Income Tax Appellate Tribunal - Mumbai
J.R. Diamonds Ltd. vs Assistant Commissioner Of Income-Tax on 31 August, 1998
Equivalent citations: [1999]70ITD42(MUM)
ORDER
1. This is an assessee's appeal for the assessment year 1992-93. It is directed against the order of the CIT(A) IV, Mumbai, dated 11-11-1997. The only ground in this appeal relates to disallowance of Rs. 22,153 claimed as deduction towards gratuity payment.
2. One Shri Ajit Shah was the employee of the assessee-company from a very long time. He stopped working with the assessee-company and went and joined M/s. Suraj Diamond Industries Ltd., which is a sister concern, with effect from 6-7-1991. Accounting to the assessee, the gratuity payable to him was arrived at Rs. 22,153 and this amount was credited in favour of M/s. Suraj Diamond Industries Ltd. with the consent of Shri Ajit Shah, to whom the amount was payable. It is stated that the amount was transferred to M/s. Suraj Diamond Industries Ltd. so that at the time of retirement the total gratuity payable to Shri Ajit Shah could be found out and paid. Thus, the contention of the assessee was that he had paid the amount. In token of this contention, the assessee produced before the Assessing Officer a receipt dated 6-7-1991 from Shri Ajit Shah, in which it is stated "this is to acknowledge the receipt of gratuity Rs. 22,153 from M/s. J. R. Diamonds (assessee Co.) by way of transfer to M/s. Suraj Diamond Industries Ltd." When a query was raised about the allowability of this amount as deduction in the hands of the assessee-company, the position was explained to the Assessing Officer by the assessee-company's letter dated 19-8-1994. The Assessing Officer, while vetting this claim of the assessee, observed in his assessment order that the assessee claimed deduction of this amount under section 40A(7). He had quoted the text of the receipt (already quoted) in his assessment order. The Assessing Officer further stated that in the assessee's balance-sheet the amount is still outstanding. He further stated that the employee's certificate is also silent as to when the transfer of the amount was made by the assessee to the new employer company. In view of the provisions of section 43B, he stated that gratuity can be allowed only subject to the condition that the said payment is made within the stipulated date. He ultimately found that since there is no evidence to show that there has been transfer within the stipulated time, there was no compliance of section 43B of the I.T. Act and on that ground he disallowed Rs. 22,153.
3. Aggrieved, the assessee went in appeal before the CIT(A). The ld. CIT(A) dismissed the claim of the assessee. While dismissing, he observed in his impugned order that the Assessing Officer noted in the balance-sheet of the assessee-company that the said sum of Rs. 22,153 is shown as outstanding. He also agreed with the Assessing Officer when he had recorded that the employee's acknowledgement is silent as to when the transfer of fund was made by the assessee to M/s. Suraj Diamond Industries Ltd.
4. I have heard Shri D. J. Thakkar, ld. Representative for the assessee, and Shri Krishna Murari, ld. Departmental Representative. Shorn of all technicalities and accounting Jargon, it would appear that what all happened on 6-7-1991 when Shri Ajit Shah stopped working with the assessee-company and joined Suraj Diamond Industries Ltd. was that the sum of Rs. 22,153 which is due to Shri Ajit Shah towards his gratuity claim was made over or transferred to the new company under which he continued his employment. The sum of Rs. 22.153 was credited in the account of Suraj Diamond Industries Ltd. in the books of account belonging to the assessee-company. The question is whether the acknowledgement of liability to M/s. Suraj Diamond Industries Ltd. in an amount of Rs. 22,153 towards gratuity due to Shri Ajit Shah amounts to payment or comprehended by the word "Paid" within the meaning of section 43(2) under which the word "paid" is defined to mean as follows :
Section 43(2) : "paid" means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head "Profits and gains of business or profession".
Section 43B, as far as it is relevant, is as follows :
"43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of -
(a) ** ** **
(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees.
(c) ** ** ** shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him."
The case of the assessee is that even though there is no actual payment of this amount, it is enough if the liability is incurred the day on which the liability is transferred in favour of Suraj Diamond Industries Ltd. and as such the gratuity amount of Rs. 22,153 should be taken to have been paid. In support of this contention, the learned Representative for the assessee had cited the following decision :
W. T. Suren & Co. Ltd v. CIT [1998] 97 Taxman 126 (SC).
The facts of that case are quite similar to the facts on hand. There, the question was about allowability of the gratuity amount due to the employees. In that case, one unit of the assessee-company was closed and the same was transferred to another who employed employees of closed units continuity of service. Assessee at the instance and consent of the employees paid gratuity amounts due to the employees to the transferee unit for the benefit of the employees. The Hon'ble Supreme Court held that the transferee held the amount in order to pay to employees on their retirement. On the question whether the payment of gratuity to the transferee could be allowed as a deduction in assessee's hands, the Hon'ble Supreme Court answered it in the affirmative. The headnote of the decision brings out the facts as well as the relevant portion of the gist of the decision of the Hon'ble Supreme Court rendered on those facts :
"The assessee, subsidiary company of R, had closed one of its distribution unit and same had been taken over by 'R'. The employees of the assessee were offered similar employment with 'R' on same terms and conditions as it was with the assessee. Some of the employees did accept the offer given by R and some did not. In respect of the employees whose services had been terminated and who had accepted the offer to join R with continuity of services as offered, their gratuity amount was paid over by the assessee to R, which amount was held by R on trust for the benefit of the assessee's employees. R made declaration that it had no beneficial interest in the said sum or any part thereof. Though a part of the assessee's business was closed and taken over by R, the other business continued. The assessee claimed gratuity amount paid as deduction. The Assessing Officer held that R alone would be entitled to claim the amount when paid by them to the assessee's employees at the time of their respective retirement and therefore, he disallowed its claim. On appeal, the Commissioner (Appeals) held that there was no actual termination of the services of the employees and the discharge of the liability in question was capital in nature, and he upheld the Assessing Officer's order. On second appeal, the Tribunal held that there was termination of the employment of the employees from the service of the assessee; that there was valid discharge of the payment of gratuity; that the assessee was still functioning; and that payment of gratuity amount was rightly claimed as deduction.
The gratuity was, thus, payable on the termination of employment of the employee on any account except dismissal and calculated on the basis of number of years of service and at the rate prescribed in the scheme. In the instant case, the amount of gratuity which was paid to R on behalf of the employees was not on account of transfer of the distribution unit of the assessee but on account of stopping of that business and the employees working in that unit becoming surplus resulting in termination of their services. Other business of the assessee, as held by the Tribunal, continued. The payment of gratuity amount to R was not made by the assessee of its own but at the instance and on behalf of the employees whose services though terminated in the assessee-company were taken over with the promise of continuity of service. As far as the assessee was concerned, it was bound to make payment of gratuity to the employees whose services were terminated and, in fact, the employees who did not join were directly paid gratuity. The assessee was obliged to pay gratuity to those employees who had joined. Instead of those employees getting the gratuity amount directly, got that amount paid from R, who put that amount in trust in a separate account for the exclusive use of the transferred employees and payable to them after their services terminated including the gratuity due on account of service rendered as per the scheme relating to gratuity of that company. The payment of amount of gratuity to R was made as per the scheme of the assessee and it was not an ex gratia or some isolated payment. It was never disputed and, in fact, no question raised if the services of the employees of the assessee were not terminated and that being the position, the obligation of the assessee to make payment of gratuity to its employees was an obligation in praesenti. The payment of gratuity amount was with the consent of the employees transferred. Thus, the payment of gratuity awarded by the assessee in the circumstances of the case was an expenditure wholly laid or expended for the purpose of the business of the assessee and was allowable deduction."
Apart from the above Supreme Court, the learned Representative also had relied upon the Bombay High Court decision in CIT v. Salem Magnesite (P.) Ltd [1991] 189 ITR 154/54 Taxman 123 and the Madras High Court decision in CIT v. Sarada Binding Works [1985] 152 ITR 520 besides citing the Madras decision rendered by the Tribunal found reported in the case of ITO v. Mount Stuart Tea Estate [1986] 19 ITD 761 (Mad.). In the Madras case, the Tribunal held that the employee acquires a right to gratuity if he had rendered continued service for not less than 5 years. The Tribunal further held that when the assessee has sold one of its concern which is a part of its business, it is bound to pay gratuity to the employees upon termination of employment notwithstanding the fact that the employees were absorbed by the purchaser. So, the gratuity had become presently payable on account of the transfer of business and any 'provision', as understood in the ordinary sense of the term, made by the assessee for the purpose of payment of gratuity is exigible for deduction in such circumstances in terms of the second limb of section 40A(7)(b)(i). In the facts of that case the assessee had agreed to provide by accepting a sum of Rs. 5,40,000 from out of the sale consideration towards gratuity that may become payable to the employees of the assessee and the purchaser had agreed to discharge the gratuity liability to the employees of the transferor. Thus, no actual payment had been made and the gratuity that has become presently payable was provided for in the ordinary sense of the term 'provision' occuring in the second limb of sub-clause (i)(b) of section 40A(7). Ultimately, the Tribunal took the view that the assessee was entitled to deduction under section 40A(7). In the facts of this case, the payment to the transferee company was made with the consent and approval of the employee, Shri Ajit Shah. He also passed a receipt. The gratuity liability which was hitherto subsisting against the assessee-company was taken over by the transferee company since the amount was made over by the transferee company to the transferor company on 6-7-1991, the date on which the assessee-company terminated the services of Shri Ajit Shah. Under the circumstances, the gratuity amount payable to Shri Ajit Shah should be taken to have been paid within the meaning of section 43(2). The meaning of the word 'paid' under section 43(2) is duty applicable while interpreting the meaning of the words used in section 43B. Therefore, I have no hesitation to come to the conclusion that the assessee is entitled to claim the deduction of the amount of Rs. 22,153 under section 40A(7). The impugned order passed by the CIT(A) is set aside and the appeal of the assessee allowed.
5. The appeal stands allowed.