Income Tax Appellate Tribunal - Bangalore
Inspecting Assistant Commissioner vs Motor Industries Co. Ltd. on 28 March, 1995
Equivalent citations: [1996]57ITD450(BANG)
ORDER
S. Bandyopadhyay, Accountant Member
1. In this appeal filed by the Department against the order of the CIT(A), a number of grounds touching different issues have been taken up. The assessment year concerned is 1978-79 for which the previous year was calendar year 1977.
2. Ground Nos. 1 and 27 being of general nature are not being considered separately.
3. Ground Nos. 2 to 5 relate to the question of allowance of the claim for gratuity. The amounts disputed before us are as follow :
(i) Additional liability for gratuity in respect of the year 1977 as a result of actuarial valuation Rs. 32,66,475
(ii) Provision for gratuity for 1976 based on actuarial valuation made in the accounts for 1976 disallowed in assessment year 1977-78 now claimed (paid over to the MICO Gratuity Trust during 1977) Rs. 18,34,913
(iii) Provision for gratuity for prior years based on actuarial valuation made in the accounts for 1971 disallowed in the assessment for assess-
ment year 1972-73 and upheld in appeal now claimed (paid over to MICO Trust during 1977) Rs. 14,84,649 3(a). It is required to be mentioned in this connection that there was further claim of the assessee towards premium paid to Life Insurance Corporation of India for 1977 under the Group Gratuity Life Insurance Scheme of Rs. 20,99,141 which was allowed by the AO himself. There was also another claim in respect of Rs. 1,05,89,439. This claim was not allowed either by the AO or even by the first appellate authority and the Tribunal also, in the assessee's appeal for this year.
3(b). Regarding the claim of the first item as above, the AO discussed in the assessment order that for assessment year 1977-78, the assessee itself had disallowed in the adjustment stage a sum relating to the year 1976 of Rs. 31,48,082. It is to be mentioned that out of this amount, a sum of Rs. 13,13,169 was ultimately allowed by the appellate authorities including the Tribunal and the balance of Rs. 18,34,913 was claimed afresh in the year under present consideration by way of second amount as shown above. The AO furthermore discussed that in the past, since the creation of the Trust on 24-12-1975, approved by the CIT on 28-1 -1976, it had been the practice of the assessee to make claims of premium paid to LIC under the Group Gratuity Life Insurance Scheme and also of payments made by the assessee through the Gratuity Trust to its employees who left during the year towards shortfall in settlement by LIC of India. He, therefore, opined that there was no warrant for change in the method of accounting adopted by the assessee. On that ground, he disallowed the claim of this amount of additional liability to the extent of Rs. 32,66,475.
3(c). The first appellate authority referred to the allowance of the amount of Rs. 13,13,169 by the appellate authorities in the earlier year. By quoting the decision of the Madras High Court in the case of CIT v. Madras Rubber Factory Ltd. [1984] 16 Taxman 198 in which it had been held that the liability provided in the books on actuarial basis is in an allowable deduction under Section 40A(7) of the Act, he held that the amount should be allowed as a deduction.
3(d). The learned departmental representative has referred to the decision of the Supreme Court in the case of Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 in this regard. He has also relied upon the decision of the Madras High Court in the case of Tuttapullum Estates v. CIT[1991] 191 ITR 131 and the Calcutta High Court decision in CIT v. Peico Electronics & Electricals Ltd. in support of his claim that the amount, being the liability for the year under consideration, is not allowable in terms of the provisions of Section 40A(7)(b)(r).
3(e). Learned counsel for the assessee, Shri S.E. Dastur has, on the other hand, filed before us the calculation of total liability towards gratuity arising during the year under consideration as per the actuarial valuation. He contends that the total liability in this regard is Rs. 53,65,616 out of which Rs. 20,99,141 has been allowed by the AO himself by way of premium paid to LIC under the Group Gratuity Life Insurance Scheme. He, therefore, claimed that the balance amount of Rs. 32,66,475 also forming the liability for this year should be allowed.
3(f). On a careful reading of the decision of the Supreme Court in the case of Shree Sajjan Mills Ltd. (supra), we find that the following propositions have been laid down therein :
(i) 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 is to be considered as 'provision made by the assessee' and the expression 'need not be' restricted to its usage in the artificial sense, viz., of setting apart specifically an amount by the assessee for meeting the liability for gratuity in the account books. This means that if the liability towards gratuity arises during the previous year under consideration and if the said liability be not expended out during the year, the amount under consideration will have to be considered as provision for gratuity.
(ii) The allowability of such a provision will have to be determined strictly in accordance with the conditions laid down in Section 40A(7) and no other provisions of the Income-tax Act shall apply to allowability of such a provision on account of the non obstante expression used in Section 40A(1).
(iii) Although payment of gratuity is made on retirement or termination of service, etc., for the services 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 accrues to the employees on their retirement or termination of their services and the liability to pay gratuity becomes an accrued liability of the assessee, only when the employees retire or their services are terminated. Until then, the right to receive gratuity is a contingent right and the liability to pay gratuity continues to be a contingent liability and the contingent liabilities cannot be deducted even under the mercantile system of accounting.
3(g). If we look at the matter from the above-mentioned findings of the Supreme Court, we are bound to hold that the amount under consideration representing the additional liability (over and above the premium paid to LIC under Group Gratuity Life Insurance Scheme) is nothing but a provision created in the account of the assessee in this year inasmuch as the amount was not expended in this year. The allowability of this provision, therefore, depends on the fulfilment of the conditions in Sub-Clause (i) of Clause (b) of Sub-section (7) of Section 40A, which reads as below :
40A(7)(b)(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 ;
The learned Counsel for the assessee strongly contended that the amount actually represents the liability of the assessee-company for being contributed to the approved gratuity fund maintained by the assessee-company. In support of this claim, he placed on our record, the detailed calculation of the gratuity liability, a reference to which has already been made. According to this calculation, the total monthly wages in respect of 9103 employees of the assessee for the year under consideration was Rs. 63,39,714. The total amount of gratuity liability according to actuarial valuation was, on the other hand, arrived at Rs. 53,65,615. Shri Dastur, learned Counsel for the assessee, contended that this amount falls well within the limit of 8-1/3% of the total wages payable to the employees as per Rule 103 and the said limit has not been exceeded. He relied on the following decisions in support of his claim that even though the limit as above was exceeded, there cannot be any disallowance of the amount to be contributed to the gratuity fund as long as the fund remains approved by the CIT:
(i) CIT v. Eastern Equipment & Sales Ltd. [1993] 201 ITR 858 (Cal.)
(ii) CIT v. Super Spinning Mills Ltd. [1987] 166 ITR 518 at page 524 (AP) (According to this decision, for the purpose of computing contribution to be made to the gratuity fund at the rate of 8-1/3% of the salary, the salary should include dearness allowance).
(iii) Super Spinning Mills Ltd. v. ITO [1984] 19 TTJ (Mad.) 588, ITAT Madras 'B' Bench.
(iv) CIT v. Triplicane Permanent Fund Ltd. [1989] 179 ITR 492 (Mad.).
3(h). We find that the case of Tuttapullum Estates (supra) has relied upon by the learned Departmental Representative is one relating to the transitional period comprising assessment year 1973-74 to which the provisions of Section 40A(7)(b)(ii) applied, with which we are not at all concerned with regard to the present issue. We are, however, concerned with the provisions of Section 40A(7)(b)(i) only. The Calcutta High Court held in the case of Peico Electronics &Electricals Ltd. (supra), that liability actuarially valued for the year 1976 was not allowable in terms of the judgment of the Supreme Court in the case of Shree Sajjan Mills Ltd. (supra) meaning thereby that the conditions as laid down in Sub-Clause (i) of Section 40A(7)(b) were not satisfied.
3(i). In the instant case, however, we have seen as above that the amount claimed by the assessee and as allowed by the CIT(A) is surely of the nature of a provision by way of liability towards gratuity for the year under consideration. The learned Counsel for the assessee has also contended that the provision was made for the purpose of payment of the amount by way of contribution towards an approved gratuity fund. This particular contention, however, does not seem to have been verified by the lower authorities. If the provision is made for making contribution to the approved gratuity fund, the corollary thereof would be that the entire amount would actually be paid to the approved gratuity fund in the near future. We, therefore, remit the matter back to the records of the AO for the purpose of verifying whether the entire amount under consideration was actually contributed to the approved gratuity fund of the assessee either in the immediately succeeding year or in the year next to that. If the facts be found to be so, then it has got to be held that the conditions of Sub-Clause (i) of Section 40A(7)(b) are satisfied in this case and in that event, deletion of the disallowance as made by the CIT(A) shall stand upheld by us. Otherwise, however, if the provision be found to be carried on in the account indefinitely without contributing the same to the approved gratuity fund, the disallowance as made in the assessment order or to the extent to which any portion of such provision be not contributed to the approved gratuity fund in the near future shall be restored as disallowed.
4. So far as the other two amounts at para 3(ii) and (iii) above, being Rs. 18,34,913 and Rs. 14,84,649 are concerned, the undisputed facts are that the amounts were contributed to the approved gratuity fund of the assessee in this year. The AO made the disallowance of these two amounts in the assessment order simply on the ground that the liability in respect of these two amounts cannot be considered to have arisen in the year 1977 corresponding to assessment year 1978-79. The CIT(A), on the other hand, held that the actual payments made by the assessee to the gratuity trust on the basis of the actuarial valuation during the previous year, viz., the calendar year 1977 is to be allowed as a deduction. Accordingly, he allowed both the amounts. The learned departmental representative has strongly objected to this allowance by arguing that the question of allowability of gratuity liability is solely guided by the provisions of Section 40A(7) as decided by the Supreme Court in the case of Shree Sajjan Mills Ltd. (supra). He also relies on the two decisions of Kerala High Court in the case of CIT v. Travancore Cement Ltd. [1990] 184 ITR 319 and CIT v. N. Radha Bai [1989] 180 ITR 429 in support of his claim. The learned Counsel for the assessee, on the other hand, strongly argues that the case of Shree Sajjan Mills Ltd. (supra) was one where no recognised gratuity fund was created. According to him, therefore, the Supreme Court did not have any scope of examining the applicability of the provisions of Section 36(1)(v) vis-a- vis Section 40A(7). According to Shri Dastur, these two provisions are completely independent of each other and relate to two different matters - whereas Section 40A(7) relates to provision for the gratuity made in the books of the assessee, Section 36(1)(v) relates to actual payment of any sum by way of contribution towards an approved gratuity fund. On an examination of both the sections of the Act minutely, we are inclined to be in agreement with the contention of Shri Dastur. Section 36(1)(v) provides for deduction of the following amount in computing the income of an assessee referred to in Section 28 :
36(1)(v) any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust;
According to us also, therefore, this particular clause relates to the case of actual contribution being made by an assessee towards an approved gratuity fund created under an irrevocable trust. This has got nothing to do with the question of allowability of a provision for gratuity which necessarily means an unspent liability. Section 36(1)(v), however, speaks of an expenditure actually incurred during the year by way of contribution having already been credited to the approved gratuity fund. The facts of the instant case correspond to the requirement of this particular clause inasmuch as the assessee is found to have made actual contributions to its approved gratuity fund created by it for exclusive benefit of its employees under an irrevocable trust. In this connection, we would like to examine some of the citations relied upon by the learned Counsel for the assessee on this issue.
4(a). In the case of ITO v. Hoechst Pharmaceuticals Ltd. [1984] 7 ITD 267, it was held by the ITAT, Bombay Bench 'C' that inasmuch as the assessee in that case made payment towards an approved gratuity fund, the amount paid was, therefore, admissible under Section 36(1)(v) without any further reference to Section 40A(7).
4(b). In the case of Mysore Tobacco Co. Ltd. v. CIT [1978] 115 ITR 698 (Kar.), no trust or fund was created earlier and no provision was made for liability and no provision was furthermore claimed as allowable deduction in earlier years. Amounts actually paid out in each year used to be claimed and allowed as deduction. The assessee made actuarial valuation of its total gratuity liability as on 31-3-1971 and claimed the same as deduction in assessment year 1971-72. The ITO allowed only the difference between actuarial valuations as on 31-3-1970 and 31-3-1971. The Karnataka High Court held in that case that an expenditure which could be claimed as a deduction in any assessment year should have been incurred in the relevant accounting year. Therefore, if the expenditure of an earlier year is taken into account in a later year the true profits of the later year, cannot be determined and the result would be lopsided and unreal. With regard to this particular decision of the Karnataka High Court, we agree with the arguments of Shri Dastur that in the instant case, the amounts have simply not been claimed on the basis of liabilities accruing in the year. The said liabilities might have accrued in the earlier years but the claim has been made by the ITO on the ground of actual contributions to the approved gratuity fund having been made in this year and in terms of the provisions of Section 36(1)(v). In this connection, we would like to rely on the finding of the Supreme Court in the case of Shree Sajjan Mills Ltd. (supra) as discussed by us above. In that case, the Supreme Court clearly held that the liabilities towards gratuity become an accrued liability only when the employees retire or their services are terminated and till then they remain contingent liability only. In the instant case also, therefore, although the liabilities might have originally been claimed as accrued liabilities in the year 1976, or 1971, since the liabilities did not become payable either to the employees themselves or to the gratuity fund in those years, the liabilities were merely of the nature of contingent liabilities in those years. In the year under present consideration only, the liabilities become accrued liabilities by virtue of the actual contributions of the amounts having been made to the approved gratuity fund.
4(c). In the case of CIT v. Smith, Kline & French (India) Ltd. [1991] 191 ITR 308 also, the Karnataka High Court held that initial contribution made to the fund after obtaining approval is deductible in accordance with the provisions of Section 36(1)(v). In the instant case also, the gratuity fund created by the assessee had not obtained approval of the CIT till 28-1-1976. The actual contributions made to the said fund, after obtaining the approval even in respect of past years, must therefore be considered to be liabilities accruing in the current year and have got to be allowed in terms of the provision of Section 36(1)(v).
4(d). The two Kerala decisions as relied upon by the learned departmental representative seem to be based on the understanding that the payments under Section 36(1)(v) were parts of the liabilities as per actuarial valuation claimed by the assessee. In any case, even if the Kerala High Court might have held in those cases that no other allowance of liability towards gratuity is deductible except what is provided in Section 40A(7), we respectfully differ with such decision. On the other hand, we hold that Section 40A(7) merely deals with provisions towards gratuity and the question of allowability of provision alone comes within the ambit of such section. At the same time, we clearly hold that so far as actual contributions to approved gratuity fund during an year is concerned, firstly, the liability in respect of the amount concerned has got to have arisen in the year of contribution itself in accordance with the abovementioned decision of the Supreme Court in the case of Shree Sajjan Mills Ltd. (supra) and, secondly, such liability has got to be allowed in terms of the provisions of Section 36(1)(v) unless it can be shown that the contribution is made out of a provision already created in earlier year and also allowed in the income-tax assessment for that year. This is certainly not the case. Ultimately, therefore, after taking into consideration the facts of the case, we are finally of the view that the CIT(A) has been right in allowing the two amounts of Rs. 18,34,913 and also Rs. 14,84,649 on the basis of actual contributions of the amounts to the approved gratuity fund. We approve of his action.
5. to 15. [These paras are not reproduced here as they involved minor issues.]