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TMI Blog1988 (6) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee also got its actuarial liability determined through an actuary, Sri. P. S. Sundaram. The actuary ascertained the assessee's liability for gratuity at Rs. 25,55,725 as on June 30, 1975 (which falls within the assessment year 1976-77). The assessee had previously made a provision for a total sum of Rs 15,29,199 in two assessment years, i.e., 1974-75 and 1975-76. During the accounting year relevant to the assessment year concerned herein (1977-78), the assessee made no provision in its books, nor was any such provision made by the authority/officer of the company competent to make such provision. Yet, the assessee claimed that the difference amount between Rs 25,55,725 and Rs. 15,29,199, i.e., 10,26,526, should be allowed as deduction. The Income-tax Officer rejected the said claim on the finding that the assessee, not having actually contributed the said amount to the fund during the relevant accounting year, is not entitled to claim the deduction. He, however, allowed deduction of a sum of Rs. 71,579 which was the amount actually paid by the assessee to its employees during the relevant accounting year on account of gratuity. The Income-tax Officer observed that the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of clause (b), 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 termination of their employment for any reason. (b) Nothing in clause (a) shall apply in relation to - (i) any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year; ... Explanation 1 -For the purpose 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the payments were made and allowed under section 37 of the Act. (2) Provision made for payment of gratuity which would become due and payable in the relevant previous year was allowed as an expenditure of the previous year on accrued basis when mercantile system was followed by the assessee. (3) Provision made by setting aside an advance sum every year to meet the contingent liability for gratuity as and when it accrued by way of provision for gratuity or by way of reserve or fund for gratuity was not allowed as an expenditure of the year in which such sum was set apart. (4) Contribution made to an approved gratuity fund in the previous year was allowed as deduction under section 36(1)(v). (5) Provision made in the profit and loss account for the estimated present value of the contingent liability properly ascertained and discounted on an accrued basis as falling on the assessee in the year of account could be deducted either under section 28 or section 37 of the Act." The said decision also sets out the object and purport of sub-section (7) of section 40A in the following words: "On a plain construction of clause (a) of sub-section (7) of section 40A of the Act, what it m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d upon several factors. The right to receive the payment accrued to the employees on their retirement or on termination of their services and the liability to pay gratuity became the accrued liability of the assessee, when the employees retired or their services were terminated. Until then, the right to receive gratuity is contingent right and the liability to pay gratuity continues to be a contingent liability qua the employer. An employer might pay gratuity when the employee retires or his service is terminated and claim the payment made as an expenditure incurred for the purpose of business under section 37. He might, if he followed the mercantile system, provide for the payment of gratuity which became payable during the previous year and claim it as an expenditure on accrued basis under section 37 of the said Act. Since the amount of gratuity payable in any given year would be a variable amount depending upon the number of employees who would be entitled to receive the payment during the year, the amount being a large one in one year and a small one in another year, the employer often finds it desirable and/ or convenient to set apart for future use, a sum every year to meet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ractice was to account for gratuity on cash basis as and when paid. After the coming into force of the Payment of Gratuity Act, 1972, and pending determination by actuarial valuation of its liability under that Act, the appellant made a provision of Rs. 20 lakhs against the total accruing liability in its balance-sheet, When filing its return of income for the assessment year 1973-74, the actuarial valuation had been determined at Rs. 48,59,341. The company added back the provision for gratuity amounting to Rs. 20 lakhs and claimed a total liability of Rs. 48,59,341 determined actuarially, as a deduction. The Tribunal did not allow the deduction of Rs. 20 lakhs on the ground that the said provision was made without complying with the requirements of section 40A(7). It, however, allowed the deduction in respect of the balance of Rs. 28,59,341. For the next assessment year 1974-75, the liability towards gratuity was worked out at Rs. 69,31,286 and the company had made provision for Rs. 45,93,559. Out of the balance for which no provision was made, the Tribunal allowed deduction of Rs. 15,71,855, but did not allow deduction of provision made for Rs. 45,93,559 on the ground that the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " as many as seven times, a circumstance emphasised by the Supreme Court in the above decision. In our opinion, that is a basic feature of this subsection. The sub-section declares that no deduction shall be allowed in respect of any provision made by the assessee for payment of gratuity to its employees, unless provision has been made by the assessee (i) for the purpose of payment of a sum by way of contribution towards an approved gratuity fund, or (ii) for the purpose of payment of any gratuity that has become payable during the previous year. (We are not concerned herein with the third exception contained in sub-clause (ii) of clause (b), since it is not relevant herein). The sweep of the sub-section is evident from the expression "any" preceding the word "provision" and also the words within brackets, viz., "(whether called as such or by any other name)", immediately following the expression "provision" in clause (a). The idea is that no provision made for payment of gratuity shall be allowed except in the circumstances mentioned in the said sub-section. Since an overriding effect is given to the provisions contained in section 40A by sub-section (1) thereof, the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee. Y. Ratnakar, learned counsel for the assessee, argued, on the basis of the decision of the Supreme Court in Kedarnath Jute Manufacturing Co. Ltd. v. CIT [1971] 82 ITR 363, that once there is an obligation to pay, it does not matter that the assessee has failed to debit the liability in its books of account. Such failure to debit the liability in its books of account, it is contended, did not preclude the assessee from claiming the sum as deduction under the relevant provision. On this basis, learned counsel submitted that even though no entry has been made in the books of account appropriating certain amount towards this liability, still the assessee is entitled to claim it as a deduction, inasmuch as the liability has accrued by virtue of, and in terms of, the approved gratuity fund. We cannot agree. In Kedarnath Jute Mfg. Co.'s case [1971] 82 ITR 363 (SC), the liability concerned was liability to pay sales tax which had attached and accrued by operation of law. Under the Sales Tax Act, the liability to pay attaches the moment the sale takes place. This liability cannot be ignored or undone by not making entries in the books of account maintained by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court. We do not think it necessary to deal with the facts or the ratio of the said judgment in detail for more than one reason. The correctness of this decision was doubted by the Madras High Court in CIT v. Andhra Prabha (P.) Ltd. [1980] 123 ITR 760 and the decision of the Madras High Court has been approved and affirmed by the Supreme Court in CIT v. Andhra Prabha Pvt. Ltd. [1986] 158 ITR 416. Secondly, in view of the decision of the Supreme Court in Shree Sajjan Mills' case [1985] 156 ITR 585, any contrary proposition by a High Court cannot be given effect to. We may, however, refer to the decision of the Calcutta High Court in CIT v. New Swadeshi Mills of Ahmedabad Ltd. [1984] 147 ITR 163, the relevant observations wherein are referred to, with approval, by the Supreme Court in Shree Sajjan Mills' case [1985] 156 ITR 585. It has been held by the Calcutta High Court that the assessee was not entitled to claim any deduction on account of its liability to pay gratuity estimated on an actuarial basis, merely because it was following the mercantile system of accounting. It was held that the assessee must fulfil the conditions in section 40A(7)(b) to claim the deduction, which ..... X X X X Extracts X X X X X X X X Extracts X X X X
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