Calcutta High Court
Commissioner Of Income-Tax vs Continental Commercial Co. Ltd. on 12 June, 1989
Equivalent citations: [1991]192ITR66(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, relating to the assessment year 1976-77, the following question of law has been referred to this court:
"Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in holding that the sum of Rs. 1,16,081 representing provision for payment of gratuity was an allowable deduction in computing the total income for the assessment year 1976-77 ?"
2. The dispute relates to the assessee's claim for deduction of Rs. 1,43,668 being provision towards payment of gratuity. The Income-tax Officer allowed Rs. 27,587, but disallowed the balance of Rs. 1,16,081 on the ground that the gratuity fund had not been approved by the Commissioner of Income-tax. On appeal, the Commissioner of Income-tax (Appeals) held that the Income-tax Officer was not justified in disallowing this claim inasmuch as the assessee had fulfilled all the requirements for this allowance and had applied for approval of the gratuity fund on December 31, 1975. It was already obliged to contribute this amount to the fund and, therefore, the claim for deduction should have been allowed.
3. The Department came up in second appeal before the Tribunal which endorsed the decision of the Commissioner of Income-tax (Appeals) with the following observations :
"We have heard the submissions of both the parties, considered the facts of the case and are of the opinion that the order of the Commissioner of Income-tax (Appeals) on this point does not require any change. There was no dispute about the fact that the assessee was under an obligation to contribute the disputed amount to the gratuity fund. Admittedly, the assessee made an application for approval of its gratuity fund on December 31, 1975, to the Commissioner of Income-tax. In view of this fact, it has to be held that the Commissioner of Income-tax (Appeals) was justified in allowing the assessee's claim for deduction of Rs. 1,16,081 which was contributed by it towards the gratuity fund. We are of the opinion that the approval of the Commissioner of Income-tax towards the gratuity fund is merely a formality in the absence of which the assessee's claim for deduction towards the payment of gratuity fund cannot be disallowed. We, therefore, uphold the order of the Commissioner of Income-tax (Appeals)."
4. The admitted fact is that the assessee made an application for approval of its gratuity fund on December 31, 1975, to the Commissioner of Income-tax. The approval of the fund was not granted by the Commissioner before the assessment was completed. Section 40A(7)(b)(ii) prescribes three conditions for allowance of the deduction of the provision for gratuity. One of such conditions is that the assessee must create an approved gratuity fund for the exclusive benefit of its employees under an irrevocable trust, the application for the approval of the fund having been made before the 1st day of January, 1976. The assessee cannot create an approved gratuity fund unless the approval is granted by the Commissioner. Once an application has been made within the time prescribed by the Act, there is nothing more that could be done by the assessee under the law. The Commissioner of Income-tax, by withholding the grant of approval on the one hand, cannot contend on the other, that the assessee did not satisfy the conditions laid down under Section 40A(7)(b)(ii) of the Act. We do not, however, agree with the Tribunal that the approval of the Commissioner of Income-tax towards the gratuity fund is a mere formality. The Commissioner may refuse to accord approval if he finds that the assessee has not satisfied all the conditions required for such approval to the gratuity fund. It is not the case here that the gratuity fund created by the assessee is not liable to be approved. Once the application has been made within the time prescribed by the Act to the Commissioner for approval, it is immaterial when such approval is accorded, inasmuch as the approval would relate back to the date of application for such approval. If, however, for any reason, the approval is not granted, the Department may withdraw the benefit extended to the assessee under Section 40A(7)(b). However, the assessee has to satisfy all the three conditions mentioned in Section 40A(7)(b)(ii). The condition of creating an approved gratuity fund would be satisfied if the assessee makes an application for such approval on or before January 1, 1976, irrespective of the fact whether such approval was accorded to the assessee before the assessment was completed.
5. For the reasons aforesaid, we answer the question in this reference in the affirmative and in favour of the assessee.
6. There will be no order as to costs.
Bhagabati Prasad Banerjee, J.
7. I agree.