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TMI Blog2014 (5) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... ether the Tribunal was justified in holding that the assessee was entitled to deduction u/s 40A(7) of the I.T.Act in respect of provision for gratuity pertained to earlier years but was provided in the accounts in the year relevant to assessment year 1973-74." Questions in DB ITR No.8/2003:- "(1)Whether on the facts and circumstances of the case the Tribunal was justified in holding that the AAC was competent to decide the appeal of the assessee against the original order of assessment dated 11.3.1974, even though the same has been set aside under Sec. 263 of the I.T. Act, 1961 for making the fresh assessment ? (2)Whether on the facts and the circumstances of the case the Tribunal was justified in holding that the assessee was entitled to deduction under section 40A(7) of the Act in respect of the provisions for granting liability amounting to Rs.35,40,328/- which pertains to earlier years was provided in the accounts in the relevant years ? (3)Whether on the facts and the circumstances of the case the Tribunal was justified in holding that the assessee was entitled to deduction under Section 40A(7) of the I.T. Act 1961 in respect of the full amount of provision for gratuity li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relatable to earlier years and thus not allowable. 4. Aggrieved by the said dis-allowance, an appeal came to be preferred before the Appellate Assistant Commissioner where the assessee challenged the order whereby the said amount of Rs.35,41,993/- was disallowed. The Appellate Assistant Commissioner passed order on 26/04/1978 which will be adverted a little later. 5. The Commissioner of Income Tax-2, Jaipur, in the meanwhile, by invoking provisions of Sec. 263 at his command vide order dt. 19/02/1975, after analyzing the facts and circumstances, set aside the order of the AO passed on 11/03/1974 after holding the same to be erroneous insofar as it was prejudicial to the interest of the revenue and directed for making a fresh assessment. 6. The assessee aggrieved by the said order filed an appeal before the Tribunal challenging the order u/s 263 of the Act. The Tribunal vide order dt. 16/10/1976 in ITA No.73/JP/75-76 sustained the order passed by the Commissioner u/s 263 of the Act. 7. The AO initiated proceedings again u/s 143(3) in the light of the order of the Commissioner u/s 263 dt. 19/02/1975 wherein he allowed a deduction of Rs.11,48,810/- only u/s 40A(7) by coming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave made a provision and accordingly upheld the order passed by the Appellate Assistant Commissioner where he allowed the claim of Rs.Rs.48,17,760/-. 12. An order came to be passed by the Commissioner of Income Tax (Appeals) dt. 28/03/1980 for this very assessment year 1973-74 where the assessee challenged the disallowance of Rs.1,28,622/- and according to the assessee, while he was entitled to a claim of Rs.12,77,432/- but the AO allowed only an amount of Rs.11,48,810/-. By this order, the Commissioner (Appeals) further allowed the balance amount of Rs.1,28,622/-. The revenue carried the matter in further appeal before the Tribunal with reference to the aforesaid amount of Rs.1,28,622/-, however, the Tribunal vide order dt.21/05/1981 dismissed the appeal of the revenue and upheld the order of the Commissioner (Appeals). 13. Thus, on an application moved by the revenue, the Tribunal has referred different questions of law to be answered by this Court and the controversy as aforesaid revolves solely on the amount of Rs.48,17,760/-. 14. Counsel for the revenue contended that in the appeal preferred by the assessee u/s 263 of the Act before the Tribunal, the Tribunal passed an orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he came to allow. He further contended that in the order dt.29/09/1979, though the Tribunal affirmed the order of the CIT(A) who had deleted the entire addition of Rs.48,17,760/- without looking into the facts that the issue before the Commissioner was only to the extent of Rs.35,41,993/- but the Tribunal also went on to consider the entire amount of Rs.48,17,760/-. He further contended that the Appellate Assistant Commissioner, while passing order on 26/04/1978, had no occasion to sit over the order of the Commissioner u/s 263 a higher authority as also the Tribunal who had passed order by then sustaining order u/s 263. He further contended that the Appellate Assistant Commissioner, being a subordinate authority to the Commissioner u/s 263 of the Act, ought to have followed the directions of the Commissioner u/s 263. He further contended that the Tribunal not only in the order dt. 29/09/1979 allowed the entire amount of Rs.48,17,760 but also allowed the balance amount which was not even allowable under the provisions of the Gratuity Act, 1972 in order dt. 21/05/1981 so also the later order dt.06/01/1986. He further contended that though the Gratuity, actually relating/pertaining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 263, then the order was fair and reasonable. Counsel for the assessee further contended that the Tribunal, in all the three orders, has repeatedly held in favour of the assessee after recording finding of fact on merits. He also relied upon judgments rendered in the case of Metal Box Company of India Ltd. Vs. Their Workmen; (1969) 73 ITR 53 (SC); Shree Sajjan Mills Ltd. Vs. CIT & Anr. (1985) 156 ITR 585 (SC); CIT Vs. Kelvinator of India Ltd. (1994) 210 ITR 933 (Del); CIT Vs. Sri Krishna Tiles and Poteries Madras (P) Ltd.; (2000) 243 ITR 870 (Mad.). 19. Counsel for the assessee further submitted that a circular has been issued by the Central Board of Direct Taxes dt. 21/09/1970, bearing Circular No.47, reported in (1978) ITR (ST) 13 which clarified certain doubts. 20. We have considered the arguments advanced by ld. counsel for the parties and perused the impugned orders as also the judgments cited at the bar. 21. As has been stated herein above, the assessee is a limited company. By virtue of the Gratuity Act of 1972, gratuity was deductible in three cases (i) where it is paid or has become payable during the accounting year; (ii) where a contribution is made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entitled to deduction of full amount of Rs.48,17,760/-. The Income-tax Officer is hereby directed to allow the relief to the appellant accordingly." 24. The Tribunal by order dt. 29/09/1979 dismissed the departmental appeal by observing that the assessee was perfectly justified in claiming the deduction to the extent of Rs.48,17,760/- The Tribunal was satisfied that the assessee has complied with all the terms and conditions laid down u/s 40A(7) of the IT Act. 25. In the light of the above factual backdrop, the issue boils down to the claim of the assessee to the extent of Rs.48,17,760/- 26. We will advert to the question No.2 in DB Income Tax Reference No.24/1986. 27. While introducing Section 40A(7) by the Finance Act, 1975, an explanatory provision came to be issued which reads as under:- "28. With a view to mitigating hardship in cases where the provisions have been made by the assessees in their accounts for the previous years relevant to the assessment years 1973-74 to 1975-76 on the basis of their understanding of the law and the clarification given by the Board in 1970, the new section 40A(7) has made a savings provision. Under this provision the prohibition reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts and the explanatory note and on perusal of the facts on record, it is a finding of fact that a report came to be issued by Sh. PK Ghosh, M.Sc., Fellow of the Institute of the Actuaries, Calcutta dt. 13th May, 1972 and subsequent report dt. 1st June, 1973 in which he opined that "the liability for gratuity in respect of the employees of the said company as on 31st December, 1972 was Rs.51,18,074/-" and further observed that "the assessee company is entitled to relief of an amount of Rs.48,19,425/-". Thus, the assessee claimed the said amount on actuarial basis. In terms of provisions of Sec. 40A(7) a trust deed came to be executed on 24th December, 1975 which was duly registered with the District Registration Officer, Pali. The assessee also moved an application before the Commissioner of Income Tax for granting approval of the gratuity fund and the Commissioner granted approval on 30th March, 1976 but made it effective from 29/12/1975. It is also an admitted fact by the Appellate Assistant Commissioner/Commissioner of Income Tax (Appeals) so also the Tribunal that the assessee deposited the entire amount based on actuarial valuation in the trust fund on or before 31st Mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee had not created any provision and the conditions were not challenged and therefore, the Apex Court dismissed the appeal of the assessee by observing that if the claim is required to be made u/s 40A(7) and the amount is required to be deducted, it must fulfill the conditions laid down u/s 40A(7) and the deduction could not be allowed on general principles under any other section of the Act. 32. The Delhi High Court, in the case of CIT Vs. Kelvinator of India Ltd.: (1994) 210 ITR 933 (Del), came to the conclusion that when a Gratuity Act is introduced for the first time, the gratuity payable to the existing employees, who have already rendered some years of service and are still in service, shall have to be considered to make a provision because the gratuity payable depends on the entire length of service of an employee. 33. The Hon'ble Apex Court, in the case of Metal Box Company of India Ltd. vs. Their Workmen (1969) 73 ITR 53 (SC), held that it is legitimate for a company keeping accounts on the mercantile basis to estimate its liability under a gratuity scheme for its employees on an actuarial valuation and deduct such estimated liability from gross profits in the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company would, therefore, become liable to pay gratuity to its employees for their past services rendered in accordance with the provisions of the Payment of Gratuity Act. On coming into force of the Gratuity Act, the assessee company became liable to provide an amount of Rs.48,17,760/- by way of gratuity to its employees which included current as well as past liability for which provision was made. Therefore, in our view, the liability to pay the said amount of Rs.48,17,760/- is concerned, it arose in the previous year, relevant to the assessment year 1973-74 under reference and since admittedly all the conditions laid down in the sub-clause (ii) of clause (b) of Sec. 40A(7) have been fulfilled, in our view, the Tribunal has rightly upheld the said claim. Therefore, in our view, the question No.2 is to be answered in the affirmative and against the revenue. 38. In so far as question No.1 is concerned, in our view, when question No.2 has been answered in the affirmative in favour of the assessee and against the revenue on merits, as assessee has fulfilled all the criteria laid down in the Gratuity Act, 1972 and Sec. 40A(7) then question No.1 becomes academic in nature and theref ..... X X X X Extracts X X X X X X X X Extracts X X X X
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