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TMI Blog1995 (3) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... provision for gratuity amounting to Rs. 4,30,245 made in the company's accounts for the year ended March 31, 1974, over and above the sum of Rs. 1,56,098 which represented the liability for the payment of gratuity for the accounting year ended March 31, 1974 ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in disallowing the claim of the assessee for deduction of Rs. 4,30,245 which represented the provision made by the assessee-company in its accounts for the year ended March 31, 1974, for payment of gratuity to its employees based on actuarial valuation ?" The relevant facts of the case are as follows : The assessee is a public limited company. The reference relates to the assessment year 1974-75, the relevant previous year being the financial year ending on March 31, 1974. Till the end of March 31, 1973, the assessee-company did not derive any taxable income, having sustained heavy losses for the earlier year. The assessee-company had carried forward depreciation allowance and development rebate. After the passing of the Payment of Gratuity Act, the assessee-company worked out its actuarial liability for the payment of gratu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istant Commissioner agreed with the assessment order of the Income-tax Officer. The assessee-company preferred an appeal to the Tribunal. The Tribunal rejected the contentions of the assessee-company in the following words : " The assessee had claimed three amounts before us. The first amount is the incremental liability of Rs. 1,56,098 for gratuity relating to the working of the assessee for this assessment year. The second amount of Rs. 4,30,245 was the actuarial liability as on March 31, 1973, as on the last day of the preceding accounting year. The third amount is the balance of development rebate of Rs. 5,26,936. The assessee had to create a provision for gratuity in order to take the benefit, of section 40A(7) which was introduced by the Finance Act, 1975. It created a provision of Rs. 4,30,425 but failed to make the payments as contemplated under section 40A(7). It has been urged before us that because the fund was actually approved by the Commissioner of Income-tax after the relevant dates given in section 40A(7), the assessee was not in a position to make the payments to the gratuity fund. A perusal of section 40A(7) shows that the assessee would come under that provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w in the order of the Appellate Tribunal holding that the assessee-company has not complied with section 40A(7) of the Act. We are unable to accept the above contentions of learned counsel for the assessee. In CIT v. Indira Cotton Mills (P.) Ltd. [1995] 215 ITR 36 (Mad) (Tax Case No. 1155 of 1981, dated October 19, 1994), a Division Bench of this court to which one of us (Mishra J.) was a party, has observed as follows : ". . . . the Legislature felt the need of a law to provide to the employees a terminal lump sum benefit called ' gratuity ', and Parliament enacted the Payment of Gratuity Act, 1972, providing for a scheme for the payment of gratuity to employees engaged in factories, mines, oil fields, plantations, shops and other establishments, ports, railway companies and for matters connected therewith or incidental thereto..... and made such employee entitled to gratuity on the termination of his employment after he had rendered continuous service for not less than five years on his superannuation, or on his retirement or resignation, or on his death or disablement due to accident or disease, in the last case the period of completion of continuous service of five years was/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issible amount as reduced by the amount so utilised, is paid by the assessee by way of contribution to the approved gratuity fund before the 1st day of April, 1976, and the balance of the admissible amount or, as 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 lst day of April, 1977. Explanation 1. ---For the purposes of sub-clause (ii) of clause (b) of this sub-section, " admissible amount " means the amount of the provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason, to the extent such amount does not exceed an amount calculated at the rate of eight and one-third per cent. of the salary (as defined in clause (h) of rule 2 of Part A of the Fourth Schedule) of each employee entitled to the payment of such gratuity for each year of his service in respect of which such provision is made. Explanation 2. ---For the removal of doubts, it is hereby declared that where any provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt as reduced by the amount so utilised by way of such contribution before the lst day of April, 1977.... It will only be a repetition of a principle that has been stated so many times by the courts that the payment of gratuity is a statutory liability created under the Payment of Gratuity Act, 1972, and it can normally be said to have arisen in the carrying on of business and for gratuity to be deductible under the Income-tax Act, 1961, it must fulfil the conditions laid down in section 40A(7) of the Act. ( see Peoples Engineering and Motor Works Ltd. v. CIT [1981] 130 ITR 174 (Cal)). The provisions of section 40A of the Act will have effect notwithstanding anything to the contrary contained in any other provisions of the Act relating to the computation of income under the head, ' Profits and gains of business or profession '. They would have effect notwithstanding anything contained in sections 30 to 39 of the Act and as prescribed under clause (a) of sub-section (7) thereof no deduction shall be allowed in respect of any provision whether called as such or by any other name made by the assessee for the payment of gratuity to his employees on their retirement or on terminatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment of gratuity to its employees on their retirement or on termination of their employment for any reason during the said financial year and the statutory liability, that is, the liability where the employee retired previous to the enforcement of the Payment of Gratuity Act, or thereafter but before March 31, 1973, crystallised only in the financial year 1972-73. In Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585, the Supreme Court has dealt with this aspect of the law and stated (headnote) : " ' Although payment of gratuity is made on retirement or termination of service, it is not for the services rendered during the year in which the payment is made, but it is made in consideration of the entire length of service and its ascertainment and computation depend upon several factors. The right to receive the payment accrues to the employees on their retirement or termination of their services and the liability to pay gratuity becomes an accrued liability of the assessee, when the employees retire or their services are terminated. Until then, the right to receive gratuity is a contingent right and the liability to pay gratuity continues to be a contingent liability qua the em ..... X X X X Extracts X X X X X X X X Extracts X X X X
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