Bombay High Court
Commissioner Of Income-Tax vs Mumbai Khoka Utpadak Sahakari Kendra ... on 15 November, 1994
Equivalent citations: [1995]211ITR836(BOM)
JUDGMENT DR. B.P. Saraf, J.
1. By this reference under section 256(1) of the Income-tax Act, 1961, at the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following question of law to this court for opinion :
"Whether, on the facts and in the circumstances of the case, the Tribunal erred in allowing a deduction of Rs. 57,539 under the provisions of section 40A(7)(b)(i) of the Income-tax Act, 1961, being 'service fund' credited for 1974 and 1975 in view of the approval of the gratuity fund by the Commissioner of Income-tax with effect from July 1, 1975 ?"
2. The assessee is a co-operative society. Its accounting year is the year ended June 30. This reference pertains to the assessment year 1976-77, the corresponding accounting year being the year ended on June 30, 1975. During this accounting year, the assessee kept in its books an account called "service fund". The amount credited to this account was in fact provision made by the assessee for the purpose of payment of sums by way of contribution towards a gratuity fund for the benefit of its employees. During the year ended June 30, 1975, the assessee credited to the said account a sum of Rs. 61,657 as provision for the year 1974 and another sum of Rs. 10,882 as provision for the year 1975.
3. By a deed of trust, the assessee created an employees' gratuity fund under the name and style of "Mumbai Khoka Utpadak Sahakari Kendra Limited". The trustees of the said gratuity fund applied to the Income-tax Commissioner for approval of the gratuity fund under rule 2(1) of Part C of the Fourth Schedule to the Act. This application was made on December 26, 1975. The Commissioner of Income-tax accorded approval to the said trust with effect from July 1, 1975, by his order dated December 30, 1975.
4. When the Income-tax Officer made the assessment of the assessee for the assessment year 1976-77, he made the following additions to its income :
Rs.
Service fund credited for 1974 61,657
Less : Already added earlier 15,000
-------------------
46,657
Service fund for 1975 10,882
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57,539
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5. The assessee had claimed deduction in respect of the above amounts under section 40A(7) of the Act. The claim of the assessee was thus rejected by the Income-tax Officer.
6. The assessee appealed to the Commissioner of Income-tax (Appeals). The contention of the assessee before the Commissioner was that as the amounts in question represented the provision made by the assessee for the purpose of payment of contribution towards a gratuity fund which was approved by the Commissioner later by his order dated December 30, 1975, the Income-tax Officer was not justified in disallowing the claim of the assessee for deduction of such amount under section 40A(7) of the Act. The Commissioner accepted the contention of the assessee. The Revenue appealed to the Income-tax Appellate Tribunal. Before the Tribunal, it was contended by the Revenue that the trust fund having been approved with effect from July 1, 1975, there was no approved gratuity fund during the previous year in question and hence the provision cannot be a provision made for the purpose of payment towards an approved gratuity fund. The above contention of the Revenue did not find favour with the Tribunal. The Tribunal held that in view of the recognition of the fund by the Commissioner of Income-tax with effect from July 1, 1975, the assessee was entitled to deduction under section 40A(7) of the Act. Hence, this reference at the instance of the Revenue.
7. We have carefully considered the facts of the case and the order of the Tribunal. The controversy pertains to the assessment year 1976-77, the corresponding previous year being the year ended on June 30, 1975. The uncontroverted factual position is that the amounts in question were credited by the assessee in its books of account to the service fund account during the accounting year ended on June 30, 1975. According to the assessee, the amount credited to this account represents the provision made by it for the purpose of payment of sums by way of contribution towards a gratuity fund for the benefit of its employees. There is, however, no controversy about the fact that no approved gratuity fund was in existence during the accounting year in question. In fact, the assessee did not even apply for approval of the gratuity fund as required by rule 2(1) of Part C of the Fourth Schedule to the Act during the accounting year. The application was made much later on December 26, 1975. The Commissioner accorded approval to the said trust by his order dated December 30, 1975, with effect from July 1, 1975. Thus, during the accounting year in question, there was no approved gratuity fund in existence.
8. "Approved gratuity fund" has been defined in clause (5) of section 2 of the Income-tax Act, 1961, to mean a gratuity 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". Rule 2 of Part C of the Fourth Schedule deals with the procedure of approval of a gratuity fund. Sub-rule (1) of rule 2 empowers the Commissioner to accord approval to any gratuity fund which, in his opinion, complies with the requirements of rule 3. Sub-rule (2) requires the Commissioner to communicate, in writing, to the trustees of the fund, the grant of approval "with the date on which the approval is to take effect". In the instant case, the Commissioner accorded approval to the gratuity fund by his order dated December 30, 1975, and communicated the grant of the approval to the assessee and intimated that the approval was to take effect from July 1, 1975. It is, therefore, clear that an approved gratuity fund within the meaning of section 2(5) read with rule 2 of Part C of the Fourth Schedule to the Act came into existence in the establishment of the assessee only with effect from July 1, 1975.
9. In this factual background, it may now be expedient to refer to the provisions of section 40A(7) of the Act, which deal with the allowance of deduction in respect of any provision made by the assessee for the purpose of payment of gratuity to his employees. Clause (a) of sub-section (7) specifically provides that no deduction shall be allowed in respect of 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. This prohibition, however, does not apply in relation to the provisions falling under clause (b) of sub-section (7). The relevant provision on which the reliance is placed by the assessee in the instant case is sub-clause (i) of clause (b). Clauses (a) and (b) of sub-section (7) of section 40A, so far as material, read as under :
Section 40A. Expenses or payments not deductible in certain circumstances. - (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............"
10. According to the assessee, the gratuity fund having been approved by the Commissioner in the next accounting year, the provision made by the assessee for the payment of gratuity to its employees by crediting the amount to the service fund is deductible by virtue of sub-clause (i) of clause (b) of sub-section (7) of section 40A of the Act.
11. On a conjoint reading of clauses (a) and sub-clause (i) of clause (b) of sub-section (7) of section 40A of the Act, we are of the clear opinion that by virtue of sub-clause (i) of clause (b) the prohibition contained in clause (a) would not apply in relation to any provision made by the assessee for payment of a sum by way of any contribution "to an approved gratuity fund". This contemplates the existence of an approved gratuity fund during the accounting year in question. In the instant case, the admitted position is that there was no approved gratuity fund in existence during the accounting year. It came into existence for the first time on the 1st day of the succeeding accounting year, i.e., on July 1, 1975. That being so, the question of provision being made by the assessee during the year in question for the purpose of payment of contribution towards an approved gratuity fund cannot arise. The Income-tax Officer was, therefore, justified in disallowing the claim of the assessee for deduction of the sum in view of the provisions of section 40A(7)(a) of the Act. The Commissioner of Income-tax (Appeals) and the Tribunal erred in reversing the decision of the Income-tax Officer and allowing deduction of Rs. 57,539 to the assessee under the provisions of section 40A(7)(b)(i) of the Income-tax Act, 1961.
12. In view of the above, the question referred to us is answered in the affirmative and in favour of the Revenue.
13. Under the facts and circumstances of the case, there shall be no order as to costs.