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TMI Blog1995 (8) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... nde d March 31, 1974, relevant to the assessment year 1974-75 made a provision for gratuity for its workers in its accounts on actuarial valuation for a sum of Rs. 24,05,655. The liability as on March 31, 1975, relevant to the assessment year 1973-74 based on actuarial valuation taking into consideration the number of workers, multiplied by 15 days of salary for each year and the number of years of service of each worker amounted to Rs. 17,87,330. So the incremental liability for this year came to Rs. 6,18,325 and both together came to Rs. 24,05,655 as on March 31, 1974. The gratuity trust deed was drawn up on March 27, 1974. On March 30, 1974, the assessee made a deposit of Rs. 17,87,330 in the Central Bank of India. For the balance of Rs. 6,18,325 a cheque was issued on October 31, 1974, to place the amount in the monthly interest deposit account. On March 28, 1975, the assessee wrote to the Commissioner of Income-tax for approval of the fund. After some correspondence, the Commissioner by order dated January 25, 1978, granted approval with effect from March 30, 1976. Before the Income-tax Officer, the assessee claimed the provision for Rs. 24,05,655 as a deduction. The Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies on the assessee to provide for gratuity liability to its employees arose from that date. But the assessee made no provision in its accounts for the financial year ended March 31, 1973, relevant to the assessment year 1973-74. In such a case, the gratuity liability relating to the earlier assessment year cannot be claimed as deduction in the present assessment year under consideration. In so far as the deduction allowed under section 36(1)(v) of the Act is concerned, learned standing counsel pointed out that inasmuch as the approval by the Commissioner was not obtained before making deposit, the benefit under section 36(1)(v) of the Act cannot be availed of. On the other hand, learned counsel appearing for the assessee, while supporting the order passed by the Tribunal, submitted that inasmuch as the assessee complied with the conditions prescribed under section 40A(7) of the Act, the assessee is entitled to deduction of the entire amount deposited in the present assessment year under consideration. According to learned counsel, the deposit of Rs. 24,05,655 is the initial deposit made valued on the basis of actuarial valuation. Learned counsel further pointed out that this is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar under consideration. But this view is not correct in view of the provisions contained in section 40A(7) of the Act. In order to remove uncertainty in the matter of allowing deduction with regard to the provision made for gratuity liability for the earlier years, the Finance Act, 1975, has inserted a new sub-section (7) in section 40A, which provides that no deduction will be allowed in the computation of taxable profits in respect of mere "provision" made by the employers in their books of account for payment of gratuity to their employees on their retirement or on termination of their employment for any reason. The amendment will not, however, affect the provisions made for the purpose of payment of sums by way of contributions towards approved gratuity funds that have become payable during the previous year, or for the purpose of making any payment on account of gratuity to employees where such gratuity has become payable during the previous year and such provisions will continue to be eligible for deduction as hitherto. With a view to mitigating hardship in cases where the provisions have been made by the assessee in their accounts for the previous years relevant to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee of the later previous year in which the sum is so paid. It will be seen that the bar on allowance of provision made for the payment of gratuity to employees will not apply for the assessment years 1973-74 to 1975-76 only if all the conditions referred to above are fulfilled. It is, therefore, possible that at the time the assessment for any of these assessment years is taken up by the Income-tax Officer, the assessee may not have created a gratuity fund under an irrevocable trust, or having created such a fund, may not have applied for the approval thereof or may not have made payments to the approved gratuity fund as required under section 40A(7)(b)(ii)(3) and the time for complying with any or all the aforesaid requirements may not have expired. In such cases, the Income-tax Officer will complete the assessment by disallowing the provisions made by the assessee. Subsequently, if the assessee complies with all these requirements within the time allowed in respect of each one of them, the Income-tax Officer will have the power to amend the original assessment order and allow the assessee necessary relief in the matter under the new sub-section (13) of section. 155. It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax Act, 1961. For and from the assessment year 1973-74, the allowability of any such provision is governed by section 40A(7) and not on general principles because of the fact that the provisions of section 40A(7) have an overriding effect by virtue of the non-obstante clause. Under the new section 40A(7) inserted by the Finance Act, 1975, with retrospective effect from April 1, 1973, no deduction is to be allowed in the computation of profits and gains of a business or profession in respect of any provision made for the payment of gratuity to the employees on retirement or on termination of employment. This is, however, subject to certain exceptions. The restriction is not to apply in relation to any provision made for the purpose of payment of a sum by way of contribution towards an approved gratuity fund that has become payable during the previous year, or for the purpose of meeting actual liability in respect of payment of gratuity to the employees that has arisen during the previous year. The restriction is not also to apply in relation to any provision made for the previous years relevant to any of the assessment years 1973-74, 1974-75 and 1975-76 to the extent the amount o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not any liability as such which arose in the earlier years. Consequently, the amount having been arrived at on an actuarial basis and having been provided in the accounts was allowable as a deduction. Learned standing counsel relied on the decisions reported in CIT v. G. T. N. Textiles Ltd, [1985] 155 ITR 5 (Ker) ; CIT v. Periya Karamalai Tea and Produce Co. Ltd. [1987] 167 ITR 32 (Ker) and CIT v. Haileburia Tea Estates Ltd. [1987] 167 ITR 254 (Ker). In CIT v. Haileburia Tea Estates Ltd. [1987] 167 ITR 254, the Kerala High Court held that the assessee was entitled to claim deduction only to the extent of the provision made by it in accordance with the provisions of section 40A(7)(b)(ii) of the Income-tax Act, 1961, in relation to the accounting year 1974-75 relevant to the assessment year 1975-76 and not in relation to the earlier years 1973-74, 1974-75 and 1975-76. According to the facts arising in CIT v. Periyakaramalai Tea and Produce Co. Ltd. [1987] 167 ITR 32 (Ker), for the assessment year 1975-76, relevant to the accounting year ending March 31, 1975, the assessee claimed deduction of Rs. 32,16,950 as provision for gratuity in respect of liability which arose prior to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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