Karnataka High Court
Commissioner Of Income-Tax vs Smith, Kline And French (India) Ltd. on 11 February, 1991
Equivalent citations: 1991(1)KARLJ374
JUDGMENT K. Shivashankar Bhat, J.
1. The question referred to us under the provisions of the Income-tax Act, 1961, reads thus :
"Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in allowing Rs. 1,36,261 also as deduction for the assessment year 1977-78 being the contribution made to an approved gratuity fund even though the employees were admitted to the fund in the years relevant to earlier assessment years ?"
2. Earlier, during the assessment year 1973-74, the assessee had claimed deduction towards estimated gratuity liability, but this was not allowed. At that time, there was no fund established by the assessee. In October, 1975, the assessee created a trust and established a fund towards its gratuity liability with effect from October 1, 1975. The fund required approval. This approval was granted during the assessment year in question with retrospective effect. The assessee thereafter contributed to this fund as part of the initial fund. The Income-tax Officer disallowed this on the ground that a similar claim made by the assessee in the year 1973-74 had been disallowed and it is not open to the assessee to claim the same once again. According to the Revenue, the initial fund contributed is practically related to the past years and the same cannot be claimed under the Act as a deduction.
3. The assessee's claim was upheld by the Appellate Tribunal as also earlier by the Commissioner of Income-tax (Appeals).
4. The claim of the assessee is under section 36(1)(v) of the Act. The Tribunal noted that the gratuity fund was approved only on January 3, 1976, and a proper contribution could be made only after the approval. Further, the Tribunal also referred to the fact that the initial contribution may be made in not more than five annual instalments.
5. It was contended by learned counsel for the Revenue that the liability towards gratuity is only a contingent liability. The contribution made by the assessee which had been disallowed in the instant case is referable to the past services of the employees and, in these circumstances, the same cannot be deducted. Learned counsel referred to the decision of this court in Mysore Tobacco Co. Ltd. v. CIT [1978] 115 ITR 698. This decision will not be of any use to the Revenue in the instant case because it was not a case of contribution to an approved fund.
6. In Shree Sajjan Mills Ltd. v. CIT the law governing the subject in question has been summarised at page 599. This was referred to by Mr. Chanderkumar to contend that the present claim is not based on any actuarial basis and would not fall within the permitted category of deductions. The Supreme Court was not concerned with the provisions of section 40A(7) which were inserted in the Act in the year 1973. However, the Supreme Court has pointed out that an estimated liability under a gratuity scheme, even if it amounted to a contingent liability, if properly ascertainable and its present value was fairly discovered, was deductible, Mr. Chanderkumar is right that the said principle is not applicable here. But, at the same time, it will have to be noted that the instant case is covered by section 40A(7)(b) of the Act. By virtue of this provision, the bar against deduction is taken away, if the contribution is towards an approved gratuity fund. Under section 36(1)(v), it is clear that any contribution towards an approved gratuity fund as stated therein is deductible. If the assessee establishes a fund by creating a trust, the benefit of the contribution will be available only if it is approved for which purpose appropriate rules have been framed under the Act.
7. Rule 103 refers to the annual contribution to the made to the fund which is approved by the Commissioner. The basis of the contribution will have to be approved by the Commissioner. Rule 104 governs the initial contribution. It specifically imposes a limitation about the quantum that can be contributed. The maximum initial contribution shall not exceed 8.33% of the employee's salary in respect of the past services. Therefore, the limitation for the initial contribution is fixed statutorily. In the instant case, it is nobody's case that the assessee has contravened any provisions of rules 103 and 104.
8. The initial contribution has to be necessarily relatable to the past services of an employee, and subject to the ceiling imposed by the rule, the employer may choose his own figure, having regard to his circumstances for contribution. An assessee cannot, in anticipation of an approval to the fund, make the contribution because approval to the fund depends upon factors beyond his control to some extent. It is left to the Commissioner either to approve or reject the same. The claim for deduction will have to be necessarily towards the contribution made to the said approved fund.
9. The Board's Circular in this regard permits the contribution of initial fund in five annual instalments. This is referred to in the third edition of Income-tax Law by Chaturvedi page 1213. The Tribunal also refers to the availability of five instalments. Therefore, even if the fund was established with effect from October 1, 1975, the contribution made thereto as initial contribution after the approval was obtained cannot be held as outside the purview of rule 104; it will be a valid contribution.
10. In Triplicane Permanent Fund Ltd. v. CIT [1989] 179 ITR 492, the Madras High Court held that any contribution to the approved fund is deductible and in case the statutory requirements are contravened, it is for the authority concerned to take action and it would not affect the contribution towards the approved fund as such. In the instant case, there is no necessity to go into this question because it is not the case of the Revenue that this contribution was outside the purview of the statutory Rules.
11. The sole contention of the Revenue is based on the fact that a claim to deduction of a similar sum was negative during the earlier year. This is entirely irrelevant. So long as the contribution satisfies the statutory requirements as a contribution to the approved fund, the assessee is entitled to the deduction and the Tribunal was justified in upholding the claim of the assessee in this regard.
12. Therefore, our answer to the question referred is in the affirmative and against the Revenue.