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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 ..... of Gratuity Act - On coming into force of the Gratuity Act, the assessee company became liable to provide an amount of ₹ 48,17,760/- by way of gratuity to its employees which included current as well as past liability for which provision was made - the liability to pay the said amount arose in the previous year, relevant to the assessment year 1973-74 and all the conditions laid down in the sub-clause (ii) of clause (b) of Sec. 40A(7) have been fulfilled, the Tribunal has rightly upheld the claim – Decided against Revenue. - D. B. Income Tax Reference No. 24/1986, D. B. Income Tax Reference No.8/2003, D. B. Income Tax Reference No. 1/2005 - - - Dated:- 9-4-2014 - Ajay Rastogi And J. K. Ranka,JJ. For the Petitioner : Mr. Anuroop Singhi, Advocate with Mr. Saurabh Jain For the Respondent : Mr. Sanjay Jhanwar, Advocate ORDER (Per Hon'ble Ranka, J.). 1. These three Income Tax References, in between the same parties, being interconnected and arising out of the one single assessment year 1973-74, are being decided by this common order for the sake of convenience. 2. The questions in all the three references No.24/1986, 8/2003 1/2005 are reproduce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epresenting the gratuity actually paid during the year, which had not been disallowed by the ITO in the assessment year at all. Questions in DB ITR No.1/2005:- Whether on facts and in the circumstances of the case, the Tribunal was justified in upholding the order of the AAC allowing extra claim of Rs.1,28,622/- on account of gratuity liability in the year under consideration? 3. Though by three references, the matter has been referred to this Court for answering the questions as aforesaid but in our view, the question revolves as to claim made by the assessee about an amount of Rs.48,19,425/- which was the liability for gratuity as the assessee maintains books of account on mercantile basis. It made provision in view of the Payment of Gratuity Act, 1972 which came into force w.e.f. 15/09/1972 and during the course of disposal of the appeals, Section 40A(7) was brought in by the Finance Act, 1975 with retrospective effect from 01/04/1973. Out of Rs.48,19,425/- it was claimed by the assessee that Rs.12,77,432/- pertained to gratuity liability of the previous year relevant to the assessment year 1973-74 while the claim of liability to the extent of Rs.35,41,993/- was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conditions were satisfied:- (a)The liability has accrued during this year. (b)The liability is ascertained through actuarial valuation. (c)A provision is being made, and (d)An irrevocable trust fund has been made for the purpose of payment of gratuity and the same is recognized by the Commissioner of Income-tax, and payment has been made to the said fund as stipulated in the Section. 9. He held that all the aforesaid conditions had been fulfilled by the assessee and accordingly directed to allow the entire amount of gratuity of Rs.48,17,760/-. 10. Both the revenue as well as the assessee, being aggrieved by the aforesaid order, challenged the matter in appeal before the Tribunal. While the revenue challenged the deduction/allowance of Rs.48,17,760/-, the assessee challenged on some points where the Appellate Assistant Commissioner had not decided the issues on merits. 11. The Tribunal, in the order dt. 29/09/1979 in ITA No.325/JP/78-79 and ITA 466/JP/78-79 came to a categorical finding that (1) trust fund has been set up by the assessee; (2) the said trust fund has been recognized by the Commissioner of Income Tax and (3) even the payment as stipulated under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d gratuity fund did not exist during the accounting period corresponding to assessment year 1973-74, the allowance of Rs.12,77,432/- made by the Income-tax Officer on account of provision for gratuity was patently wrong and prejudicial to the interest of revenue. Commissioner's order, therefore, directing the Income-tax Officer to reconsider this matter denovo in accordance with law is correct and we refuse to interfere with this part of his order. 15. He contended that when the Tribunal had affirmed the order of the Commissioner u/s 263, then, in so far as the amount of Rs.12,77,432/-, which was originally allowed by the AO, is concerned, should not have been deleted by the Tribunal or by the CIT(A) in the subsequent proceedings and further contended that the ld. Commissioner in its order u/s 263 dt. 19/02/1975 had set aside the assessment to make a fresh assessment in accordance with law and keeping in view the observations made. Therefore, it was wide open and available with the AO to consider the matter afresh as a whole. He further contended that against the order passed by the AO, wherein the amount of Rs.35,41,993/- was disallowed, an appeal came to be filed before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed u/s 37(1) of the Act. 16. He further contended that the claim made by the assessee being unjust, questions of law deserve to be answered in favour of the revenue and against the assessee. Counsel for the revenue relied upon judgment of Allahabad High Court, in the case of Ramesh Beekay Co. Vs. CIT, reported in (1994) 72 Taxman 71 (All). 17. Per-contra, ld. counsel for the assessee submitted that in the assessment order dt. 11/03/1974, which was passed by the AO initially, had specifically disallowed an amount of Rs.35,41,993/- and even the AO was satisfied about the claim of Rs.12,77,432/- which he allowed. He contended that against disallowance of Rs.35,41,993/-, the assessee preferred an appeal before the Appellate Assistant Commissioner and the same came to be disposed of on 26/04/1978 and by that time Sec. 40A(7) came to be inserted w.e.f. 01/04/1973. He contended that all the aforesaid conditions stood fulfilled by the assessee. The Appellate Assistant Commissioner as also the Tribunal holding that the aforesaid conditions has been fulfilled, went on to decide the matter on merits and once the claim has been allowed on merits, then the submission of counsel for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r did it apply to the Commissioner of Income Tax for approval in terms of Section 36(1)(v) of the IT Act and accordingly set aside the order of the AO framed on 11/08/1974 and directed to make a fresh assessment. It may be pointed out that when the CIT passed order u/s 263 on 19/02/1975 provisions of Section 40A(7) had not been introduced. This was challenged by the assessee before the Tribunal which also upheld the order u/s 263 passed by the Commissioner by order dt. 16/10/1976 by observing as referred to supra. 23. The AO while passing order in pursuance to the order of CIT was of the view that the assessee is entitled to a deduction of Rs.11,48,810/- u/s 40A(7) the AO allowed accordingly. In the meanwhile, the Appellate Assistant Commissioner before whom an appeal was preferred by the assessee against the disallowance of Gratuity to the extent of Rs.35,41,993/-, came up for consideration and the Appellate Assistant Commissioner came to the conclusion that the assessee is entitled to deduction of entire amount of Rs.48,17,760/- which was the claim originally made and he decided the issue in view of the newly inserted Sec. 40A(7) of the IT Act. The relevant portion of the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and files an application to the Commissioner for the approval thereof before that date. (iii)A sum equal to at least 50 per cent of the admissible amount (i.e. an amount calculated at the rate of 8 per cent of the salary of each employee entitled to the payment of gratuity for each year of service in respect of which the provision is made) is paid by the assessee by way of contribution to the approved gratuity fund before 1st April, 1976 and the balance of the admissible amount is so paid before 1 April, 1977. Where any amount has been utilized out of the provision made in any previous year for the purpose of the payment of any gratuity before the creation of the approved gratuity fund, the amount to be paid to the approved gratuity fund will be calculated with reference to the admissible amount as reduced by the actual payment made before the date of creation of the approved gratuity fund. 29. For the removal of doubts, it has been specifcially provided that where any provision made by the assessee in his accounts for the payment of gratuity to his employees has been allowed as a deduction in any previous year, any sum paid out of such provision by way of contribution to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity. 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. Clause (b)(ii) deals with a situation that the assessee might provide by the spread-over method and provides that such provision would be excluded from the operation of Clause (a) provided the three conditions laid down by the Sub-clauses are satisfied. The submission of the assessee is that if no provision is made by the assessee for gratuity, still the same will be deductible and Section 40A(7) will have no application, would defeat the very purpose and object, of Section 40A(7) and render it nugatory. The interpretation as suggested by the assessee would entitle the assessee who made no provision to claim deduction whereas an assessee who made a provision would not get deduction unless the requirements laid down in the Sub-section are fulfilled. This interpretation, if accepted, will lead to a curious result, and if one may venture to say an absurd result, and even where the assessee has not chosen to adopt the spread-over method and has not provided for the presen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion, therefore, enables the assessee to make the provision in any of the assessment years falling between the 1st day of April, 1973, and the 1st day of April, 1976, and the provision made in all these years, if the other conditions of that provision are satisfied, would be eligible for being claimed as a deduction in the year in which the provision was made. 35. The Gujrat High Court, in the case of CIT Vs. Geskets Radiators Pvt. Ltd.: (1991) 192 ITR 509 (Guj.) also came to the conclusion that once the assessee fulfills all the criteria laid down, as aforesaid, then the entire amount is allowable. 36. The Allahabad High Court also, in the case of Swadeshi Cotton Mills Co. Ltd. Vs. Income Tax Officer: (1978) 112 ITR 1038 (All); The Gujrat High Court, in the case of CIT Vs. Shreno Ltd.: (1994) 210 ITR 289 (Guj) in the case of CIT Vs. Shree Digvijay Cement Co. Ltd.: (1993) 203 ITR 746 and Calcutta High Court, in the case of CIT Vs. Remington Rand of India Ltd. Ors.: (1986) 159 ITR 922 (Cal) took the same view. 37. After considering Section 40A(7) when the assessee has complied with all the conditions laid down, which have been reproduced herein above, then, in our v ..... X X X X Extracts X X X X X X X X Extracts X X X X
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