9911796707
TMI Blog2014 (4) TMI 248X X X X Extracts X X X X X X X X Extracts X X X X ..... if there be an actuarial valuation, the charging of the profit as by way of a provision made, no doubt, satisfies the requirement on the declaration of a dividend, but then, the actuarial valuation charged on the profits must find its place in the form of a creation of a separate fund identified for such purpose with systematic accumulation - The sum of money set apart to meet the scheme has to be there visibly without any probability further, either into the balance sheet entries/or the Profit and Loss account, to call it as a fund. The scheme is not a recognised one, but one reached as per the agreement between the parties - It is not denied by the assessee that a provision was made in the accounts as regards the gratuity payable based on the service weightage - Being a provision made for payment of gratuity to the employees on the retirement or termination of their employment, the claim stands clearly hit by Section 40A(7)(a) of the Income Tax Act. What was created was only a provision in the books of accounts, hence, not a fund or a contribution to a fund to be considered u/s 40A(9) of the Act - the only other provision, which would hit the claim of the assessee herein wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid to service weightage is neither a gratuity, nor a payment to any welfare fund and at best only a provision in the nature of a contingent liability and therefore to be disallowed? (iii) Whether on the facts and in the circumstances of the case, the Income Tax Tribunal was right in not considering Section 40(A)(9) while dealing with service weightage as it prohibits any payments towards setting up of any fund, or trust etc. Except for the purpose of recognised provident fund or approved gratuity fund or approved superannuation fund, or if required by any law? (iv) Whether on the facts and in the circumstances of the case, the Income Tax Tribunal was right in law in not considering Section 40A(10) which is an exception to Section 40A(9) in allowing the service weightage especially when the service weightage does not fall within the exemption categories of superannuation fund, gratuity fund or welfare fund? 2. The assessee herein is a company, which filed its return of income admitting a total income of Rs.6,82,96,470/-. The assessee claimed deduction on a provision made as by way of retirement benefit based on service weightage of the employee. It is seen from the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r a payment to any welfare fund. The Tribunal also failed to consider the applicability of Section 40A(9) of the Income Tax Act to the facts of the case herein. Consequently, the order suffers from serious illegality and hence, liable to be set aside. 5. Learned Standing Counsel appearing for the Revenue took us through the provisions of Section 40A(9), 43B(b) as well as to the definition of paid in Section 43(2) of the Income Tax Act and submitted that the assessee was having service weightage scheme even prior to this assessment year. Under the Scheme, on the eve of retirement, the employees would be given retirement benefits, calculated on the basis of last drawn salary and other relief for three days multiplied by the number of years of service put in, in the organisation. Evidently, the scheme is not one which falls for consideration under Section 36(1)(iv) or 36(1)(v) of the Income Tax Act. Section 40A of the Income Tax Act is a specific provision, which speaks about expenses or payment not deductible under certain circumstances. He submitted that under Section 40A(9), no deduction would be allowed in respect of any sum paid by the assessee, as an employer, towards the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company. The company follows mercantile system of accounting and going by Section 43(2) defining 'paid', the liability incurred amounts to 'paid'. Elaborating on the meaning of 'contribution', learned standing counsel appearing for the Revenue referred to P.Ramanatha Aiyar's Advanced Law Lexicon, 3rd Edition, Volume 1 as to the meaning of 'contribution' and submitted that the assessee had worked out its liability on actuarial basis and created a provision by charging the profits of a particular year. Going by the meaning 'contribution', any sum credited by an employer out of his own monies as by way of provision, would be contribution and as far as this case is concerned, the assessee had taken note of every individual employee's account and scientifically worked out its liability and took it to a collective account, viz., the provision made therein; hence, contributing to a common fund by charging the profit, thereby making a provision, would satisfy the second limb of Section 40A(9), i.e, on the aspect of a contribution by the employer. 8. Placing reliance on the decision reported in (2010) 323 ITR 166 (M/S Vijaya Bank Va. C.I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the accounts as not a fund created for a specific purpose. He pointed out that the purpose for which the provision was made, was on account of an agreement between the parties. When the assessee had thus consciously made a provision in its accounts for a particular purpose, the expression 'fund' is not to be read in a narrow sense. In other words, the provision is also a fund created for a particular purpose, namely, for payment to the employees at the time of retirement and the calculation itself is based on an actuarial basis. Hence, the making of a provision in the accounts would amount to contributing to a fund and hence hit by Section 40A(9) of the Income Tax Act. 11. Learned Standing Counsel appearing for the Revenue further submitted that even applying the decision reported in (1969) 73 ITR 53 (Metal Box Company of India Ltd. v. Their Workmen), the provision under Section 40A(9), inserted by Finance Act, 1984 with reference to 01.4.1980, would stare at the assessee for making any claim as deduction. He submitted that it is no doubt true that the assessee could make a provision in its accounts for meeting out a specific purpose; yet, for the purpose of sub-section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and a provision made there for, the claim was allowed. 14. Learned counsel appearing for the assessee thus submitted that in the light of the detailed consideration by the Tribunal, the claim of the Revenue is totally unsustainable. He also submitted that a provision made in the accounts cannot, however, be called as a fund, as had been contended by the Revenue, since the provision made was not credited to a separate account or to a fund to call it so for the purpose of attracting Section 40A(9). He submitted that the decision reported in (1996) 219 ITR 121 (Commissioner of Income Tax (Appeals) V. Duncan Brothers Co. Ltd.) does not, in any manner, assist the Revenue to support its claim based on Section 40A(9) of the Income Tax Act. On the other hand, the decision is in favour of the assessee only. Thus, when there is no contribution to a fund, the question of invoking Section 40A(9) does not arise. 15. Referring to the decision reported in (2012) 349 ITR 386 (SC) (Sandur Manganese and Iron Ores Ltd. V. Commissioner of Income Tax), he pointed out that the said provision was inserted as a measure for countering tax avoidance. He pointed out to the discussion of the Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability and nothing beyond. He refers to the Guidance Note on Terms Used in Financial Statements, particularly to the meaning given to 'fund', that there must be a specifically earmarked asset representing the service weightage scheme, payable to the employees. He brought to our attention the difference in the language in Section 40A(7) and 40A(9) of the Income Tax Act that under Section 40A(9) earmarking of the out goings to a particular fund is required to bring the case of the assessee under Section 40A(9). On facts thus found, the claim of the Revenue has to be rejected. 18. Replying to the said argument, learned Standing Counsel appearing for the Revenue pointed out to the introductory part of clause 5 in the Guidance Note on Terms Used in Financial Statements and submitted that the definition of the expression 'fund' as given in the guidance note, by itself, would not decide the scope of the expression. The admitted fact that the assessee had been charging the profits regularly on actuarial basis shows that the earmarking of the funds for that particular purpose is there, in any event, the amount payable by the assessee worked out on actuarial basis on serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t where any provision made by the assessee for the payment of gratuity to his employees on their retirement or termination of their employment for any reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity to any employee shall not be allowed as a deduction in computing the income of the assessee of the previous year in which the sum is so paid. (9) No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under clause (iv) or clause (iva) or clause (v) of sub-section (1) of section 36, or as required by or under any other law for the time being in force. Definitions of certain terms relevant to income from profits and gains of business or profession. 43. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usts are, therefore, intended to be used as a vehicle for tax avoidance by claiming deduction in respect of such contributions, which may even flow back to the employer in the form of deposits or investment in shares, etc. 16.2 With a view to discouraging creation of such trusts, funds, companies, association of persons, societies, etc. the Finance Act has provided that no deduction shall be allowed in the computation of taxable profits in respect of any sums paid by the assessee as an employer towards the setting up or formation of or as contribution to any fund,trust, company, association of persons, body of individuals, or society or any other institution for any purpose, except where such sum is paid or contributed (within the limits laid down under the relevant provisions) to a recognised provident fund or an approved gratuity fund or an approved superannuation fund or for the purposes of and to the extent required by or under any other law. 22. As is evident from the reading of the Section, the inserted provision bars deduction of any sum paid by an assessee as an employer towards the setting up or formation of, or contribution to, any fund, trust, company, association ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny purpose, except where such sum is paid for the purposes and to the extent provided by or by Clause (iv), (iva) or (v) of sub-section (1) of Section 36, or as required by or under any other law for the time being in force. 26. Keeping this provision in the background, we may have to look at the decision of the Supreme Court reported in (1969) 73 ITR 53 (Metal Box Company of India Ltd. v. Their Workmen) as well as the decision reported in (2000) 245 ITR 428 (Bharat Earth Movers V. Commissioner of Income Tax (Appeals)). 27. Although the decision reported in (1969) 73 ITR 53 (Metal Box Company of India Ltd. v. Their Workmen) was not directly under the Income Tax Act, yet, the decision for income tax purpose has its relevance - vide 123 ITR 716 (CIT V. Andhra Prabha P. Ltd.). The facts arising in the decision reported in (1969) 73 ITR 53 (Metal Box Company of India Ltd. v. Their Workmen) were that the company computed the bonus payable to its employees at 13.28% of the total wages paid to the employees by arriving at the gross profits after working out the deduction in accordance with Section 4 of the Payment of Bonus Act. The gross profit under Section 4 of the Payment of Bonu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r taxation, dividends. provident fund schemes, staff benefit schemes and other items for which a company is contingently liable are to be treated as current liabilities and, therefore, dubitable against the gross receipts. Schedule VI, Part 2, lays down the requirements of profit and loss account and el. 3 (ix) of it provides that a profit and loss account shall set out amongst other things the aggregate of amounts set aside or provisions made for meeting. specific liabilities, contingencies or commitments. But the contention was that though Schedule VI to the Companies Act may permit a provision for contingent liabilities, the Income-tax Act, 1961 does not, for under sec. 36(v) the only deduction from profits and gains permissible is of a sum paid by an assessee as an employer by way of his contribution towards an' approved gratuity fund created by him for the exclusive benefits of his employees under an irrevocable trust This argument is plainly incorrect because sec. 36 deals with expenditure deductible from out of the taxable income already assessed and not with deductions which are to be made while making the P L account. In our view, an estimated liability under gratuit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gent one. The liability is in praesenti though it will be discharged at a future date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain. 32. There, the assessee company created a fund by making a provision for meeting its liability arising on account of the accumulated earned/vacation leave. This was a part of the beneficial scheme floated by the company for its employees for encashment of leave. A sum of Rs.62,25,483/-, relating to the assessment year 1978-79, was set apart in a separate account as a provision for encashment of accrued leave and the same was claimed as deduction. The High Court held that the liability would arise only if an employee did not go on leave and instead, applied for encashment. The Supreme Court pointed out that subject to a ceiling, every employee would avail the leave or seek encashment. Therefore, the liability was a certainty, hence, it could not be called as a contingent liability. 33. Referring to the principles laid down in the decision reported in (1969) 73 ITR 53 (Metal Box Company of India Ltd. v. Their Workmen), the Supreme Court held that the provisions made by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rucial words on which much of the arguments were advanced before us for the purpose of deciding the issue are setting up or formation of, or as a contribution to, any fund, trust etc. and contribution for any purpose . Admittedly, the Scheme floated herein is not a one required by or under any law. Therefore, the case of the assessee would not fall for consideration under Section 36(1)(iv) or (iva) or (v) of the Income Tax Act. The definite case of the Revenue is that by making a provision in the accounts, there is a contribution to a fund and the provision itself is to be construed as 'fund'. Hence, Section 40A(9) of the Income Tax Act stands attracted. 35. For understanding the scope of the expression 'contribution', learned Standing Counsel appearing for the Revenue placed reliance on the meaning given to that expression as had been stated in P.Ramanatha Aiyar's Advanced Law Lexicon, 3rd Edition, Volume 1. The Law Lexicon referred to the meaning of the word 'contribution' as given under the Provident Funds Act (19 of 1925) and Employer's State Insurance Act (34 of 1948). The word 'contribution' is understood legally as referable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;fund' may mean actual cash resources of a particular kind (eg. money in a drawer or a bnk), or it may be a mere accountancy expression used to describe a particular category which a person uses in making up his accounts. R.K.Dalmia v. Delhi Administration AIR 1962 SC 1821, 1834. [I.P.C. (45 of 1860) S.405, Expln.1] Allchin v. Coulthard, (1942) 2 KB 228] Fund is a systematic accumulation of cash or any separation of assets to meet future tax liability. Only an accounting entry of an exact sum being earmarked for payment of tax liability arising at the end of the current accounting year is not a fund. Commissioner of Income Tax v. Duncan Brothers and Co. Ltd., (1996) 8 SCC 31, paras 13 and 14 37. In the decision reported in AIR 1962 SC 1821 (R.K.Dalmia and others V. The Delhi Administration), the Supreme Court dealt with the expression 'fund' and referred to the decision reported in (1942) 2 KB 228 (Allchin v. Coulthard). The decision of the Supreme Court arose in a criminal matter under Section 409 of the Indian Penal Code that the accused, as a Chairman of the Board of Directors and of the Principal Officer of the company, entrusted with the dominion over the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appropriation of fund of the company in the current account of the company with a bank. The Supreme Court held that the 'funds' referred to in the charge amounted to 'property', within the meaning of Section 405 of the Indian Penal Code. Thus the discussion in the decision on the term 'funds' is about, it being money as equivalent to property and hence does not directly relate to the interpretation or understanding of the meaning of the expression 'funds'. 'Fund' in the context of Section 40A(9) of the Income Tax Act refers to money set apart for the specific purpose, the contribution to which may be either by cash remittance or by account entry transfer or a provision made therefor. Thus, as pointed out in the decision reported in (2003) 1 ALL ER 1168 (Myers v. Design Inc.(International) Ltd.), the word 'fund' is not a term of art and (like so many other words) is capable of a variety of meanings depending on the context in which it is used. Thus the Supreme Court decision reported in AIR 1962 SC 1821 (R.K.Dalmia and others V. The Delhi Administration) is not of any assistance to the Revenue in the matter of understanding the express ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly an accounting entry of an exact sum being earmarked for payment of tax liability arising at the end of the current accounting year. Such a provision cannot be considered as a fund. The Supreme Court further pointed out that the term 'fund' must be applied to any sum of money available to the company including a provision for taxation. 42. Referring to the Board's Circular No.I.P.(XV-5) of 1968 dated January 23, 1968, the Supreme Court observed that a sum of money set apart to meet unforeseen risks was considered as a 'fund'. The provision for taxation of the kind in question was not a fund either etymologically or in accounting parlance. It observed that a specific provision for an ascertained liability was not a fund within the meaning of that term in the rules in question. The Supreme Court held that such a provision for taxation could not be compared to a fund of the kind referred to in the circular. 43. The substance of the decision is that in order to be a fund, apart from systematic accumulation of cash, there must be an identified earmarked head, which would represent the liability that the company has to meet and that a mere provision made in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t go into the Guidance Note on Terms Used in Financial Statements as to the meaning of 'fund' under Clause 6.15, which defines it as an account usually of the nature of a reserve or a provision which is represented by specifically earmarked assets. 47. As rightly pointed out by the learned counsel appearing for the assessee, even if there be an actuarial valuation, the charging of the profit as by way of a provision made, no doubt, satisfies the requirement on the declaration of a dividend, but then, the actuarial valuation charged on the profits must find its place in the form of a creation of a separate fund identified for such purpose with systematic accumulation thereon. The sum of money set apart to meet the scheme has to be there visibly without any probability further, either into the balance sheet entries/or the Profit and Loss account, to call it as a fund. 48. In the context of the decision of the Supreme Court reported in (1996) 219 ITR 121 (Commissioner of Income Tax (Appeals) V. Duncan Brothers Co. Ltd.), we hold that a mere provision made in the accounts, per se, cannot be equated to the creation of fund, the fact that every year there is a systematic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lhi High Court reported in 334 ITR 341 (Commissioner of Income- tax v. Ranbaxy Laboratories Ltd.), (2010) 320 ITR 322 (Commissioner of Income-tax-IV, New Delhi, Vs. Insilco Limited). 54. The decision reported in (2010) 320 ITR 322 (Commissioner of Income-tax-IV, New Delhi, Vs. Insilco Limited) was a case relating to a provision for long service award based on an actuarial calculation. The Delhi High Court considered that the claim of the assessee was admissible in the light of Circular No.47 dated 21st September, 1970 (78 ITR Statute 13). The Delhi High Court referred to the decision reported in (2000) 245 ITR 428 (Bharat Earth Movers V. Commissioner of Income Tax (Appeals)) as well as the decision reported in (1969) 73 ITR 53 (Metal Box Company of India Ltd. v. Their Workmen) and upheld the claim of the assessee. The High Court allowed the claim holding that the provision for a liability is amenable to deduction if there is an element of certainty that it shall be incurred and it is possible to estimate the liability with reasonable certainty even though the actual quantification may not be possible. 55. A reading of the judgment of the Delhi High Court shows that the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lhi High Court in this regard. 58. Short of repetition, we may extract the provisions under Section 40A(7) of the Income Tax Act , which reads as under: 40A. ...... (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 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. Explanation. For the removal of doubts, it is hereby declared that where any provision made by the assessee for the payment of gratuity to his employees on their retirement or termination of their employment for any reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity to any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expression 'gratuity' is concerned, there is no definition of what 'gratuity' is, even under the Payment of Gratuity Act; yet, a monetary relief to an employee at the time of his retirement or termination of service is treated as 'gratuity'. Section 4 of the Payment of Gratuity Act enjoins on the employer to pay gratuity to an employee on the termination of his employment after he has rendered continuous service for not less than 5 years on the employee attaining superannuation or retirement or resignation or on his death or disablement or due to accident or disease. The payment of gratuity itself is calculated based on the number of years of service put in by the employee, calculated at the rate of 15 days wages based on the rate of wages last drawn by the employee concerned. 62. A reading of the provisions of the Payment of Gratuity Act shows that it is a complete code containing detailed provisions covering all the essential features of a scheme for payment of gratuity. In the decision reported in (2004) 1 SCC 755 = AIR 2004 SC 1426 (Ahmedabad Pvt. Primary Teachers' Assn. V. Administrative Officer), the Supreme Court held that gratuity in its e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her a gratuity, nor a payment to any welfare fund and at best only a provision in the nature of a contingent liability and therefore to be disallowed? In the background of the ground thus raised, learned counsel appearing for the assessee submitted that it is not open to the Revenue to contend otherwise to somehow bring the case of the assessee under one of the clauses under Section 40A of the Income Tax Act. Thus, learned counsel submitted that it is not open to the Revenue to go against what had been raised as a question in the grounds of appeal before this Court. 65. It is no doubt true that the Revenue had contended in the grounds of appeal that it was neither a gratuity nor a payment made to any welfare fund and would constitute only a provision and that the focus throughout was only on Section 40A(9). Section 260A of the Income Tax Act deals with the appeal to the High Court. Sub-section(6) to Section 260A states that the High Court may determine any issue which has not been determined by the Appellate Tribunal or has been wrongly determined by the Appellate Tribunal, by reason of a decision on such question of law as is referred to in sub-section (1) of Section 260A. Sub- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 260A(4). This power is subject, however, to two conditions, (one) the court must be satisfied that appeal involves such questions, and (two) the court has to record reasons therefor. 68. In the light of the provisions under Section 260A of the Income Tax Act on the extent of jurisdiction of this Court to decide the question of law arising on the facts stated, we hold that what was created was admittedly only a provision in the books of accounts, hence, not a fund or a contribution to a fund to be considered under Section 40A(9) of the Income Tax Act; the only other provision, which would hit the claim of the assessee herein would be Section 40A(7) of the Income Tax Act. Thus, going by Section 40A(7) of the Income Tax Act, on the facts admitted, we hold that the assessee's claim for deduction is hit by Section 40A(7) of the Income Tax Act. The provision had been in the statute book with effect from 01.04.1973, inserted by Finance Act 1975, subsequently substituted by Finance Act, 1999, with effect from 1.4.2000. The provision as is relevant to the assessment year under consideration is one what prevailed prior to the substitution by Finance Act, 1999, effective from 1.4 ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
