Income Tax Appellate Tribunal - Delhi
Income-Tax Officer vs Auto Meters Ltd. on 20 July, 1987
Equivalent citations: [1988]24ITD478(DELHI)
ORDER
G. Krishnamurthy, President
1. This appeal is filed by the Income-tax Officer against the order of the Commissioner (A) and the cross-objection is by the assessee. The Income-tax Officer feels aggrieved by the direction of the Commissioner (A) to allow deduction of the sum of Rs. 3,25,988 representing the initial contribution to be made to the gratuity fund.
2. The assessee-company debited its profit and loss account by a sum of Rs. 3,72,424 towards gratuity liability. Of this, sum of Rs. 3,25,988 represented provision for payment of initial contribution of gratuity as per actuarial valuation and the balance represented the amount paid during the year. While the Income-tax Officer allowed the deduction for the payment made during the year, he declined to allow the provision made for gratuity of Rs. 3,25,988 on the ground that it was only a provision made for the payment of gratuity and there was a prohibition imposed by Section 40A(7) with -effect from 1-4-1973 to allow deductions for provisions made towards gratuity. The Income-tax Officer observed that even though the gratuity liability was an allowable deduction Under Section 36(1)(iv) of the Income-tax Act, the said section was superseded with effect from 1-4-1973 by enacting Section 40A(7) of the Income-tax Act. The assessee relied upon a decision of the Madras High Court in the case of CIT v. Andhra Prabha (P.) Ltd. [1980] 123 ITR 760 but the Income-tax Officer held that this decision was not applicable to the facts of the assessee's case. Another main reason shown by the Income-tax Officer was that though the liability in respect of Rs. 3,25,988 was for initial contribution, it related to earlier years and therefore could not be allowed as a deduction in the year under appeal.
3. When the matter reached the Commissioner (A) on appeal, apart from reiterating the contentions taken before the Income-tax Officer specific emphasis was laid upon the decision of the Madras High Court in the case of Andhra Prabha (P.) Ltd. (supra) to urge that the provision was allowable as a deduction and that the Income-tax Officer misread the provisions of the Income-tax Act and mis-appreciated the Madras High Court decision. The Commissioner (A) found force in the arguments of the assessee and following the decision of the Madras High Court held that the assessee was entitled to the deduction in the following words :
It would appear from the judgment of the Madras High Court that the words 'that has become payable during the previous year' refer to the 'payment of any gratuity' and not to 'any contribution towards an approved fund', which would, therefore, include the initial contribution towards the gratuity fund. I am, therefore, of the opinion that the appellant is entitled for deduction on account of the provision for initial contribution to the approved gratuity fund under Sub-clause (i) of Clause (b) of Sub-section (7) of Section 40 A. It would thus be seen that the Commissioner (A) took the view that the initial contribution towards gratuity fund also would be a permissible deduction under the provisions of Section 40A(7) notwithstanding that that section imposed a prohibition on the allowance of the contributions to gratuity fund. It is against this order of the Commissioner (A) that the present appeal is directed.
4. During the course of the arguments the learned departmental representative by making a pointed reference to the decision of the Supreme Court in the case of Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 submitted that the Supreme Court also laid down that if the provisions of Section 40A(7) were not complied with, no provision made towards gratuity fund would be allowed as a deduction and in view of this authoritative interpretation placed upon Section 40A(7) by the Supreme Court, which is the law of the land, the Commissioner (A) could not be said to be right in holding that the amount was admissible as a deduction. It was also submitted that he was not justified in placing reliance upon the decision of the Madras High Court in Andhra Prabha (P.) Ltd.'s case (supra). The learned departmental representative also referred us to the decision of the Allahabad High Court in the case of Addl. CIT v. Balrampur Raj Electric Supply Co. [1981] 128 ITR 615. He also referred us to the observations made by the learned author Chaturvedi and Pithisaria (third Edition) at pages 1213, 1523 and 1524.
5. On the other hand, the learned counsel for the assessee submitted that the very Supreme Court decision on which reliance was placed by the departmental representative to support their view, actually supported the assessee's view. He pointed out that the Income-tax Officer disallowed the claim on the ground that it related to earlier years but even so under the Income-tax Rules 103 and 104 initial contribution made to a gratuity fund is always allowable as a deduction, initial contribution would always relate to back years and therefore the Income-tax Officer went against the very spirit of the Rules when he disallowed the claim of the assesses. He also pointed out that the Madras High Court had correctly interpreted the law and it could not be said that the Commissioner (A) was wrong in relying on it. He also submitted that the purpose of enacting Section 40A(7) is no doubt to put an embargo on the allowance of provisions made for payment of gratuity not because gratuity was not allowable as a deduction but because gratuity payment, till it materialises, remains a contingent liability and it was to provide for the disallowance of contingent liability that Section 40A.(7) was enacted. At the same time, the contributions that became due for payment to approved gratuity funds having become ascertained and accrued liabilities, care was taken to see that provisions made for payment of such contributions which had become due was allowed as a deduction. This is a case where the liability to pay contribution arose and a provision made in the accounts to discharge that liability. It is not the same as a provision made for the payment of future liability. While future liability for gratuity could be said to be contingent liability, the liability that had already accrued for payment even though of back years as per the provisions of the gratuity fund could not be said to be of the same character and nature. This distinction was recognised and was pointed out by the Supreme Court in its decision in Shree Sajjan Mills Ltd.'s case (supra). Therefore, the Commissioner (A) was right in allowing the claim of the assessee.
6. We have carefully considered these submissions made to us. As we have already mentioned earlier, the provision made for gratuity of Rs. 3,25,988 was towards the provision made for contribution towards gratuity fund approved by the Commissioner of Income-tax. The gratuity fund was constituted by the assessee with effect from 27-3-1978, which was very much within the accounting year. The Commissioner of Income-tax was approached for grant of approval. He granted the approval by his letter dated 17-4-1980 but with retrospective effect from the day the fund was constituted, namely, 27-3-1978. Thus the fund in the accounting year was an approved gratuity fund. The amount of Rs. 3,25,988 to be contributed by way of initial contribution was arrived at on the basis of actuarial valuation. It could not be said therefore that it was only an estimate without reference to reality or a scientific method. Section 40A(7) provides :
40A. (7) (a) Subject to the provisions of Clause (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason.
(b) Nothing in Clause (a) shall apply in relation to-
(i) any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year ;
(ii) any provision made by the assessee for the previous year relevant to any assessment year commencing on or after the 1st day of April, 1973, but before the 1st day of April, 1976, to the extent the amount of such provision does not exceed the admissible amount, if the following conditions are fulfilled, namely :
(1) the provision 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 ;
(2) the assessee creates an approved gratuity fund for the exclusive benefit of his employees under an irrevocable trust, the application for the approval of the fund having been made before the 1st day of January, 1976 ; and (3) a sum equal to at least fifty per cent of the admissible amount, or where any amount has been utilised out of such provision for the purpose of payment of any gratuity before the creation of the approved gratuity fund, a sum equal to at least fifty per cent of the admissible amount as reduced by the amount so utilised, is paid by the assessee by way of contribution to the approved gratuity fund before the 1st day of April, 1976, and the balance of the admissible amount or, as the case may be, the balance of the admissible amount as reduced by the amount so utilised, is paid by the assessee by way of such contribution before the 1st day of April, 1977.
Explanation 1 : For the purpose of Sub-clause (ii) of Clause (b) of this sub-section 'admissible amount' means the amount of the provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason, to the extent such amount does not exceed an amount calculated at the rate of eight and one-third per cent of the salary [as defined in Clause (h) of Rule 2 of Part A of the Fourth Schedule] of each employee entitled to the payment of such gratuity for each year of his service in respect of which such provision is made.
Explanation 2 : For the removal of doubts, it is hereby declared that where any provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity to any employee shall not be allowed as a deduction in computing the income of the assessee of the previous year in which the sum is so paid.
Thus this section provides a total ban on the deduction of any provision made by whatever name called for the payment of gratuity to the employees on their retirement or on termination of their employment for any reason but exception was made to this total prohibition in certain circumstances, which were enumerated in Clause (b). They are if a provision is made by the assessee for the purposes of payment of a sum by way of any contribution towards approved gratuity fund or for the purposes of payment of any gratuity, that has become payable during the previous year. We will not deal here with the other provisions of provided in Clause (b)(ii). Then the ban imposed by Clause (a) would not apply. Thus Clause (b) speaks of the provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund or for the purposes of payment of any gratuity but the further condition that it imposed was that the contribution or the payment must have become payable during the previous year. In other words, if the liability to make the payment to an approved gratuity fund has arisen, then even if a provision is made to provide for that contribution, that provision will not be considered to be a mere provision for a contingent liability. The question that has therefore to be asked in this case is whether by the grant of approval by the Commissioner of Income-tax to the gratuity fund, under the provisions governing the gratuity fund, the liability to make the contribution had arisen or not ? If it had arisen, it became payable during the previous year and any provision made to discharge that liability is covered by Clause (b) and not by Clause (a) and therefore became payable. The departmental representative did not agree before us that under the provisions governing the gratuity fund or under the approval granted by the Commissioner of Income-tax with retrospective effect, the payment of contribution to the gratuity fund had not become payable during the previous year. If therefore under the provisions of the gratuity fund the liability to make the contribution to the gratuity fund had arisen, that liability becomes an ascertained liability as distinct from contingent liability spoken of in Clause (a) and that liability has to be allowed as a deduction under Clause (b). The initial contribution that has to be made under the provisions of the gratuity fund, has now become payable during the previous year although it relates to the earlier years. Once the liability to make the contribution towards approved gratuity fund arises as a consequence of the grant of approval to the gratuity fund, the question for the purposes of Clause (6) would not be, whether the contribution related to earlier years or not, but the question would be whether the liability arose in the previous year or not. That was why Clause (6) provided for two situations where provision could be made ; one is for the purpose of payment of a sum by way of any contribution towards approved gratuity fund and the second is for the purpose of payment of any gratuity. In other words, if a provision is to be made for the purpose of payment by way of any contribution, that contribution can be either initial contribution or annual contribution. If it is initial contribution it must necessarily relate to the earlier years and if it is annual contribution then the question of back years would not arise but in both the cases the question of ascertainment on scientific lines would and should arise. In this case the provision for the contribution was made on the basis of the actuarial report, which was not in dispute and which means that the amount of contribution for the purpose of making the provision was arrived at on scientific and rational basis. The liability to pay that contribution has arisen in this previous year and it cannot be said that the provision made for that contribution is not allowable Under Section 40A(7)(6). Section 40A(7)(a) would apply only if a provision is made for future payments of gratuity to the employees either retiring or about to retire. As we have mentioned earlier Clause (b) is an exception carved out for this general bar on the allowance of deduction for the provisions made to the gratuity fund. In this context, the observations made by the Supreme Court in Shree Sajjan Mills Ltd.'s case (supra) may be noticed. Quoting from the head-notes :
On a plain construction of Clause (a) of Section 40A(7) of the IT Act, 1961, whatever is provided for future use by the assessee out of the gross profits of the year of account for payment of gratuity to employees on their retirement or on the termination of their services would not be allowed as a deduction in the computation of profits and gains of the year of account, unless the respective conditions specified in Clause (b) were fulfilled. The expression 'provision made by the assessee' is not used in any artificial sense, e.g., of setting apart specifically by the assessee for meeting the liability for gratuity in his account books, but in its ordinary sense. The embargo under Clause (a) is on deduction of amounts provided for future use in the year of account for meeting the ultimate liability to payment of gratuity. Clause (b)(i) excludes from the operation of Clause (a) contribution to an approved gratuity fund and amount provided for or set apart for payment of gratuity which would be payable during the year of account. Clause (b)(ii) deals with a situation where the assessee might provide by the spread-over method and provides that such provision would be excluded from the operation of Clause (a) provided the three conditions laid down by the sub-clauses are satisfied.
It will be seen from this head-note extracted from the judgment of the Supreme Court that the Supreme Court pointed out that Clause (b)(i) excludes from the operation of Clause (a) contribution to an approved gratuity fund and. the amount provided for or set apart for the payment of gratuity which would be payable during the year of account. We have therefore to see whether the provision made for the contribution to the approved gratuity fund had become payable during the year of account or not. To repeat what we have said earlier, this is a cardinal question that arises in this case and in our view the liability to make the contribution to that gratuity fund arose in the accounting year as a direct consequence of the grant of approval to the gratuity fund. We may also here notice Rule 104 of the Income-tax Rules. It provides :
104. Initial contributions :
The amount to be allowed as a deduction on account of an initial contribution which an employer may make in respect of the past services of an employee admitted to the benefits of a fund shall not exceed 8-1/3 per cent of the employee's salary for each year of his past service with the employer.
We may also notice Rule 103 of the Income-tax Rules, which provides for the deduction of ordinary annual contributions. That rule says that ordinary annual contribution by the employer to a fund shall be made on a reasonable basis as may be approved by the Commissioner of Income-tax having regard to the length of the service of each employee concerned so, however, that such contribution shall not exceed 8-1/3 per cent of the salary of each employee during that year. Thus Rule 104 provides that the amount to be allowed as a deduction on account of initial contribution can be computed at 8-1/3 per cent of the employee's salary for each year of his past service with the employer. This indicates that the amounts payable for past services are also covered by the expression "initial contribution" and the entire amount of initial contribution can be allowed provided it did not exceed the limit provided in Rule 104. This clearly postulates that the initial contribution to an approved gratuity fund should necessarily take into consideration the past services of each employee, which means contributions to be made in respect of back years. When the Rule itself provides that the amount payable in respect of back years is to be taken into account, it is perhaps not correct on the part of the Income-tax Officer to say that since initial contributions included contributions made for past services, the amount became inadmissible. We are, therefore, of the opinion that Clause (6) of Section 40A(7) read with Rule 104 of the Income-tax Rules, clearly postulates the allowance as a deduction the amount paid by way of initial contribution to an approved gratuity fund, the only condition being that that must become payable during the previous year. In the absence of anything brought to our notice to show that the amount had not become payable and the only reason shown being that the initial contribution related to earlier years, which is not in accordance with the spirit of Rule 104 of the Income-tax Rules, we are of the opinion that the Commissioner (Appeals) is right in his conclusion. We, therefore, endorse his view.
7. The second ground raised by the revenue was that on the facts and in the circumstances of the case, the learned Commissioner (Appeals) was not justified in deleting the addition of Rs. 7,302 made by the Income-tax Officer towards commission paid to M/s. Chhabra Auto Industries. If we turn to the order of the Commissioner (A), this is all what he had observed in deleting the addition made by the Income-tax Officer :
M/s Chhabra Auto Industries were not examined by the ITO at any stage. The disallowance of Rs. 7,302 on account of commission paid to them, is, therefore, deleted.
But what we now find from the record is that despite several opportunities provided to the assessee the said person was never produced before the Income-tax Officer, on the other hand, this is what the Income-tax Officer had observed in regard to this :
The nature of commission payment to M/s Chhabra Industries was of the same nature as to the other two parties mentioned above. Assessee had filed an affidavit of M/s. Jagjeet Singh partner of M/s. Chhabra Industries. Since assessee had filed the affidavit of Mr. Jagjeet Singh in support of its claim of services rendered, hence representative of the assessee was asked to produce Shri Jagjeet Singh for cross-examination. Representative of the assessee had not been able to produce Shri Jagjeet Singh and hence the affidavit of Sh. Jagjeet Singh is ignored ab initio and it is informed that no services were rendered by M/s. Chhabra Industries like the earlier two cases.
It is very clear from the order of the Income-tax Officer that Shri Jagjeet Singh was not produced before the Income-tax Officer for verification on the points averred in the affidavit. The Income-tax Officer cannot therefore be found fault with for not examining Shri Jagjeet Singh. This therefore, appears to be a case where the assessee failed to lead proper evidence in support of its claim. The Commissioner (A), in our opinion, is therefore not justified in saying that the payment was allowable even though Shri Jagjeet Singh was called for examination but did not appear before the Income-tax Officer. The fault did not therefore lie with the Income-tax Officer. We therefore reverse his order on this issue and restore that of the Income-tax Officer.
8. The points raised in the cross-objection were not particularly pressed before us and therefore nothing survives before us to consider the cross-objection.
9. In the result, the appeal is allowed in part whereas the cross-objection stands dismissed.