Kerala High Court
Commissioner Of Income-Tax vs Sudarsan Clay Products Ltd. on 1 December, 1989
Equivalent citations: [1990]184ITR575(KER)
Author: K.S. Paripoornan
Bench: K.S. Paripoornan
JUDGMENT Varghese Kalliath, J.
1. At the instance of the Commissioner of Income-tax, Cochin, the Income-tax Appellate Tribunal (for short, "the Tribunal"), Cochin Bench, has referred the following questions of law for the opinion of this court:
"(1) Whether, on the facts and in the circumstances of the case, the assessee is entitled to make provision for gratuity in respect of services rendered by the employees to the vendor-company ?
(2) Whether, on the facts and in the circumstances of the case, did the assessee create an approved gratuity fund contemplated under Section 40A(7) of the Income-tax Act to attract the provision ?
(3) Whether, on the facts and in the circumstances of the case, the liability for gratuity for the service rendered by the employees to the vendor is a capital expenditure ?"
2. The Tribunal referred the above questions of law as directed by this court in the judgments in Original Petition No. 6380 of 1982 dated November 21, 1984, and Original Petition No. 6382 of 1982 dated November 29, 1984. The reference relates to the assessment years 1974-75 and 1975-76. These assessment years relate to the previous years ended on March 31, 1974, and March 31, 1975, respectively. For the concerned years, the assessee claimed deduction of the provision for gratuity liability amounting to Rs. 1,20,560 and Rs. 2,90,570 respectively.
3. The assessee is a subsidiary of Sudarsan Trading Co. Ltd. The assessee took over the business of manufacturing and selling tiles and ceramic products of Standard Pottery Works (P.) Ltd. We would refer to Standard Pottery Works (P.) Ltd. hereinafter as the vendor and Sudarsan Trading Co. Ltd. as the vendee company or the assessee.
4. An agreement was entered into between the vendor and the vendee on March 29, 1973, whereby the vendee took over the business of the vendor. As per the terms of the agreement, the vendor and the vendee agreed that the business would be taken over as a going concern and that the services of the employees under the employment of the vendee shall not be interrupted by the transfer of the business. It was stipulated that the employees of the vendor shall continue in service as the employees of the assessee. Clause 14 of the agreement also provided that, after the execution of the document of sale, both the vendor and the vendee shall take all necessary steps to reconstitute or otherwise modify the trust shown as the Standard Pottery Works Employees' Gratuity Fund created by a deed dated June 10, 1963, so that the amounts contributed by the vendor to the gratuity fund and the accretions thereto held by the trustees are continued to be used for the benefit of the beneficiaries under the trust in the manner laid down in the trust deed and the regulations of the gratuity fund. This trust and the gratuity fund were approved by the Commissioner of Income-tax.
5. The assessee claimed before the Income-tax Officer that the gratuity fund continued to be an approved gratuity fund even after the transfer of the business by the vendor to the assessee. The Income-tax Officer held that there had been no reconstitution of the approved gratuity fund as provided in Clause 14 of the agreement. He also held that Clause 10 which stipulated weightage for services rendered by the employees to the vendor sought to create a change in respect of such past employment on the assessee and that the liability based upon such services could not be allowed as a liability of the assessee. The Income-tax Officer further held that the additional payment to the employees consequent to the conditions in Clause 10 of the agreement was only in lieu of the additional amount which would have otherwise been paid to the vendor as the price of the undertaking itself and, therefore, a capital expenditure. The Income-tax Officer passed the assessment orders dated February 18, 1977, and August 28, 1978.
6. The assessee filed appeals before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) did not agree with the Income-tax Officer and held that, in view of the agreement between the assessee and the vendor and because there had been no change in the gratuity fund in respect of its constitution, objects or beneficiaries, the approval originally granted to the gratuity fund continued to be in force in spite of the change in the ownership of the business. The Commissioner of Income-tax (Appeals) directed the Income-tax Officer to allow the claim of the assessee as due under Section 40A(7)(b) of the Income-tax Act, subject to the conditions set out therein. The Department appealed before the Tribunal. The Tribunal confirmed the order of the Commissioner of Income-tax (Appeals) and dismissed the appeals filed by the Department. Thereafter, at the instance of the Revenue, the questions of law formulated in the first paragraph of this judgment have been referred for the decision of this court.
7. We heard counsel on both sides. The Tribunal has found, we would say rightly, that even if there was no stipulation in the agreement regarding the gratuity entitlement of the employees of such going concern, the assessee would still be liable to make the contributions in accordance with the stipulation contained in the deed creating the trust. It has to be noted that the gratuity fund, as already constituted by the trust deed, has been approved by the Commissioner of Income-tax, Kerala. Though the agreement contemplated reconstitution of the fund, the real change that was intended by the particular provision in the agreement was to make such modification in the trust deed as would bring out the position clearly of the transfer of the business as a going concern from the vendor to the assessee. In effect, such modification of the original trust deed does not amount to a reconstitution in the sense in which it has been considered by the Income-tax Officer. It is only to clarify and provide for payment of gratuity as per the existing arrangement to the employees of the business. The agreement clearly provided for continuous service by the employees in the business and it is plain and clear when it is said in the agreement that the assessee is purchasing the business as a going concern. It is also pertinent to note that the necessary modifications as required by the Commissioner of Income-tax, Kerala, and the necessary intimation as required by the Commissioner of Income-tax have been made by the trustees to the gratuity fund. So, there cannot be any doubt that the gratuity fund was an approved fund during the previous years for the two assessment years.
8. The Tribunal has said that the Commissioner of Income-tax (Appeals) made it clear "that the assessee is only entitled for any contributions under Sub-clause (i) of Section 40A(7)(b) or the incremental liability based on actuarial valuation to the extent of the provision made." Further, the Tribunal said that it is clear that the claim of the assessee as defined by the Commissioner Income-tax (Appeals) in his order is clearly within the ambit of Section 40A(7)(b)(i). Being an approved gratuity fund, the assessee is entitled to make contributions in accordance with Sub-clause (i) of Section 40A(7)(b) of the Income-tax Act.
9. The agreement was entered into on March 29, 1973, and the assessee took over the business of the vendor as a going concern on April 19, 1973. We are concerned with the assessment years 1974-75 and 1975-76. The previous years for the above said two assessment years ended on March 31, 1974 and March 31, 1975. For these two previous years, the assessee can rightly make contributions to the approved gratuity fund and what the assessee has done is to make provision for payment of contributions for the said two previous years. This the assessee can do under Section 40A(7)(b)(i) of the Income-tax Act.
10. Counsel for the Revenue submitted before us that the order of the Tribunal is capable of creating a doubt enabling the assessee to make contributions to the gratuity fund on the incremental liability based on actuarial valuation and at the same time, counsel for the Revenue submitted that there cannot be any doubt as to the right of the assessee to make provision for payment of gratuity for the previous years within the ambit of Section 40A(7)(b)(i) of the Income-tax Act.
11. This court had occasion to say very clearly in CIT v. Periya Karamalai Tea and Produce Co. Ltd. [ 1987] 167 ITR 32, that incremental liability is not a subject which is germane to Section 40A(7)(b)(ii) of the Income-tax Act. We would make it clear that this principle is applicable in this case also. When we have made it clear that the incremental liability is not a concept which can be the import or content of Section 40A(7)(b)(ii), the Revenue cannot find any legal infirmity in the order of the Tribunal. In view of the above clarification, we feel that we should decline to answer question No. 1. We do so. We further hold that questions Nos. 2 and 3 do not arise for decision in this case. The references are answered as above.
12. A copy of this judgment under the seal of this court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.