     In the  assessment of 1974-75, the Tribunal referred to
\nthe facts  and observed\t that  increased  liability  of\t Rs.
\n15,71,855 had  been claimed  by\t the  assessee\twithout\t any
\nprovision made\tin respect  thereof in the books of account.
\nIn the\tcircumstances, they upheld the claim of the assessee
\nfor Rs.\t 15,71,855 and\tdirected the  Income-tax Officer  to
\nallow this sum as a liability.\n<\/p>\n
     At the instance of the revenue, the following questions
\nwere referred to the High Court, namely:\n<\/p>\n
\t  “(1) Whether, on the facts and in the circumstance
\n\t  of the  case, the  tribunal was  right in  law  in
\n\t  allowing the\tdeduction  of  Rs.  15,71,855  under
\n\t  Section 37 of the I.T. Act, 1961 out of the sum of
\n\t  Rs. 28,59,431 for which provision was made towards
\n\t  liability for gratuity?\n<\/p><\/blockquote>\n
\t  (2) Whether, on the facts and in the circumstances
\n\t  of the  case, the  Tribunal was  right in  law  in
\n\t  holding that\tSection 40A(7)\tis attracted only in
\n\t  respect of  the provision  made in  the  books  of
\n\t  account and  that the\t balance  liability  claimed
\n\t  i.e. Rs.15,71,855  towards gratuity  is admissible
\n\t  under sec. 37 of the Income Tax Act, 1961. ”\n<\/p><\/blockquote>\n
600<\/span><\/p>\n
and for the reasons mentioned, for the assessment year 1973-
\n74 which  is the  subject matter  of  the  next\t appeal\t and
\nfollowing the  said decision,  the High\t Court held that the
\nassessee was  not entitled  to deduction  on account  of its
\nliability for  gratuity under  the Payment  of Gratuity Act,
\n1972 without complying with the provisions of section 40A(7)
\nof the\tAct and\t accordingly answered  both the questions in
\nthe negative  and against the assessee. This decision is the
\nsubject matter of Appeal No. 4221 (NT) of 1984.\n<\/p>\n
     Civil Appeal  NO. 4222  (NT) of  1984 arises out of the
\nassessment year\t 1973-74. The  High Court  observed that the
\nassessee  company  had\tentered\t into  agreements  with\t the
\nWorkers Union  for payment  of gratuity\t by the\t 31st March,
\n1972. Company’s practice was to account for gratuity on cash
\nbasis as  and when paid. The company had made a provision in
\nits  books  of\taccount\t for  payment  of  gratuity  to\t its
\nemployees to the extent of Rs. 20,00,000 during the relevant
\naccounting year.  With the  coming into force of the Payment
\nof Gratuity Act, 1972 with effect from 16th September, 1972,
\na statutory  liability was  created of\tthe company  to\t pay
\ngratuity to  its employees as per the provisions of the said
\nAct. The assessee company, therefore, arranged for actuarial
\nquantification\tof   its  liability   for  gratuity  to\t its
\nemployees. Pending  the determination  of such\tan actuarial
\nvaluation,  the\t  assessee  had\t made  a  provision  of\t Rs.
\n20,00,000 Against the total accruing liability till the date
\nof the\tpreparation of the balance-sheet. At the time of the
\nfiling of the return of income for the assessment year 1973-
\n74, the\t assessee added\t back this  provision  for  gratuity
\namounting to  Rs. 20,00,000  and claimed the total liability
\nof Rs.\t48,59,431 which\t was the  actuarial determination of
\nliability arising under the Payment of Gratuity Act, 1972 in
\nthe relevant accounting year.\n<\/p>\n
     Before the\t Income-tax Officer,  the  assessee  claimed
\ndeduction of  the  entire  liability  of  Rs.  49,59,431  as
\ndetermined actuarially. It was contended that the provisions
\nof section  40A(7) of  the  Act\t were  not  applicable.\t The
\nIncome-tax Officer  had disallowed  the claim  on the ground
\nthat there  was\t non-compliance\t with  the  requirements  of
\nsection 40(A)(7)  of the Act. The Income-tax Officer allowed
\ndeduction only\tto the extent of actual payment made towards
\ngratuity to  the employees  during the\trelevant  accounting
\nyear. This amount came to Rs. 24,366. The assessee preferred
\nan appeal  against the\tIncome-tax Officer, order before the
\nAppellate Assistant Commissioner. The Appellate
\n601<\/span>
\nAssistant commissioner\twas of\tthe view  that provisions of
\nsection\t   40(A)(7)  did  not  constitute  any\tbar  to\t the
\nassessee’s claim  for deduction as the assessee had not made
\nany provision  in its  books in\t respect of  the  amount  of
\ngratuity determined  actuarially and  the provision  of\t Rs.
\n20,00,000 had  also been  added back  in  the  statement  of
\nincome.\t However,   the\t Appellate   Assistant\tCommissioner
\nallowed deduction  of  Rs.  30,25,662  on  this\t head  which
\naccording to  him constituted  assessee’s liability  for the
\nrelevant accounting year.\n<\/p>\n
     The revenue  appealed against  this  decision.  It\t was
\ncontended  that\t  the  assessee\t was  not  entitled  to\t any
\ndeduction for  gratuity\t except\t the  amount  actually\tpaid
\nbecause\t there\t was  non-compliance   with  the   statutory
\nprovisions of  section 40A(7)  of the Act. The Tribunal held
\nthat the total liability for gratuity actuarially determined
\nfor the\t accounting year  was Rs.  48,59,431.  However,\t the
\nassessee had  made a  provision\t of  Rs.  20,00,000  without
\ncomplying with the requirements of section 40A(7) of the Act
\nand, therefore,\t this sum  of Rs.  20  lakhs  could  not  be
\nallowed as  deduction. But  the balance of Rs. 28,59,431 for
\nwhich no provision was made in the books was allowable under
\nsection 37(1) of the Act.\n<\/p>\n
     At the  instance of the revenue, the following question
\nfor this year was referred to the High Court :\n<\/p>\n
\t  “Whether, on the facts and in the circumstances of
\n\t  the case,  the Tribunal  was justified in allowing
\n\t  the deduction of Rs. 28,59,431 under section 37 of
\n\t  the Income  Tax Act,\t1961 out  of the  total\t Rs,
\n\t  48,59,431 made  by the  assessee towards liability
\n\t  for gratuity?”<\/p><\/blockquote>\n
     Section 40A  was inserted by the Finance Act, 1968 with
\neffect from  1st April, 1968. It is necessary to set out the
\nrelevant provisions of section 40A:\n<\/p>\n
\t  “40A.\t Expenses  or  payments\t not  deductible  in
\n\t  certain circumstances – (1) The provisions of this
\n\t  section shall have effect notwithstanding anything
\n\t  to the  contrary contained  in any other provision
\n\t  of this  Act relating to the computation of income
\n\t  under the  head to the computation of income under
\n\t  the  head   “Profits\tand  gains  of\tbusiness  or
\n\t  profession”.\n<\/p><\/blockquote>\n
     …. ………………………………………….\n<\/p><\/blockquote>\n
602<\/span><\/p>\n
\t  (7)(a) Subject to the provisions of clause (b), no
\n\t  deduction shall  be  allowed\tin  respect  of\t any
\n\t  provision (whether  called as such or by any other
\n\t  name made  by the  assessee  for  the\t payment  of
\n\t  gratuity to  his employees  on their retirement or
\n\t  on termination of their employment for any reason\n<\/p><\/blockquote>\n
\t  (b) Nothing  in clause (a) shall apply in relation
\n\t  to –\n<\/p><\/blockquote>\n
\t  (1) any  provision made  by the  assessee for\t the
\n\t  purpose  of  payment\tof  a  sum  by\tway  of\t any
\n\t  contribution towards an approved gratuity fund, or
\n\t  for the  purpose of  payment of any gratuity, that
\n\t  has become payable during the previous year;\n<\/p><\/blockquote>\n
\t  (ii) any  provision made  by the  assessee for the
\n\t  previous year\t relevant  to  any  assessment\tyear
\n\t  commencing on or after the 1st day of April, 1973,
\n\t  but before  the 1st  day of  April, 1976,  to\t the
\n\t  extent the  amount  of  such\tprovision  does\t not
\n\t  exceed the  admissible amount,  if  the  following
\n\t  conditions are fulfilled, namely –\n<\/p><\/blockquote>\n
\t  (1) the  provision is\t made in  accordance with an
\n\t  actuarial valuation of the ascertainable liability
\n\t  of the  assessee for\tpayment of  gratuity to\t his
\n\t  employees on their retirement or on termination of
\n\t  their employment for any reason;\n<\/p><\/blockquote>\n
\t  (2) the assessee creates an approved gratuity fund
\n\t  for the  exclusive b\tn fit of his employees under
\n\t  an irrevocable  trust,  the  application  for\t the
\n\t  approval of  the fund\t having been made before the
\n\t  1st day of January 1976; and
\n\t  (3) a\t sum equal  to at least fifty percent of the
\n\t  admissible amount,  or where\tany amount  has been
\n\t  utilised out\tof such provision for the purpose of
\n\t  payment of any gratuity before the creation of the
\n\t  approved gratuity  fund, a  sum equal\t to at least
\n\t  fifty percent\t of the admissible amount as reduced
\n\t  by the amount so utilised, is paid by the assessee
\n\t  by way  of contribution  to the  approved gratuity
\n\t  fund before  the 1st\tDay of\tApril, 1976, and the
\n\t  balance of  the admissible  amount or, as the case
\n\t  may be, the balance
\n603<\/span>
\n\t  of the  admissible amount as reduced by the amount
\n\t  so utilised,\tis paid\t by the\t assessee by  way of
\n\t  such contribution  before the\t 1st day  of  April,
\n\t  1977.”<\/p><\/blockquote>\n
     According\tto  the\t High  Court,  section\t40A  had  an
\noverriding effect  on the  other provisions  relating to the
\ncomputation of\tincome under  the head “profit” ant gains of
\nbusiness or  profession”. This\tmeant that  while  computing
\nincome under  the head\t“profits and  gains of\tbusiness  or
\nprofession” and\t allowing various  deductions  provided\t for
\nunder the  Act, requirements  of 40A  would be\tmandatory In
\nrespect of  the matters\t covered thereunder.  The High Court
\nwas of the view that sub-section (7) of section 40A referred
\nto deductions  on account  of payment  of  gratuity  to\t the
\nemployees of an assessee and section 37 which was
\nthe residuary section for allowance of expenditure would not
\nbe applicable. The High Court agreed with the view expressed
\nby  the\t  Calcutta  High   Court  In  the  case\t of  Peoples
\nEngineering &  Motor Works  Ltd. v.  Commissioner of  Income
\nTax, West Bengal – II, 130 I.T.R. 174.\n<\/p>\n
     The High Court was also of the view that if, therefore,
\nan assessee  claimed deduction\ton  account  of\t accrual  of
\nliability for  gratuity, the  same will\t be hit\t by the\t bar
\nunder  sub-section   (7)(a)  of\t  section  40A\tof  the\t Act
\nirrespective of\t the fact  whether the\taccount books of the
\nassessee referred to the liability or not.
\nThe High  Court was  further of\t the opinion that In view of
\nthe non\t obstante clause  in section  40A  of  the  Act,  no
\ndeduction was  permissible under  section 37  of the Act for
\nthe assessee’s\tliability for  payment of  gratuity  to\t its
\nemployees without  complying  with  the\t provisions  of\t sub
\nsection (7)(a)\tof section  40A of the Act. The question was
\ntherefore, answered in the negative
\nand against the assessee.\n<\/p>\n
     On behalf\tof the\tassessee in  these  appeals  it\t was
\nsubmitted with\treference to  section 40A(7) of the Act that
\nthe said section was a provision of disallowance and but for
\nthe said section, provisions made by an assessee for payment
\nof gratuity  could be  claimed as deduction under section 37
\nof the\tAct as\texpenditure incurred  wholly and exclusively
\nfor the\t purpose of  the assessee’s business. Alternatively,
\nIt was\turged that  such a provision would have been claimed
\nas deduction  generally in  determining the true profits ant
\ngains of  business which  could be  subjected to  tax  under
\nsection 28 of the Act. It was emphasised on behalf of the
\n604<\/span>
\nassessee that  deduction in  respect of\t gratuity  could  be
\nclaimed de  hors section 40A(7) which in effect provided for
\nthe disallowance  of the deduction in respect of gratuity in
\ncertain circumstances.\ttherefore, it was urged on behalf of
\nthe assessee  that this\t provision should  be very  strictly
\nconstrued. And so construed, section 40A(7) could only apply
\nif the\tassessee had  made provision for payment of gratuity
\nand only to the extent of the amount of such provision.\n<\/p>\n
     It was  emphasised that  the expression ‘Provision made
\nby the\tassessee’ is a term of accounting and signified that
\nthe assessee  hat set  apart the  amount  in  his  books  of
\naccount for meeting the liability known to exist on the date
\nof the\tbalance-sheet. Consequently  if no  amount had\tbeen
\nspecifically set  apart in  the\t books\tof  account  of\t the
\nassessee for meeting the liability of gratuity, it could not
\nbe said\t that there  was any  provision made by the assessee
\nfor the payment of gratuity. Reliance in this connection was
\nplaced on  the observations  of this  Court in\tVazir Sultan
\nTobacco. Ltd.  etc. etc.  v.  Commissioner  of\tIncome\tTax,
\nAndhra Pradesh,\t Hydrabad, [1982]  1 S.C.R. 789 at 800 & 804
\n132 I.T.R. 559 at 568. at 800 & 804. It was submitted that a
\nprovision  could   be  made   only  after   an\tamount\t was
\nspecifically set  apart in  the books of account by debiting
\nthe profit and loss account for meeting a certain liability.
\nIt was\tthen urged  that the  language and the scheme of the
\nAct supported the aforesaid submission namely;\n<\/p>\n
     (a)that section 40A(7)(b) (ii) drew a clear distinction
\nbetween ‘provision  made by  the assessee….for  payment of
\ngratuity’ and  ‘amount admissible as deduction on account of
\ngratuity’. This showed clearly that the making of a claim by
\nthe assessee  for deduction on account of gratuity could not
\nbe equated with the making of a provision.\n<\/p>\n
     (b)The words  ‘made by the assessee’ following the word
\n‘provision’ were also very significant and clearly indicated
\nthat an\t amount\t must  be  set\tapart  specifically  by\t the
\nassessee for meeting the liability for gratuity.\n<\/p>\n
     (c)If  the\t legislature  at  all  wanted  to  equate  a
\ndeduction in  respect of  gratuity with a provision made for
\npayment of  gratuity section  40A(7) would  have been worded
\ndifferently, namely;\n<\/p>\n
\t  “No deduction\t shall be  allowed in respect of any
\n\t  liability for the payment of gratuity….”<\/p><\/blockquote>\n
605<\/span><\/p>\n
     (d) The  expression ‘provision  made by  the  assessee’
\noccurs in  section 40A(7)  no less  than seven\ttimes. These
\nwords must  therefore be  given their due meaning and effect
\nand could not be treated as redundant.\n<\/p>\n
     (e) Explanation II to section 40A(7) referred to amount
\nbeing paid  to an  employee in\ta subsequent year out of the
\nprovision of  gratuity. This  provision was intelligible and
\nmeaningful only\t if ‘provision’\t was understood\t to mean the
\nsetting apart of an amount in the books of account. So as to
\nmake funds available for disbursement.\n<\/p>\n
     (f) Section  36(1)(vii  a)\t of  the  Act  provided\t for
\ndeduction in  respect of  the provision\t for doubtful  debts
\nmade by\t certain financial  institutions. There was no doubt
\nthat ‘provision’ in section 36(1)(vii a) of the Act meant an
\namount specifically set apart in the books of account of the
\nassessee to  meet the  loss  on\t doubtful  debts.  The\tword
\n‘provision’ in\tsection 40A(7)\tmust also  receive the\tsame
\nmeaning, according to the assessee.\n<\/p>\n
     (g)  Section  34(3)(a)  spoke  of\tthe  creation  of  a
\ndevelopment rebate  reserve by\tdebiting the Profit and Loss
\nAccount and crediting the Reserve Account. Thus, the Income-
\ntax Act\t itself contemplated,  according to  the assessee, a
\nReserve as  an appropriation  or earmarking  of\t profits  by
\nmaking entries for this purpose in the books of account.\n<\/p>\n
     (h)  The\tother  clauses\t of  section  40A  spoke  of
\n‘expenditure’ and  ‘allowance’. But  section  40A  struck  a
\ndifferent note\tand used  the word  ‘provision. Consequently
\n‘provision’ could  not\tbe  equated  with  ‘expenditure’  or
\n‘allowance’ or ‘deduction.\n<\/p>\n
     In interpreting  a taxing\tstatute, it was submitted on
\nbehalf\tof   the  assessee,  equitable\tconsiderations\twere
\nentirely  out\tof  place,   nor  could\t taxing\t statute  be
\ninterpreted on\tany presumptions  or assumptions.  The Court
\nmust look squarely at the words of the statute and interpret
\nthese. It  should interpret a taxing statute in the light of
\nwhat was  clearly expressed  and it could not imply anything
\nwhich was not expressed; it could not import provisions into
\nthe statute  so as  to supply  any assumed  deficiency,\t nor
\ncould It  refuse to  give effect  to  the  plain  and  clear
\nmeaning\t of  the  words\t on  the  ground  that\tstrange\t and
\nanomalous consequences might arise.\n<\/p>\n
     It was, therefore, urged on behalf of the assessee that
\nthe judgment  under appeal  of the  High Court was erroneous
\nfor the following reasons:\n<\/p>\n
606<\/span><\/p>\n
     (a) that  it regarded a claim for deduction of gratuity
\nin the\tincome-tax assessment as tantamounting to the making
\nof a provision by the assessee in his books of account, and\n<\/p>\n
     (b) it proceeded on the unwarranted assumption that the
\nCompanies Act  mandatorily required  a\tcompany\t to  make  a
\nprovision for gratuity, and failure to make such a provision
\nconstituted a  violation of  the Companies  Act, and  such a
\ncompany should not be permitted to take advantage of its own
\nwrong.\n<\/p>\n
     It was  submitted that  there was\tno provision  in the
\nCompanies Act  or  in  the  accounting\tpractice  making  it
\nmandatory for a company to get an actuarial valuation of its
\ngratuity liability  or to  make a  provision for the same in
\nits books  of account.\tThe Company  Law Board\thad put this
\nmatter beyond  doubt under  circulars on  several  occasions
\nspecially by  Circular No.  13\/77 dated 21st November, 1977,
\nwhich provided\tthat a company might either make a provision
\nfor gratuity  or might\tmerely\tindicate  the  fact  of\t the
\nliability for  gratuity by  appending a\t note at the foot of
\nthe accounts. Further, the Institute of Chartered Accountant
\nhad also issued a publication titled ‘statement on treatment
\nof Retirement  Gratuity’ which also clarified that a company
\nneed not  make any provision for gratuity. These submissions
\nwere  elaborated   with\t reference   to\t certain   books  on
\naccountancy.\n<\/p>\n
     Our attention  was drawn  to the  observations of\tthis
\nCourt in  the case  of Metal  Box Company  of India  Ltd. v.
\nTheir Workmen,<\/a>\t73 I.T.R. 53 at 67-68, which were reiterated
\nand referred  to in  the decision  of this  Court  in  Vazir
\nSultan Tobacco\tCo.  Ltd.  v.  Commissioner  of\t Income\t Tax<\/a>
\n(supra). In  these appeals  we are  not concerned  with\t the
\ndistinction  between  ‘provision’  and\t‘reserves’.  We\t are
\nconcerned  with\t  the  true   meaning  and  purport  of\t the
\nexpression provision  made by  the assessee  . This Court in
\nVazir Sultan’s\tcase observed  at page\t569 referring to the
\nobservations in the case of Metal Box:\n<\/p>\n
\t  “The distinction between a provision and a reserve
\n\t  is in\t commercial accountancy\t fairly well  known.
\n\t  Provisions made  against  anticipated\t losses\t and
\n\t  contingencies are  charges  against  profits\tand,
\n\t  therefore, to\t be taken into account against gross
\n\t  receipts in  the P.  & L. account and the balance-
\n\t  sheet.   On\tthe   other   hand,   reserves\t are
\n\t  appropriations of  profits, the  assets  by  which
\n\t  they are represented being retained to form part
\n607<\/span>
\n\t  of  the   capital  employed\tin   the   business.
\n\t  Provisions  are usually shown in the balance-sheet
\n\t  by way of deductions from the assets in respect of
\n\t  which they  are made\twhereas general reserves and
\n\t  reserve  funds   are\tshown\tas   part   of\t the
\n\t  proprietor’s interest.  (See Spicer  and  Pegler’s
\n\t  Book keeping and Accounts, 15th Edn. p. 42).”<\/p><\/blockquote>\n
     It was emphasised that the concept of provision applied
\nnot only  in respect  of companies  but also  to  individual
\nassessees.\n<\/p>\n
     Reliance was  also placed\ton the\tobservations of this
\nCourt in  Kedarnath Jute  Mfg. Co.  Ltd. v.  Commissioner of
\nIncome-tax (Central),  Calcutta,<\/a> 82 I.T.R. 363, where it was
\nemphasised that\t whether  an  assessee\twas  entitled  to  a
\nparticular deduction or not depended on the provision of law
\nrelating thereto and not on the view that the assessee might
\ntake of\t his rights;  nor could\t the existence or absence of
\nentires in the books of account be decisive or conclusive in
\nthe matter. The assessee who was maintaining accounts on the
\nmercantile system  was fully justified in claiming deduction
\nof the\tamount of  sales tax  which it\twas, under  the law,
\nliable to pay during the relevant accounting year.\n<\/p>\n
     Counsel was  emphatic that there was no obligation cast
\non any\tassessee either\t by any law or even by the canons of
\naccounting practice  to make  any provision  in the books of
\naccount\t in  respect  of  the  liability  to  pay  gratuity.
\nConsequently, an  assessee might  claim as  deduction in his
\nincome-tax assessment  the liability  in respect of gratuity
\neven though  he might  not have\t made any provision or other
\nentry in his books of account in respect of gratuity.\n<\/p>\n
     It was  the assessee’s case that section 40A(7) was not
\na  complete   code  in\trespect\t of  gratuity.\tSection\t 40A
\ncontained  only\t  a   series   of   specific   and   limited
\ndisallowances. If  an item of expenditure was not covered by
\nsection 40A,  it was  not as  if it  could not be claimed as
\ndeduction at  all. On  the contrary,  if section 40A did not
\napply, there  was no  bar at all to claiming the expenditure
\nas deduction  either under  section 28\tor under  section 37
\nprovided it  was incurred  wholly and  exclusively  for\t the
\npurpose of  business. It  was further submitted that section
\n40A(7) could  not possibly  be considered  to be  a complete
\ncode with regard to the allowance of deduction for gratuity,
\ninter alia,  because  section  40A(7)  merely  provided\t for
\ndisallowance if\t provision  of\tgratuity  was  made  by\t the
\nassessee. It does not say
\n608<\/span>
\nthat no\t deduction will\t be allowed  in respect\t of gratuity
\nunless and until certain conditions were fulfilled.\n<\/p>\n
     Section  40A   is\tin   Chapter  IV  which\t deals\twith
\ncomputation of\ttotal income. It is under the sub-heading of
\na group\t of sections dealing with the computation of profits
\nand gains  of business\tor profession.\tThe  said  group  of
\nsection begin  with section  28 and  go\t upto  section\t40D.
\nSection 40A  is with  the marginal  note under\tthe  heading
\n“Expenses   or\t  payments   not   deductible\tin   certain
\ncircumstances”. If  the marginal  note\tor  heading  is\t any
\nindication, and\t it certainly  is a  relevant factor  to  be
\ntaken into  consideration in  construing the  ambit  of\t the
\nsection, then  these  payments\tmentioned  therein  are\t not
\ndeductible   according\t  to   the    statute\tin   certain
\ncircumstances. therefore,  the heading\tof this section is a
\nclear indication  that certain\tpayments and  expenses which
\nwould be otherwise deductible would not be deductible except
\nin certain  circumstances indicated  in the section. This is
\nabundantly made clear by the non-obstante expression used in
\nsub-section  (1)  of  section  40A.  As\t noted\tbefore,\t the
\nprovisions of  section 40A shall have effect notwithstanding
\nanything to the contrary contained in any other provision of
\nthe Act.  Payments of  deductions or provision for deduction
\ncould have  been eligible  for deduction  or could have been
\ndeducted either\t under section 28 or under section 37 of the
\nAct. But  the use  of the  non-obstante expression  makes it
\nclear that if there is any legislative base dealing with the
\nprovisions for gratuity then the same would be applicable in
\nspite of and notwithstanding any other provision of the Act.
\nRead with  the marginal\t notes\tof  section  40A,  the\tnon-
\nobstante clause\t of sub-section\t (l) of\t section 40A  has an
\noverriding effect  over the  provisions of any other section
\nby providing  that the\tprovisions of  the section will have
\neffect notwithstanding anything to the contrary contained in
\nany other  provision relating  to the  computation of income
\nunder the head Profits and gains of business or profession .
\nExpenditures or\t allowances which  are deductible  under any
\nother  provision   relating  to\t  the  head   ‘Business\t  or
\nprofession’ will  be disallowed\t in  cases  to\twhich  these
\nprovisions of the section apply. This sub-clause was
\n inserted  by Finance  Act, 1975  with retrospective  effect
\nfrom 1.4.1973. It is necessary to appreciate the purpose and
\nobject intended\t to be achieved by this sub-section in order
\nto arrive at the true meaning of the provision.\n<\/p>\n
     Payment of\t gratuity  as  commonly\t understood  is\t the
\npayment\t made  to  the\temployee  by  the  employer  on\t his
\nretirement or  termination of his service for any reason. It
\nis made voluntarily
\n609<\/span>
\nby the\temployer as  a regular practice or pressure of trade
\nor business  either under an agreement with the employees or
\non the understanding of the trade and after the enactment of
\nthe Payment  of Gratuity  Act, 1972 which came into force on
\n16th September,\t 1972, as  a statutory\tliability under\t the
\nsaid Act  Although payment of gratuity is made on retirement
\nor termination\tof service,  It\t was  not  for\tthe  service
\nrendered during the year In which the payment is made but it
\nis made in consideration of the entire length of service and
\nits  ascertainment   and  computation  depend  upon  several
\nfactors.\n<\/p>\n
     The  right\t to  receive  the  payment  accrued  to\t the
\nemployees  on  their  retirement  or  termination  of  their
\nservices and  the  liability  to  pay  gratuity\t became\t the
\naccrued liability of the assessee when the employees retired
\nor their  services, were terminated. Until then the right to
\nreceive gratuity  is a contingent right and the liability to
\npay gratuity  continues to  be a  contingent ability qua the
\nemployer. An  employer might  pay gratuity when the employee
\nretires or  his service\t is terminated and claim the payment
\nmade as\t an expenditure incurred for the purpose of business
\nunder section  37. He  might, if  he followed the mercantile
\nsystem, provide\t for the  payment of  gratuity which  became
\npayable\t during\t the  previous\tyear  and  claim  it  as  an
\nexpenditure on\tthe accrued  basis under  section 37  of the
\nsaid Act.  Since the amount of gratuity payable in any given
\nyear would be a variable amount depending upon the number of
\nemployees who  would be\t entitled  to  receive\tthe  payment
\nduring the  year, the  amount being  a large one in one year
\nand a small one in another year, the employer often finds it
\ndesirable and\/or  convenient to\t set apart  for future use a
\nsum every  year\t to  meet  the\tcontingent  liability  as  a
\nprovision for  gratuity or  a fund  for gratuity.  He  might
\ncreate an  approved gratuity  fund for the exclusive benefit
\nof  his\t employees  under  an  irrevocable  trust  and\tmake
\ncontributions  to   such   fund\t  every\t  year.\t  Contingent
\nliabilities do not constitute expenditure and can not be the
\nsubject matter of deduction even under the mercantile system
\nof accounting.\tExpenditure which  was deductible for income
\ntax purposes  is   towards a  liability actually existing at
\nthe  time   but\t setting  apart\t money\twhich  might  become
\nexpenditure on the happening of an event is not expenditure.
\n(See in\t this connection  the observations  of this Court in
\nIndian molasses Co. (P) Ltd., v. Commissioner of Income-tax,
\nWest Bengal),  37 I.T.R.  66 at pages 76 & 80. A distinction
\nis often made between an actual liability in praesenti and a
\nliability de  futuro, which  for  the  time  being  is\tonly
\ncontingent. The former is deductible but not the latter.\n<\/p>\n
610<\/span><\/p>\n
     Amounts set  apart by  way of  provision or by way of a
\nreserve or  fund to  meet the  liability of  gratuity as and
\nwhen it\t becomes payable will not be deductible allowance or
\nexpenditure. Where,  however, an  approved gratuity  fund is
\ncreated for  the exclusive benefit of the employees under an
\nirrevocable trust,  contribution made to the fund during the
\nyear of account will be allowed to be deducted under section
\n36(1)(v),
\n     In Metal Box Company of India v. Their Workmen<\/a> (supra),
\nthis Court  held that  contingent liabilities discounted and
\nvalued as  necessary could  be taken into account as trading
\nexpenses if these were sufficiently certain to be capable of
\nbeing valued. An estimated liability under a gratuity scheme
\neven if\t it amounted  to a  contingent liability if properly
\nascertainable and  its present\tvalue was  fairly discounted
\nwas deductible\tfrom the  gross profits\t while preparing the
\nprofit and  loss account. In view of this decision and other
\ndecisions that\tfollowed it,  lt became\t permissible for  an
\nassessee if  he so  chose to provide in his profits and loss
\naccount for  the estimated liability under a gratuity scheme
\nby ascertaining\t its present  value  on\t accrued  basis\t and
\nclaiming it  as an  ascertained liability  to be deducted in
\nthe computation\t of the\t profits and  gains of\tthe previous
\nyear.\n<\/p>\n
     It would  thus be\tapparent from the analysis aforesaid
\nthat the position till the provisions of section 40A(7) were
\ninserted in the Act in 1973 was as follows :-
\n(1) Payments  of gratuity  actually made  to the employee on
\nhis  retirement\t  or  termination   of\this   services\twere
\nexpenditure incurred for the purpose of business in the year
\nin which the payments were made and allowed under section 37
\nof the Act.\n<\/p>\n
(2) Provisions\tmade for  payment of  gratuity\twhich  would
\nbecome due  and payable\t in the previous year was allowed as
\nan expenditure\tof the\tprevious year  on accrued basis when
\nmercantile system was followed by the assessee.
\n(3)   Provisions  made by setting aside an advance sum every
\nyear to\t meet the  contingent liability\t and gratuity as and
\nwhen it\t accrued by  way of provision for gratuity or by way
\nof reserve  or fund  for gratuity  was\tnot  allowed  as  an
\nexpenditure of the year in which such sum was set apart.
\n(4)   Contribution made\t to an approved gratuity fund in the
\nprevious  year\t was  allowed  as  deduction  under  section
\n36(1)(v).\n<\/p>\n
611<\/span><\/p>\n
(5) Provision  made in\tthe Profit  and Loss Account for the
\nestimated present value of the contingent liability properly
\nascertained and discounted on an accrued basis as falling on
\nthe assessee  in the  year of  account could  be  deductible
\neither under section 28 of section 37 of the Act.\n<\/p>\n
     As there  were several methods which the assessee might
\nchoose to  adopt in  meeting his  liability to pay gratuity,
\nthe treatment  which he\t would receive\tunder the Income-tax
\nAct would  depend  upon\t the  method  adopted  by  him.\t The
\nassessee is only under an obligation to pay gratuity when it
\nbecame due  and payable.  The other  methods adopted  by the
\nassessee for  meeting the liability for gratuity as and when
\nit arose  are provisions  or arrangements made by him at his
\noption. It  is not  obligatory\ton  him\t to  make  any\tsuch
\nprovision and  if no such arrangement or provision was made,
\nno question arose to consider its deductibility or allowance
\nunder the Act.\n<\/p>\n
     The  intention  of\t the  legislature  in  enacting\t the
\nprovision of  section 40(A)(7)\twould be  apparent from\t the
\nnotes on  clauses of  the amendment  where in  paragraph 46,
\nafter referring\t to the\t provisions  of\t section  37(1)\t and
\nsection 36(1)(v)  of the  Act, it  was observed\t (98  I.T.R.
\nStatutes p. 194), inter alia, as follows :-\n<\/p>\n
\t  “A reading  of these\ttwo provisions clearly shows
\n\t  that the  intention has always been that deduction
\n\t  in respect  of gratuities should be allowed either
\n\t  in the year in which the gratuity is actually paid
\n\t  or in\t the year in which contributions are made to
\n\t  an  approved\tgratuity  fund.\t A  doubt  has\tbeen
\n\t  expressed  that   the\t relevant   provisions,\t  as
\n\t  presently worded,  do not  secure  the  underlying
\n\t  objective and\t that a provision made by a taxpayer
\n\t  in his  accounts in  respect of  estimated service
\n\t  gratuity payable  to employees  will be deductible
\n\t  in computing\tthe taxable  income in\ta case where
\n\t  the provision\t has been made on a scientific basis
\n\t  in the form of an actuarial valuation. In order to
\n\t  remove uncertainty  in the  matter, it is proposed
\n\t  to  specifically   provide  in  the  law  that  no
\n\t  deduction will  be allowed,  in the computation of
\n\t  profits and  gains of a business or profession, in
\n\t  respect of  any reserve  created or provision made
\n\t  for the  payment of  gratuity to  the employees on
\n\t  retirement or on termination of employment for any
\n\t  reason. This restriction will,
\n612<\/span>
\n\t  however, not apply in relation to a provision made
\n\t  for the  purpose of  payment of  a sum  by way  of
\n\t  contribution towards\tan  approved  gratuity\tfund
\n\t  that\thas   become  payable  during  the  relevant
\n\t  account year, on for the purpose of meeting actual
\n\t  liability in respect of payment of gratuity to the
\n\t  employees that has arisen during such year.”<\/p><\/blockquote>\n
     This intention  and the  purpose of the legislature was
\ncarried into  effect by inserting sub-section (7) in section
\n40A  by\t ensuring  the\toverriding  effect  over  the  other
\nprovisions of  the Act.\t Therefore, in\tinterpreting  or  in
\ntrying to  find out  the  meaning  of  that  provision,\t one
\nshould, if  possible and  in this  case lt  is\tnot  at\t all
\nstraining, give\t effect to  that intention and not to make a
\nnonsense of  that intention.  Clause (a)  of the  said\tsub-
\nsection provides  that\tno  deduction  will  be\t allowed  in
\nrespect of  any provision  (whether called as such or by any
\nother name) made by the assessee for the payment of gratuity
\nto his employees on their retirement or termination of their
\nservices for  any reason. The expression ‘provision’ has not
\nbeen defined in the Act ant lt is not used in any artificial
\nsense but  in its  ordinary meaning.  This 18 clear from the
\nwords  (whether\t called\t as  such  or  by  any\tother  name)
\noccurring in  sub-section. According to Webster, ‘provision’
\nin its\tordinary sense\tmeans ‘something provided for future
\nuse’
\n     On a  plain construction  of clause  (a) of sub-section
\n(7) of\tsection 40A  of the  Act,  what\t it  means  is\tthat
\nwhatever is  provided for  future use by the assessee out of
\nthe gross  profits of  the year\t of account  for payment  of
\ngratuity  to   employees  on  their  retirement\t or  on\t the
\ntermination of\ttheir  services\t would\tnot  be\t allowed  as
\ndeduction in  the computation  of profits  and gains  of the
\nyear of\t account. The  provision  of  clause  (a)  was\tmade
\nsubject to  clause (b).\t The embargo  is  on  deductions  of
\namounts provided  for future  use in the year of account for
\nmeeting the  ultimate  liability  to  payment  of  gratuity.
\nClause (b)  (i) excludes  from the  operation of  clause (a)
\ncontribution  to   an  approved\t gratuity  fund\t and  amount
\nprovided for  or set  apart for\t payment of  gratuity  which
\nwould be  payable during the year of account. Clause (b)(ii)
\ndeals with  a situation\t that the  assessee might provide by
\nthe spread-over\t method and  provides  that  such  provision
\nwould be  excluded from the operation of clause (a) provided
\nthe three  conditions  laid  down  by  the  sub-clauses\t are
\nsatisfied.\n<\/p>\n
     The submission  of the assessee is that if no provision
\nis made by the assessee for gratuity, still the same will be
\n613<\/span>
\ndeductible and\tsection 40A(7)\twill  have  no\tapplication,
\nwould defeat  the very\tpurpose and object of section 40A(7)
\nand render  it nugatory.  The interpretation as suggested by
\nthe  assessee\twould  entitle\tthe  assessee  who  made  no
\nprovision to  claim deduction whereas an assessee who made a
\nprovision would\t not get  deduction unless  the requirements
\nlaid  down   in\t the   sub-section   are   fulfilled.\tThis
\ninterpretation, if  accepted, will lead to a curious result,
\nand if\tone may\t venture to  say an  absurd result, and even
\nwhere the  assessee has\t not chosen to adopt the spread-over
\nmethod and  has not  provided for  the present\tvalue of the
\ncontingent liability  attributable to the year of account by
\ncharging it  on the  profits of the year, the assessee would
\nstill be  entitled to  claim as\t deduction  from  the  gross
\nprofits of  the year  the said\testimated liability which he
\ncould have provided for but he has not chosen to do so.\n<\/p>\n
     Where the\tintention of the legislature in enacting the
\nprovision  in\tquestion  was  to  put\tan  embargo  on\t the
\ndeduction, the\tinterpretation\tsuggested  by  the  assessee
\ndefeats that purpose.\n<\/p>\n
     Kedarnath Jute  Mfg. CD.  Ltd. v.\tC.I.T.\treferred  to
\nhereinbefore dealt  with a  different situation. The accrual
\nof sales-tax  liability in  that case  did not depend on the
\noption of  the assessee\t to make  or not  to make it for the
\nyear. The case of Bombay High Court in Tata Iron & Steel Co.
\nLtd. v.\t D.V. Bapat,  Income-tax Officer, Companies Circle I<\/a>
\n(2), Bombay  and Anr.,\t101 I.T.R.  292, was a case on which
\nreliance  was\tplaced\ton  behalf  of\tthe  assessee  where
\nprovision was  made but\t was a\tcase before the enactment of
\nsection 40A(7)\tarising out  of the assessment year 1972-73.
\nSimilarly C.I.T.  Kerala v.  High Land Produce Co. Ltd.,<\/a> 102
\nI.T.R. 803,  another decision relied on by the assessee was,
\nwhere a\t provision was\tmade. It arose out of the assessment
\nyear 1970-71  before the  enactment of section 40A(7). These
\nare the\t cases upon  which the\tassessee had relied. Another
\ncase upon  which the  assessee relied  was  Swadeshi  Cotton
\nMills Co.  Ltd. v.  Income-Tax Officer,\t Special Circle<\/a>\t ‘A’
\nWard, Kanpur (supra). This case arose out of assessment year
\n1973-74\t to  which  the\t provision  of\tsection\t 40A(7)\t was
\napplicable. The\t Allahabad High\t Court how-  ever   took the
\nview that  bar created\tby the\tsaid provision did not apply
\nsince the  conditions laid  down  had  to  be  fulfilled  in
\nfuture. It  did not take into consideration the provision of
\nsection\t 155(13)   of  the   Act.  Madras   High  Court\t  in
\nCommissioner  of  Income-Tax,  Madras  (Central)  v.  Andhra
\nPrabha P.  Ltd.,<\/a> 123  I.T.R. 760  at 772,  has\tdoubted\t the
\ndecision of  the Allahabad High Court in 112 I.T.R. 1038 and
\nfurther observed  that the  question of\t deductibility of  a
\nclaim for gratuity liability could not be allowed on general
\nprinciples under any provisions of the Act.\n<\/p>\n
614<\/span><\/p>\n
     The aforesaid difficulties in accepting the contentions
\nurged on  behalf of  the assessee  were highlighted  by\t the
\nCalcutta High  Court in\t the case  of Peoples  Engineering &
\nMotor Works  Ltd. v  Commissioner of Income-Tax West Bengal-
\nII, (supra). It was pointed out that payment of gratuity was
\na statutory  liability created under the Payment of Gratuity
\nAct, 1972.  It could normally be said to have arisen for the
\ncarrying  on  of  business.  However,  for  gratuity  to  be
\ndeductible under  the Act,  must fulfil\t the conditions laid
\ndown in\t section 40A(7).  The deduction could not be allowed
\non general  principles under  any other\t section of  the Act
\nbecause sub-section  (1) of  section 40A makes it clear that
\nthe provisions\tof the\tsection shall  have  effect  notwith
\nstanding anything  to the  contrary contained  in any  other
\nprovision of  the Act  relating to the computation of income
\nunder the head “Profits and gains of business or profession”
\nor in  other words  it means  that section  40A\t would\thave
\neffect notwith standing anything contained in sections 30 to
\n39 of the Act.\n<\/p>\n
     This position was again reiterated by the Calcutta High
\nCourt in  the case of Commissioner of Income Tax, Central-V,
\nCalcutta v. New Swadeshi Mills of Ahmedabad Ltd.,<\/a> 147 I.T.R,
\n163, where  it was  explained at page 172 of the report that
\nprohibition in section 40A(7) was on deduction in respect of
\nany provision  (whether called as such or by any other name)
\nmade by\t the assessee  for  the\t payment  of  gratuity.\t The
\namplitude of  the section  was indicated  by the  use of the
\nexpression “whether called as such or by any other name.” It
\nwas further  reiterated that the interpretation suggested on
\nbehalf of  the assessee\t would lead  to a  conclusion  which
\nwould be  extra-ordinary and  repugnant to  commonsense.  It
\nwill also  cause grave\tinjustice to  the assessees who have
\nbeen prudent  enough to\t set apart  a  sum  for\t payment  of
\ngratuity.\n<\/p>\n
     The principle  that fiscal\t statutes should be strictly
\nconstrued  does\t  not  rule   out  the\tapplication  of\t the
\nprinciples of  reasonable construction to give effect to the
\npurpose or intention of any particular provision as apparent
\nfrom the  scheme of  the Act,  with the\t assistance of\tsuch
\nexternal aids as are permissible under the law.\n<\/p>\n
     For the aforesaid reasons, it is not possible to accept
\nthe assessee’s\tcontentions. The  questions referred  to the
\nHigh Court  were therefore  rightly answered  in negative by
\nthe High Court,
\nThe appeals, accordingly, fail and are dismissed with costs.\n<\/p>\n
M.L.A.\t\t\t\t\t  Appeals dismissed.\n615<\/span>\n\n\n\n<\/pre>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Shree Sajjan Mills Ltd vs Commissioner Of Income Tax, M.P. … on 8 October, 1985 Equivalent citations: 1986 AIR 484, 1985 SCR Supl. (3) 593 Author: S Mukharji Bench: Mukharji, Sabyasachi (J) PETITIONER: SHREE SAJJAN MILLS LTD. Vs. RESPONDENT: COMMISSIONER OF INCOME TAX, M.P. BHOPAL AND ANR. DATE OF JUDGMENT08\/10\/1985 BENCH: […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-233233","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nShree Sajjan Mills Ltd vs Commissioner Of Income Tax, M.P. ... on 8 October, 1985 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/shree-sajjan-mills-ltd-vs-commissioner-of-income-tax-m-p-on-8-october-1985\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Shree Sajjan Mills Ltd vs Commissioner Of Income Tax, M.P. ... on 8 October, 1985 - 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