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1997 (12) TMI 35

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..... 40(c) of the Act. He, therefore, disallowed a sum of Rs. 1,05,593 in the computation of the income of the assessee applying the provisions of section 40(c) of the Act. The Commissioner of Income-tax (Appeals), on appeal, directed the Income-tax Officer to exclude the payments made by the assessee-company towards gratuity, payment to an approved gratuity fund, payment to a recognised provident fund and payment to an approved superannuation fund from the value of the remuneration, benefits and amenities provided by the assessee-company to the director and then, determine the ceiling limit under section 40(c) of the Act. In so far as the payment made by the assessee to the Life Insurance Corporation for taking out a one year term assurance policy is concerned, the Commissioner (Appeals) upheld the action of the Income-tax Officer to include the same in the value of the remuneration, benefits and amenities. The Revenue as well as the assessee, aggrieved by the order of the Commissioner (Appeals), preferred appeals to the Income-tax Appellate Tribunal. The Appellate Tribunal upheld the view of the Commissioner (Appeals) that the contributions made towards provident fund, pension fu .....

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..... in law, on the facts and in the circumstances of the case, in holding that the payment of gratuity to employees taken over from the amalgamated company is allowable as a business expenditure in the assessment of the assessee-company ?" Mr. C. V. Rajan, learned counsel for the Revenue, submitted that the Appellate Tribunal was not correct in holding, that the payment of gratuity, contribution made to the provident fund, pension fund and the premium to the Life Insurance Corporation are not includible under section 40(c) of the Act. As far as the payment of gratuity to the employees taken over from the amalgamated company, he submitted that there was a provision towards gratuity in the amalgamated company and if the deduction is again made in the assessee's company, it would amount to double deduction and, therefore, the assessee is not entitled to deduction towards gratuity to employees taken over from the amalgamated company. Mr. Janarthana Raja, learned counsel for the assessee, on the other hand, submitted that other payments also would not fall within the scope of section 40(c) of the Act. Learned counsel for the assessee submitted that as far as the payment towards one year .....

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..... r the Bench held that the retirement gratuity could not be regarded as a periodic payment and it is not covered by the provisions of section 40(c) of the Act and, therefore, the ceiling provided under section 40(c) of the Act would not apply to the payment of gratuity received by the director. The reasoning on which the Bombay High Court came to such a conclusion shows that for the purpose of salary within the meaning of section 40(c) of the Act, it would not take within its ambit any one-time payment or a payment which is not relatable to any period covered by the previous year. The emphasis that was given by the Bombay High Court is that the provisions of section 40(c) of the Act would cover a periodic payment relating to any specific period of service and where the gratuity is paid on the basis of the entire length of service of an employee which cannot be apportioned year-wise, the payment of gratuity cannot be equated to monthly salary or yearly payment or monthly allowance within the meaning of section 40(c) of the Act. The Bombay High Court while holding the above view held as under: "If the computation provisions contained in section 40(c) and section 40A(5) do not provid .....

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..... be taken into account for the purpose of disallowance under section 40A(5) of the Act. In Sapt Textile Produces (India) Ltd. v. CIT [1996] 217 ITR 378, the Bombay High Court followed its earlier decisions and held that the expenditure on retirement gratuity is beyond the scope and ambit of section 40(c) of the Act. We are in complete agreement with the view expressed by the Bombay High Court that the payment of gratuity which is not relatable to a particular year of service, which would be payable on the completion of continuous years of service and which is not a periodic payment cannot be regarded as falling within the scope of section 40(c) of the Act warranting the disallowance under the said provisions of the Act. We, therefore, hold that the Tribunal was correct in holding that the amount of gratuity paid to the director should be excluded from the expenditure which is exempt in the hands of the director. The first question also refers to the premium paid to the life insurance corporation. It is seen, on the facts of the case, a Master Policy No. GI 31120 was taken and the Tribunal, on a perusal of the terms of the policy, came to the conclusion that the policy amount assur .....

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..... h of the insured while in service and the employee has no right to claim the amount and the right created in favour of the employee is only a contingent interest and, therefore, according to the plain reading of the insurance policy, we are of the view that the premium paid by the assessee-company cannot be regarded as perquisite or amenity or remuneration to the director. The above decision of the Karnataka High Court was followed by the same court in CIT v. J. B. Advani and Company (Mysore) (Pvt.) Ltd. [1987] 163 ITR 638, wherein the Karnataka High Court held that the premium paid by the assessee on the insurance policy taken out in the name of its manager was not a perquisite within the meaning of section 40A(5)(a) of the Act. It is relevant to notice that in the abovesaid decision, the policy taken was life insurance policy and we are not expressing any opinion on the question whether the provisions of section 40(c) would apply to the payment of premium in the case of a life insurance policy taken on the life of the employee-director. The above view was also reiterated by the same court in the cases of CIT v. Motor Industries Co. Ltd. [1988] 173 ITR 374 and CIT v. Amco Batterie .....

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..... re taken over by the assessee-company, the assessee-company also took over the gratuity liability and to discharge its statutory liability, the assessee paid the sum. He, therefore, held that since there was an actual payment, the assessee is entitled to deduction under section 37 of the Act. The Appellate Tribunal, following its earlier order in I.T.A. No. 1257 (Mds) of 1979, dated December 17, 1980, held that since the business of the amalgamated company was taken over as a result of the amalgamation, the assessee was liable to pay the gratuity to the employees taken over and, therefore, at the time of actual payment by the assessee, the assessee was entitled to deduction under section 37 of the Act. Mr. C.V. Rajan, learned counsel for the Revenue, submitted that since the provision has been allowed as a deduction in the computation of business income of the amalgamated company, it is not open to the assessee to claim deduction for the same liability in its hands at the time of actual payment and it would amount to double deduction for the same liability. He, therefore, submitted that the Tribunal was not correct in allowing the deduction. Mr. Janarthana Raja, learned counsel f .....

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..... taking over by the assessee-corporation and under the assessee-corporation after its take over." In that case, under the terms of takeover, the assessee therein was bound to pay gratuity payable by the predecessor private transport companies to its employees and the Revenue contended that there should be a bifurcation and the entire payment could not be allowed as a deduction in the computation of the income of the assessee therein. This court, in that situation, held that when the assessee was bound to pay gratuity by virtue of takeover of the predecessor private transport companies, the entire amount paid was allowable as a deduction. Following the ratio held by this court in CIT v, Pandian Roadways Corporation Ltd. [1991] 187 ITR 121, we are of the view, that because of the amalgamation, the assessee was obliged to, pay gratuity to its employees, though the employees rendered services to the amalgamated company prior to the taking over and on that account, it cannot be said that the payment was not towards business consideration. There is also no double deduction of the same amount as the grant of double deduction postulates the double deduction in the assessment of the same .....

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