Andhra HC (Pre-Telangana)
Commissioner Of Income-Tax vs Super Spinning Mills Limited on 11 February, 1987
Equivalent citations: [1987]166ITR518(AP)
Author: K. Ramaswamy
Bench: K. Ramaswamy
JUDGMENT K. Ramaswamy, J.
1. For the assessment year 1974-75 the previous year ending on March, 31, 1974, the assessee-company in the balance-sheet, has shown on the liabilities side, a sum of Rs. 2,71,846 as conurbation toward the accrued gratuity fund for 1973-74 and claimed deduction under section 36 (1) (v) of the Income-tax Act, 1961 (43 of 1961), for short, "the Act". Towards the account "Salaries and Wages", the assessee has debited a sum of Rs. 20,95,241. Under rule 103 of the Income-tax Rules, 1962, the assessee is entitled to deduct 8 1/3% towards gratuity fund. But the Income-tax Officer held that the assessee is entitled to deduction at 8 1/3% from the salaries actually paid to the employees and this amount claimed being in excess thereof, it is not in conformity with rule 103. The assessee is not entitle dot the entire allowance on the contributions. The Income-tax Officer restricted the claim to a sum of Rs. 1,74,603 and disallowed the balance of Rs. 97,551. On appeal, the Appellate Assistant commissioner confirmed the same. On further appeal, the Income-tax Appellate Tribunal held that once the Commissioner has granted approval to the gratuity fund, it is irrevocable under rule 2 (3) of Part C of the Fourth Schedule and the Income-tax Officer is devoid of Jurisdiction to sit in judgment over the approval accorded by the Commissioner. It has also held that the entire contribution made by the assessee is in conformity with rule 103. Therefore, it is not in any contravention thereof. At the instance of the Revenue, this reference has been made raising two question of law viz. :
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in holding that the Income-tax Officer has no option except to allow as a deduction under section 36 (1) v) of the Income-tax Act, 1961, whatever contribution has been made by the employer-assessee to the gratuity fund maintained by it in accordance with the rules of the said gratuity fund as approved by the Commissioner of Income-tax ?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the Departmental authorities have misconstrued the scope of rule 103 when they interpreted the expression therein 8 1/3% of the salary of each employee during each year' as meaning 8 1/3% of the salary actually paid to each employee during each year ?"
2. Sri M. Suryanarayana Murthy, learned standing counsel for the Revenue, seeks to support the stand taken by the assessing authority. He contends that what was sought to be given benefit of deduction to the assessee is the actual payment made but not as per contract of service. He also further contends that the approval accorded by the Commissioner must be in conformity with the rules made in Part C of Schedule IV and it was subject to rule 103; that, in any case, the contribution was in excess of 8 1/3% of the statutory limit and, therefore, the assessee is not entitled to the benefit of allowance to the extent of the excess contribution made by him to the gratuity fund. The Revenue can go behind the approval and give allowance as per rule 103. These contentions have been repelled by Sri Ravi, learned counsel for the assessee. He contends that rule 3 of the Part C of Schedule IV to the Act is a complete code by itself. Once the Commissioner has applied his mind and accorded permission for the constitution of the gratuity fund, so land as it is not revoked, it is conclusive and is binding on the assessing authority and it is bound to allow the allowance of the entire contribution made by the assessee. In case the assessing authority feels that the recognition granted is not in accordance with the rules, the only course open to it is to make a reference to the Commissioner to take appropriate action. In this case, the assessing authority has not made any reference and, therefore, it is not open to it to go buying the approval accorded by the Commissioner on the premise that the is excess of contribution. He alternatively contends that the contribution is in conformity with rule 103 which postulates the making of contribution and prescribes the limit as 8 1/3%. What the employee is entitle do is the salary and the term "salary" includes dearness allowance and the contribution is to be calculated on the basis of the salary said to the employee. If the amount contributed by the assays is so calculated, indisputably it is not in excess of 8 1/3%; therefore, it is not in transgression of rule 103 of the Rules. He also relied on Gestetner Duplicators (P.) Ltd. v. CIT .
3. In view of the respective contentions, the first question that arises for consideration is whether the Income-tax Officer has jurisdiction to go behind the approval granted by the Commissioner for the constitution of the gratuity fund. The assessee has got an irrevocable trust deed dated December 16, 1972, executed, under which to constituted a "gratuity fund" and it was approved by the Commissioner, of Income-tax by his proceedings dated February 3, 1973, and it is stated that it was corrected on June 20, 1973. This trust was constituted in conformity with the provisions of section 4 of the Payment of Gratuity Act, 1972, which fastens statutory liability on the employer today gratuity to an employee of at the rate of fifteen days' wages based on the rate of wages last drawn by the employee concerned, for every completed year of service or part thereof in excess of six month. Clause 14 of Schedule A of the trust deed contains rules and regulations of the trust fund, which provide for contribution by the assessee to the gratuity fund at the rate of 15/26 of the salary (month's) for the completed year of service of an employee. For computation thereof, after excluding four holidays in a month, the working days in each month are 26 days, and as per section 4 (2) of the Payment of Gratuity Act, fifteen days' salary is computed, i.e. 15/26, and on that basis the contribution towards the gratuity funds has been formulated and was approved by the Commissioner of Income-tax. Thus, an amount of Rs. 2,71,846 in conformity therewith was credited to the gratuity fund.
4. The question is, whether the gratuity fund shown on the liabilities sides per the mercantile system of accounting maintained by the assessee and as approved by the Commissioner, is liable to be interfered with and disallowance could be made by the taxing authorities. For appreciation thereof, it is necessary to took to the relevant provisions of the Act and the Rules. Section 2 (5) of the Act defines "approved gratuity fund" to mean a ratite fund which has been and continues to be approved by the Commissioner in accordance with the rules contained in Part C. of the Fourth Schedule. Section 36 (1) empowers the assessee to claim several deductions in respect to matters dealt with therein, in computing the income from profits and gains of business referred to in section 28. Clause (v) thereof reads that any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund create by him for the exclusive benefit of this employee under an irrevocable trust is to be deducted in computing the income chargeable tax. Section 40A (1) postulates that the provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head "Profits and gains of business of profession". Sub-section (7) reads thus :
"(7) (a) Subject to the provisions of clause (b), no deduction shall be allowed in respect of any provisions (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 provisions made by the assessee for the purposes 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."
(Other clause and sub-section are not relevant for the purpose of this case. Hence omitted.) (This provision was inserted by the Finance Act, 1975, with retrospective effect from April 1, 1973).
Part C of Schedule IV deals with approved gratuity funds. Rule 1 is the definition rule. Under rule 2, the Commissioner may accord approval to any gratuity fund which, in his opinion, complies with the requirements of rule 3 and may at an time withdrawn such approval, if, in his opinion, the circumcision ices of the fund cease to warrant the continuance of the approval. Conditions for approval had been adumbrated in rule 3 which are not disputed. Hence they are not necessary to be extracted. Rule 4 adumbrates filing of applications for approval. Rule 5 defines that gratuity is deemed to be salary. Rule 6 enjoins the liability of trustees on cessation of approval. Rule 7 prescribes the liability of the contributions by the employer when it is deemed to be income of the employer. Rule 8 deals with appeal against the order of the Commissioner refusing to accord approval. Rule 9 gives power to the Board to make rules which shall be subject to the provision of section 296.
5. Rule 103 of the Income-tax Rules, 1962, reads thus :
"Ordinary annual contributions. - The ordinary annual contribution by the employer to a fund shall be made on a reasonable basis as may be approved by the Commissioner having regard to the length of service of each employee concerned so, however, that such contribution shall not exceed 8 1/3% of the salary of each employee during each year."
"Salary" has been defined in rule 2 (h) of Part A of the Fourth Schedule which includes dearness allowance.
6. A reading of these fasciculate of the provisions would clearly indicate that under the Payment of Gratuity Act, there is a statutory liability fastened on an employee to make payment of gratuity in the form prescribed under section 4 (2) thereof to the employee. It is a statutory liability and when such liability is fastened on the employer, with a view to have compliance there of and for claiming allowance from computation of taxable income under section 36 (1) (v), he has to make an application as per rule 4 of Part of C of Schedule IV. He has to execute an irrevocable deed of trust constituting a gratuity fund, giving the particulars thereof; and the Commissioner has the power to accord permission under rule 2 (2). Once the Commissioner accords permission constituting the gratuity fund, the order according permission constituting the trust and, pursuant thereto, any contribution so made the conclusion and final unless the approval is revoked by the Commissioner as per the rules. Therefore, once approval is accorded by the Commissioner, it is binding on the assessing authority or the Appellate Assistant Commissioner and the authorities administering the provisions of the Act have no power to go behind the approval granted by the Commissioner. This point had arisen in the context of recognised provident funds under Part A of Schedule IV, in Gestetner Duplicator's case wherein it was held :
"However, we would like to make some observations with regard to the true impact of the recognition granted by the CIT to a provident fund maintained by an assessee. The facts in the present case that need be stressed in this behalf are that it was as far back as 1937 that the CIT had granted recognition to the provident fund minuend by the assessee under the relevant rules under the 1922 Act, that such recognition had been granted after the true nature of the commission payable by the assessee to its salesmen under their contracts of employment had been brought to the notice of the Commissioner and that the said recognition had continued to remain in operation during the relevant assessment years in question, the laws fact in particular clearly implying that the provident fund of the assessee did satisfy all the conditions laid down in r. 4 of Part A of the Fourth Schedule to the Act even during relevant assessment years. In that situation, we do not think that it was open to the taxing authorities to question the recognition in any of the relevant years on the ground that the assessee's provident fund did not satisfy any particular condition mentioned in r. 4. It would be conducive to juridical discipline and the maintaining of certainty and uniformity in administering the laws that the taxing authorities should proceed on the basis that the recantation granted and available for any particular assessment year implies the provident funds satisfies all the conditions under r. 4 of the Part A of the Fourth Schedule to the Act and not sit in judgment over it. There is ample power conferred upon the Commissioner under r. 3 of the Part A of the Fourth Schedule to withdraw at any time the recognition already granted, if, in his opinion, the provident fund contravenes any of the conditions required to be satisfied for its recognition and if during the assessment proceedings for any particular assessment year, the taxing authority funds that the provident fund maintained by an assessee had contravened any of the conditions of recognition, he may refer the question of withdrawal of recognitions, to the Commissioner but until the Commissioner acting the powers reserved to him withdraws such recognition, the taxing authority must proceed on the basis that the provident funds has satisfied all the requisite conditions for its recognition for that year; any other course is bound to result in chaos and uncertainty which has to be avoided."
7. The same ratio would apply on all fours to the facts in this case. Thus, we hold that once the Commissioner accorded approval on February 3, 1973, as rectified by proceedings dated June 20, 1973, constitutions the gratuity fund, it is binding on the assessee authority and the assessing authority is devoid of power and jurisdiction to go being the Parmesan to find out whether the contribution made by the assessee is in conformity with the rules or in excess thereof. Accordingly, he has to give the allowance for the entire amount contributed towards the gratuity fund of the employees of the assessee during the relevant assessment year.
8. It is next to be seen whether the contribution made by the assessee is is conformity with rule 103 of the Rules. The conurbation must bear reasonable basis to the length of service. It is true that under rule 103, the maximum up to which the assessee is to make contribution is 8 1/3% per cent. of the salary. It is already seen that "salary" includes dearness allowance. Therefore, the employee is entitle in terms of his contract of employment not only to the actual salary but also to the dearness allowance. When the contribution is to be made towards gratuity in terms of section 4 (2) of the Payment of Gratuity Act on the formula of 15/26 days a months, then the contribution is to be worked out on that basis. The taxing authority has proceeded on the premise that what is actually payable or paid to the employee is the criteria and fixed the percentage at 8 1/3%. We are unable to respect the stand taken by the assessing authority. In a given case, where due to sickness or strike or lock-out, etc., if the employee is not paid salary for the period for which he is not entitled as per the contract of service, that may be a case of entitling him to receive the actual wages. But when the Gratuity Act prescribes the contribution by the employer towards his share at a prescribed percentage, it has to be worked out on the basis of the contact of employment and not on the basis of what was actually paid in a given month/months to the employee. Obviously, taking irrelevant factors into consideration, Rs. 97,551 was disallowed under section 36 (1) (v) of the Act. It is clearly illegal. Accordingly, we answer the questions in favour of the assessee and against the Revenue. No costs.