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TMI Blog1996 (6) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... s Jawahar Mills Ltd. Employees Gratuity Fund, from December 1, 1972. The approval was asked for and obtained for group gratuity-cum-life assurance scheme as can be seen from the copy of the order of the Commissioner in C. No. 207 (44)-73, dated December 3, 1973. The trust deed provides that the intention is to provide for payment of gratuity by taking insurances on the lives of employees. In pursuance of this provision, the group insurance scheme was entered into. The scheme covers the gratuity payable to persons whose services are terminated or on death, resignation or retirement of the employee during the period covered by the policy. The amount of premium is only a fraction of the incremental liability towards gratuity. The policy covers death, resignation, retirement or termination during the year while the incremental liability takes into account the discounted value of the expected future liability of all the employees. The Income-tax Officer allowed in the assessment years 1975-76 and 1976-77 the actual payment of gratuity and payment of premium under section 36(1)(v) of the Act and did not allow the incremental liability since he was of the opinion that the assessee did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e gratuity liability is both statutory and contractual in the assessee's case and since the assessee is maintaining its accounts on the mercantile basis, there was no doubt that the incremental liability was a charge on the assessee's profits, whether provision as such is made or not. The Tribunal further held that such a charge would constitute a provision within the meaning of section 40A(7)(b)(i). The Tribunal concluded that the assessee's claim was admissible under section 40A(7). In this view of the matter, the Tribunal did not go into the further point whether the claims were admissible even under section 36(1)(v) of the Act. Accordingly, the Tribunal agreed with the Commissioner of Income-tax (Appeals) that the difference between the incremental liability and premia paid (should be allowed) as further deduction. The Tribunal thus dismissed the Departmental appeals. In the assessment year 1978-79, the assessee had paid a sum of Rs. 1,90,735 towards renewal premium in respect of the group gratuity-cum-life insurance scheme for its employees. It was debited to the profit and loss account and was allowed by the Inspecting Assistant Commissioner under section 36(1)(v). In addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s court in ITO v. Palani Andavar Mills Ltd. [1996] 218 ITR 364. On the other hand, learned counsel appearing for the assessee submitted that it is no doubt true that the assessee has not made any provision in the books of account for payment of the incremental gratuity liability based on actuarial valuation. According to learned counsel, the incremental liability is allowable as deduction under section 36(1)(v) of the Act. It was further submitted that even if no provisions were made, it would be allowable under section 36(1)(v) which authorises the allowance of any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of its employees, under an irrevocable trust. Learned counsel further submitted that the assessee was following the mercantile system of accounting under which " paid " includes " payable ". To support this view he relied upon section 43(2) of the Act. According to learned counsel the gratuity liability is both statutory and contractual in the assessee's case and since the assessee is maintaining its accounts on the mercantile basis, there was no doubt that the incremental liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubject to clause (b). The embargo is on deduction of amounts provided for future use in the year of account for meeting the ultimate liability to payment of gratuity. 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 where 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 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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