Delhi High Court
Commissioner Of Income-Tax vs Ghaziabad Engineering Co. (P.) Ltd. on 10 January, 2001
Equivalent citations: (2001)169CTR(DEL)74, [2001]249ITR244(DELHI)
Author: Arijit Pasayat
Bench: Arijit Pasayat, D.K. Jain
JUDGMENT Arijit Pasayat, C.J.
1. At the instance of the Revenue, the following questions have been referred for the opinion of this court by the Income-tax Appellate Tribunal, Delhi Bench-E ("the Tribunal" in short), under Section 256(1) of the Income-tax Act, 1961 (in short "the Act") :
"1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in law in holding that the transfer of the assessed's rights as allottee stood completed on January 5, 1971, and not on April 13, 1971, when the lease dated March 22, 1971, was got registered and thus the assessed was not liable to capital gains tax ?
2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in law in holding that the assessed's claim for deduction of Rs. 3,74,738 on account of the provisions for staff gratuity was admissible under Section 37(1) of the Income-tax Act, 1961 ?"
2. The dispute relates to the assessment year 1972-73 for which the previous year ended on October 31, 1971.
3. The factual position, filtering out unnecessary details are as follows :
The assessed is a limited company. A return was filed by it wherein deduction was claimed for a sum of Rs. 3,74,738 stating that the said amount constituted provision made for payment of gratuity to the employees as and when their services came to be terminated in future. Additionally, a sum of Rs. 2,29,511, which related to certain gains from transfer of plots, was claimed to be not taxable. The Inspecting Assistant Commissioner ("the IAC" in short), held that the claim of gratuity was not allowable as Section 36(1)(v) of the Act, which related to approved gratuity fund, had no application to the facts of the case and that Section 37 of the Act had no application to the facts of the case. So far as the capital gains question is concerned, it was held that the transfer took place on April 13, 1971, and, therefore, tax was leviable on the gains made from the transfer of land. The matter was carried in appeal by the assessed before the Commissioner of Income-tax (Appeals) (in short, the "CIT(A)"). Both the claims of the assessed as regards leviability of amount relatable to gratuity and the gains from transfer of land were accepted by the said authority. The Revenue carried the matter in further appeal before the Tribunal. It affirmed the views of the first appellate authority.
4. On being moved for reference the questions as set out above have been referred for the opinion of this court.
5. We have heard learned counsel for the Revenue. There is no appearance on behalf of the assessed in spite of service.
6. Learned counsel for the Revenue submitted that there was no actual payment of gratuity. In fact, Section 37 had no application to the facts of the case and only when the circumstances enumerated in Section 36(1)(v) are fulfillled the deduction can be allowed. Similarly, it was submitted that the date which had to be reckoned was the date of registration of the document, i.e., April 13, 1971, and not any anterior date. Therefore, according to him, the Tribunal's views on both the aspects were erroneous.
7. So far as the first question is concerned, a few dates need to be noted. On October 1, 1970, the assessed wrote a letter to Harsha Tractors Limited (in short "HTL") offering to sell three contiguous plots of land identified as plots 1, 2 and 29 in the records of the U. P. State Industrial Corporation (in short "Corporation"). These plots belonged to the Corporation originally. HTL accepted the offer by its letter dated October 3, 1970. The assessed wrote to the Corporation on October 6, 1970, seeking their consent to the transfer of land to HTL. In turn, HTL, on October 8, 1970, wrote to the Corporation confirming its agreement to take over the three plots from the assessed. The Corporation, vide its letter dated December 7, 1970, approved the transfer of plots in favor of HTL. Certain conditions were stipulated by the Corporation. fulfillling the conditions, the assessed made over possession of the three plots and structures thereon to HTL on November 1, 1970, and the agreement of transfer was executed between the assessed and HTL on January 5, 1971. The Corporation executed the lease deed on March 22, 1971, in favor of HTL in respect of the plots which was registered on April 13, 1971. So far as the building, tubewells, etc., are concerned, a registered sale deed was executed by the assessed with HTL on June 12, 1972. The question that emerges for consideration is as to on which date the transfer became operative. It is well established that a document so long as it is not registered is not valid, yet once it is registered, it takes effect from the date of its execution (see Ram Saran Lall v. Domini Kuer, and Thakur Kishan Singh (Dead.) v. Arvind Kumar, ). Section 47 of the Indian Registration Act, 1908, provides that a registered document shall operate from the date it would have commenced to operate if no registration thereof had been required or made and not from the date of its registration. That being the position, the deed of transfer is operative from March 22, 1971. Therefore, Section 47(iv) of the Act has to be applied with effect from March 22,1971, when the lease deed was executed and not from April 13, 1971, when it was in fact registered. That being the position, the Tribunal was justified in its conclusion that capital gains tax was not leviable though it erroneously took the view that the effective date was January 5, 1971, when the agreement between the assessed and HTL was executed.
8. Coming to the second question, guidelines as to when gratuity can be allowed have been laid down by various judgments of the apex court. Payment of gratuity as commonly understood is the payment made to the employee by the employer on his retirement or termination of his service for any reason. It is made voluntarily by the employer as a regular practice or pressure of trade or business either under an agreement with the employees or on the understanding of the trade and after the enactment of the Payment of Gratuity Act, 1972, which came into force on September 16, 1972, as a statutory liability under the said Act, Although payment of gratuity is made on retirement or termination of service, it was not for the service rendered during the year in which the payment is made but it is made in consideration of the entire length of service and its ascertainment and computation depend upon several factors. The right to receive the payment accrued to the employees on their retirement or termination of their services and the liability to pay gratuity became the accrued liability of the assessed, when the employees retired or their services were terminated. Until then the right to receive gratuity is a contingent right and the liability to pay gratuity continues to be a contingent liability qua the employer. An employer might pay gratuity when the employee retires or his service is terminated and claim the payment made as an expenditure incurred for the purpose of business under Section 37. He might, if he followed the mercantile system, provide for the payment of gratuity which became payable during the previous year and claim it as an expenditure on accrued basis under Section 37 of the said Act. Since the amount of gratuity payable in any given year would be a variable amount depending upon the number of employees who would be entitled to receive the payment during the year, the amount being a large one in one year and a small one in another year, the employer often finds it desirable and/or convenient to set apart for future use, a sum every year to meet the contingent liability as a provision for gratuity or a fund for gratuity. He might create an approved gratuity fund for the exclusive benefit of his employees under an irrevocable trust and make contributions to such fund every year. Contingent liabilities do not constitute expenditure and cannot be the subject-matter of deduction even under the mercantile system of accounting. Expenditure which was deductible for income-tax purpose is towards a liability actually existing at the time but setting apart money which might become expenditure on the happening of an event is not expenditure, (see in this connection, the observations of the apex court in Indian Molasses Co. (P.) Ltd v. CIT [1959] 37 ITR 66). A distinction is often made between an actual liability in praesenti and a liability de futuro, which for the time being is only contingent. The former is deductible but not the latter. Amounts set apart by way of provision or by way of a reserve or fund to meet the liability of gratuity as and when it becomes payable will not be deductible allowance or expenditure. Where, however, an approved gratuity fund is created for the exclusive benefit of the employees under an irrevocable trust, contribution made to the fund during the year of account will be allowed to be deducted under Section 36(1)(v). This position has been laid down by the apex court in Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585. In fact, we have culled out and extracted the principles from the said judgment.
9. The position was again considered by the apex court in CIT v. Andhra Prabha P. Ltd. (1986] 158 ITR 416. It has to he noted that the assessment year involved is prior to the introduction of Section 40A(7) of the Act by the Finance Act, 1975, with retrospective effect from April 1, 1973. That being the position, the Tribunal was justified in holding that the assessed's claim was admissible under Section 37(1) of the Act. The second question, therefore, is answered in the affirmative, in favor of the assessed and against the Revenue.
10. The reference is, accordingly, disposed of.