Income Tax Appellate Tribunal - Madras
Sakthi Textiles Ltd. vs Income-Tax Officer on 31 July, 1986
Equivalent citations: [1986]19ITD483(MAD)
ORDER
George Cheriyan, Accountant Member
1. This appeal is by the assessee and relates to the assessment year 1981-82. The accounting year of the assessee-company ended on 31-12-1980. The assessee had sought as deduction a sum of Rs. 7,25,972 being the provision made towards incremental liability of gratuity payable in respect of the accounting periods as indicated below :
Rs.
(a) 31-12-1975 3,27,457
(b) 31-12-1976 1,72,583
(c) 31-12-1977 2,25,932
Total 7,25,972
The incremental liability for each of the years had been determined on an actuarial basis. The ITO disallowed the claim on the ground that the assessee had not actually made any contribution to the employees' gratuity fund. According to the ITO, the provisions of Section 40A(7)(b)(ii) of the Income-tax Act, 1961, would apply and the conditions therein were not satisfied (sic).
2. The assessee appealed to the Commissioner (Appeals). It was submitted that the claim was actually a liability which was present and existing. Reliance was placed before the Commissioner (Appeals) on the decision of the Madras High Court in the case of CIT v. Andhra Prabha (P.) Ltd. [1980] 123 ITR 760. The Commissioner (Appeals) negatived the claim of the assessee observing as under :
As pointed out by me earlier the company had constituted a gratuity fund and this was approved by the Commissioner of Income-tax, Madras, to have effect from 19-12-1973. The liability to pay the incremental amounts for the years 1975, 1976 and 1977 was to the fund and arose at the end of the respective years. The year under review is the calendar year 1980, during which time the contributions for 1975, 1976 and 1977 were not of relevance. Even the decision relied on by the learned representative does not help to him. As pointed out by the Supreme Court the two provisions even taking into account Section 40A(7) take care of (a) the claim for deduction based on payment to an approved gratuity fund, and (b) provision for payment to an approved fund and provision for payment for which a liability has arisen. The appellant's case cannot apparently come under (a) above. It cannot, in my opinion, be covered under (b) above also since liability to pay arose very much earlier than the year 1980. The case before the Madras High Court was for allowance of a claim to gratuity under the working Journalists Act of 1955. It was a special piece of legislation applicable to a select category of employees and final decision taken in that case was for allowance under Section 28 of the Act ; in view of these special features present in that case, I am afraid that I will be unable to support the contention of the learned representative. In the result the order of the Income-tax officer on this aspect is confirmed.
3. The assessee is in appeal before us. The case was argued at length. The learned counsel for the assessee, apart from relying on the decision of the Madras High Court in the case of Andhra Prabha (P.) Ltd. (supra) also relied on the decision of the Calcutta High Court in the case of CIT v. New Swadeshi Mills of Ahmedabad Ltd. [1984] 147 ITR 163 and in particular, the observations at p. 171. He also adverted to the notes on clauses whereby the provisions of Section 40A(7) were amended by the Finance Act, 1975, but with retrospective effect from 1-4-1973. The learned counsel submitted that he was placing reliance only on the provisions of Section 40A(7)(b)(i) for claiming the deduction. According to him, the assessee's case squarely fell within such provision and the deduction had to be allowed.
4. The learned departmental representative, on the other hand, relied on the decision of the Supreme Court in the case of Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585. According to the learned departmental representative, the observations of the Supreme Court in the aforesaid case placed the matter beyond all doubts, and the issue had to be decided in favour of the revenue.
5. We have considered the rival submissions. The assessee has based its claim for deduction only with reference to the provisions of Section 40A(7)(b)(i), which are as under :
(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 ;
According to the assessee, as long as a provision is made for purposes of payment of a sum by way of contribution to an approved gratuity fund, then such provision is an admissible deduction, whether the gratuity to which such provision relates becomes payable during the previous year or not. The learned counsel submitted, the words 'that has become payable during the previous year' should be read as applicable only to the second limb of Section 40A(7)(b)(i), i.e., 'for the purpose of payment of any gratuity' and would not be applicable to the first limb, viz., 'provisions which are made'. He submitted that even if the notes on clauses on which reliance was placed by the revenue are read, the intention of enacting Section 40A(7)(b)(i) is clear from the first part of the notes on clauses [i.e., set out in [1975] 98 ITR (St.) 194] and such intention is clearly spelt out by the terms in which Section 40A( 7)(b)(i) is worded and by the use of the disjunctive 'or' as occurring therein. He submitted that there was no scope for reading the word 'or' as 'and' in the aforesaid provision, though he very fairly stated that it was an accepted principle of statutory interpretation that where the circumstances so required the words 'or' and 'and' could be read vice versa. In the case of Andhra Prabha (P.) Ltd. (supra), their Lordships had explained the provisions of Section 40A(7) as under :
The effect of the statutory provisions may be described as follows :
Section 36(1)(v) provides for deduction of any amount paid by way of contribution towards an approved gratuity fund created by the employer. Sub-section (7) of Section 40A prohibits the deduction of a provision for gratuity. But the prohibition does not extend to the following cases :
(a) provision for contribution to approved gratuity fund, or
(b) provision for payment of gratuity for which a liability has arisen during the year.(p. 766) The learned counsel had emphasised that the aforesaid elucidation of the provisions clearly supported his view. So also the observations of the Calcutta High Court in the case of New Swadeshi Mills of Ahmedabad Ltd. (supra), which were relied on by the learned counsel, were as under :
The Payment of Gratuity Act came into force on 16th September, 1972. Section 40A(7) was introduced in the Income-tax Act with effect from 1st April, 1973, and was made applicable to the assessment year 1973-74 and all the subsequent years. Section 40A is an overriding section and will apply notwithstanding anything contained in any other provisions of this Act relating to computation of income under the head 'Profits or gains of business or profession'. The section heading is 'Expenses or payments not deductible in certain circumstances'. Section 40A(7)(a) prohibits deduction of any provision by whatever name called made by an assessee for the payment of gratuity to his employees on their retirement or termination of their employment for any reason. This is, however, subject to the provisions of Clause (b). Clause (b) lays down the conditions which have to be fulfilled by an assessee in order to get out of the mischief of the provisions contained in Section 40A(7)(a). A provision to pay an amount which has become due and payable during the previous year will have to be allowed. A provision for payment of gratuity of a sum by way of contribution towards an approved gratuity fund will also have to be allowed although the gratuity has not become payable during the relevant previous year.. . .
[Emphasis supplied] (p. 171) It was stressed that these observations also supported the stand.
6. We are of the view that there is considerable force in the argument placed by the learned counsel based on the aforesaid observations of the Calcutta and Madras High Courts.
7. In Shree Sajjan Mills Ltd.'s case (supra), the Supreme Court had occasion to consider the intention of the Legislature in enacting Section 40A(7) with reference to the notes on clauses and their Lordships observed as under :
The intention of the Legislature in enacting the provision of Section 40A(7) would be apparent from the Notes on Clauses of the amendment wherein paragraph 46, after referring to the provisions of Section 37(1) and Section 36(1)(v) of the Act, it was observed [[1975] 98 ITR (St.) 194], inter alia, as follows :
'A reading of these two provisions clearly shows that the intention has always been that deduction in respect of gratuities should be allowed either in the year in which the gratuity is actually paid or in the year in which contributions are made to an approved gratuity fund. A doubt has been expressed that the relevant provisions, as presently worded, do not secure the underlying objective and that a provision made by a taxpayer in his accounts in respect of estimated service gratuity payable to employees will be deductible in computing the taxable income in a case where the provision has been made on a scientific basis in the form of an actuarial valuation. In order to remove uncertainty in the matter, it is proposed to specifically provide in the law that no deduction will be allowed, in the computation of profits and gains of a business or profession, in respect of any reserve created or provision made for the payment of gratuity to the employees on retirement or on termination of employment for any reason. This restriction will, however, not apply in relation to a provision made for the purpose of payment of a sum by way of contribution towards an approved gratuity fund that has become payable during the relevant year, or for the purpose of meeting actual liability in respect of payment of gratuity to the employees that has arisen during such year.' This intention and the purpose of the Legislature was carried into effect by inserting Sub-section (7) in Section 40A by ensuring the overriding effect over the other provisions of the Act. Therefore, in interpreting or in trying to find out the meaning of that provision, one should, if possible, and in this case it is not at all straining, give effect to that intention and not to make a nonsense of that intention. Clause (a) of the said sub-section provides that no deduction will 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 termination of their services for any reason. The expression 'provision' has not been defined in the Act and is not used in any artificial sense but in its ordinary meaning. This is clear from the words 'whether called as such or by any other name' occurring in the sub-section. According to Webster, 'provision' in its ordinary sense, means 'something provided for future use'.
On a plain construction of Clause (a) of Sub-section (7) of Section 40A of the Act, what it means is that whatever is provided for future use by the assessee out of the gross profits of the year of account for payment of gratuity to employees on their retirement or on the termination of their services would not be allowed as deduction in the computation of profits and gains of the year of account. The provision of Clause (a) was made subject to Clause (b). The embargo is on deductions of amounts provided for future use in the year of account for meeting the ultimate liability to payment of gratuity. Clause (b)(i) excludes from the operation of Clause (a) contribution to an approved gratuity fund and amount provided for or set apart for payment of gratuity which would be payable during the year of account. . . .
[Emphasis supplied] (p. 600) Their Lordships of the Supreme Court have stated that the intention as set out in the notes on clauses was carried into effect by inserting Section 40A(7). We have supplied emphasis to a certain portion of the notes on clauses which states that the restriction would not apply in relation to a provision made for the purpose of payment of a sum by way of contribution towards an approved gratuity fund that has become payable during the relevant year. The Supreme Court, after setting out this portion of the notes on clauses, has categorically stated that the intention was carried into effect by inserting Section 40A(7) and that in interpreting the section, effect should be given to the intention. In a later portion in elucidating Clause (b)(i), it has been stated in the judgment that Clause (b)(i) excludes from the operation of Clause (a) contribution to an approved gratuity fund and amount provided for or set apart for payment of gratuity which would be payable during the year of account. On a reading of the observations of the Supreme Court, which we have set out, we consider that the Court has laid down that even a provision to be an admissible deduction should relate to a payment of gratuity which would be payable during the year of account. In view of this pronouncement by the Supreme Court, we would hold that on the facts the assessee is not entitled to the deduction claimed of Rs. 7,25,972.
8. In the result, the appeal is dismissed.