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TMI Blog2004 (12) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... despite the fact that gratuity fund had not been approved by the Commissioner of Income-tax (for short, "the CIT") is the question which arises for determination in this reference made by the Income-tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for short, "the Tribunal"), under section 256(1) of the Income-tax Act, 1961 (for short, "the Act"). The assessee is carrying on the business of manufacturing auto spring leaves, etc. For the assessment year 1978-79, it filed a return on November 29, 1978, declaring a total income of Rs. 4,17,784. The Inspecting Assistant Commissioner, Karnal (for short, "the Assessing Officer"), finalised the assessment vide his order dated March 12, 1987. He added a sum of Rs. 33,542 to the income of the assessee which the latter set apart as gratuity payable to the employees. The Commissioner of Income-tax (Appeals), Chandigarh, upheld the addition made by the Assessing Officer on the ground that the gratuity fund had not been approved by the Commissioner of Income-tax. However, the Tribunal accepted the assessee's appeal and allowed deduction to the tune of Rs. 33,542 in lieu of the gratuity fund. It referred to the order dated December 28, 198 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the Act was defective in many respects. He then pointed out that after removing the shortcomings, the amended trust deed was filed on March 15, 1979, and argued that the approval granted by the Commissioner of Income-tax with effect from March 26,1979, cannot relate back to the date of application so as to entitle the assessee to claim deduction for the assessment year 1978-79. Shri Bindal referred to the judgment of the Supreme Court in Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 and various High Courts including this court in Bitoni Lamps Ltd. v. CIT [1989] 178 ITR 421 (P H); Kumson Motor Owners Union Ltd. v. CIT [1993] 201 ITR 601 (All); Balasubramania Foundry v. CIT [2000] 241 ITR 523 (Mad); CIT v. Official Liquidator, Ahmedabad Manufacturing and Calico Printing Co. Ltd. [2000] 244 ITR 156 (Guj); CIT v. Coimbatore Premier Corporation (P) Ltd. [2000] 244 ITR 753 (Mad) and CIT v. Coimbatore Premier Corporation (P) Ltd. [2000] 246 ITR 626 (Mad) and argued that the deduction in lieu of the amount of gratuity could not have been claimed by the assessee for the assessment year 1978-79 because till then, the gratuity fund had not been approved by the Commissioner of Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case may be, the balance of the admissible amount as reduced by the amount so utilised, is paid by the assessee by way of such contribution before the 1st day of April, 1977." A reading of the provisions reproduced above shows that notwithstanding any other provision in the Act, the provision for future use by the assessee out of its gross profits of the year of account for payment of gratuity to its employees is not allowable as a deduction in the computation of profits and gains of the year of account, unless the case is covered by one or other of the two sub-clauses of clause (b) of section 40A(7) of the Act. Sub-clause (i) of clause (b) is attracted only if the assessee makes provision for payment of gratuity in an approved gratuity fund. To put it differently, the provision for gratuity made only in an approved gratuity fund entitles the assessee to claim deduction in the computation of profits and gains of the year of account. In Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585, their Lordships of the Supreme Court interpreted section 40A(7)(a) and (b) of the Act and held that unless the conditions specified in clause (b) are fulfilled, the provision made by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion Bench of the Allahabad High Court reiterated that in order to avail of the benefit of deduction under section 40A(7)(b) of the Act, it must be shown that the provision was made strictly in the manner laid down in that clause. In Balasubramania Foundry v. CIT [2000] 241 ITR 523, a Division Bench of the Madras High Court held that the assessee is not entitled to the deduction of the provision made towards the gratuity liability without complying with the provisions of section 40A(7) of the Act. The Division Bench further held that deduction cannot be allowed on general principles under any other section. In CIT v. Official Liquidator, Ahmedabad Manufacturing and Calico Printing Co. Ltd. [2000] 244 ITR 156, a Division Bench of the Gujarat High Court held as under: "The claim was rejected in view of the provisions of section 40A(7) of the Act of 1961, which was enacted with retrospective effect from April 1, 1973, requiring creation of an approved gratuity fund as a necessary condition before any provision for gratuity could be allowed under section 36(1)(v) of the Act. The assessee's claim was founded either on section 28 or 37 of the Act. An amount of Rs. 1,54,00,000 being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Income-tax granted approval to the gratuity fund with effect from March 26, 1979. All this is clearly borne out from paras. 2 to 6 of order dated December 2, 1980 passed by the Commissioner of Income-tax which read as under: "2. The trust deed, rules and the accounts of the fund were examined and certain discrepancies were pointed out to the applicant. Consequently, the trustees removed the shortcomings in the various clauses and definitions given in the trust deed and the fund rules from time to time. The applicant-fund thereafter drew up an amended trust deed (applied as deed of variation) on October 10, 1978 and filed it in this office on March 15, 1979. 3. In addition to the discrepancies referred to above, it was also noticed from the receipts and payment accounts and balance-sheets of the fund as on March 31,1976, March 31,1977 and March 31, 1978 that a part of the investible one has remained deposited in the savings bank account in the Punjab and Sind Bank Ltd., in contravention of the provisions of rule 101 read with rule 67 of the Income-tax Rules, 1962. The fund was, accordingly, given an opportunity of being heard on December 26, 1979 when Sh. Mohinder Allag, accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s liable to be ignored. In view of the above discussion, we have no hesitation to hold that the Tribunal committed a serious error by ordering deduction of Rs. 33,542 on account of provision for gratuity made by the assessee. The two judgments, on which reliance has been placed by Shri Jain, are clearly distinguishable. The facts of the judgment of the Calcutta High Court in CIT v. Shalimar Wire and Industries Ltd. [1991] 188 ITR 814 show that the approval to the gratuity fund, for which application was made on December 30, 1975, was granted by the competent authority with effect from March 27, 1976. The Division Bench of the High Court took the view that the approval would relate back to the assessment year in question and accordingly declared that the assessee was entitled to deduction of Rs. 4,27,781, representing provision for payment of gratuity made in the previous year ending on June 30, 1974. In Berger Paints India Ltd. v. CIT [2004] 266 ITR 99, their Lordships of the Supreme Court held that deduction only on actual payment of duty is admissible under section 43B of the Act, irrespective of the amount included in valuing closing stock. None of these judgments have any b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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