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TMI Blog1987 (6) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... ompulsory Gratuity Act, 1971, which was promulgated some time in August, 1971, with retrospective effect from June 14, 1971. The Income-tax Officer disallowed the claim of the assessee for deduction on account of the aforesaid provision for gratuity. Being aggrieved, the assessee preferred an appeal from the said assessment before the Appellate Assistant Commissioner. It was contended on behalf of the assessee before the Appellate Assistant Commissioner that the liability in respect of payment of gratuity accrued on the last day of the accounting period relevant to the assessment year involved. The Appellate Assistant Commissioner held, following the decision of the Bombay High Court in Official Liquidator, Sakseria Cotton Mills Ltd. v. CIT [1971] 81 ITR 528, that liability in respect of gratuity was allowable on the basis of actuarial and scientific calculation. The Appellate Assistant Commissioner accepted the certificate of the actuary furnished by the assessee that the present discounted liability for payment of gratuity to the various employees of the assessee retiring in future amounted to Rs. 57,643. Following the decision of the Bombay High Court in Tata Iron Steel Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n allowable deduction in computing the profits and gains of the assessee's business ?" At the hearing, the learned advocate for the Revenue submitted that under the Income-tax Act, 1961, an assessee was entitled to claim deduction on account of gratuity only under section 36(1)(v) which provided as follows: " 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- . ...... (v) 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 his employees under an irrevocable trust." Learned advocate submitted further that the assessee was not entitled to claim deduction on account of only a provision for gratuity under section 37 of the said Act of 1961 by reason of the aforesaid specific provision of section 36. It was also faintly submitted that as the West Bengal Employees' Payment of Compulsory Gratuity Act, 1971, was promulgated only in August, 1971, after the close of the accounting year, the assessee could not have provided for gratuity as payable under the statute in its a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es were expenditure incurred for purposes of business in the year in which 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 previous year was allowed as an expenditure of the previous year on accrued basis when the 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 deductible either under section 28 or section 37 of the Act. " (c) D. V. Bapat, ITO v. Tata Iron Steel Co. Ltd. [1986] 159 ITR 938 (SC). In this case, in the assessment year 1973-74, the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said assessment year, the Income-tax Officer disallowed a part of the amount provided. The Appellate Assistant Commissioner and the Tribunal accepted the case of the assessee and allowed the entire amount provided. An application for reference from the order of the Tribunal was rejected both by the Tribunal and by the High Court. The Revenue preferred an appeal before the Supreme Court from the order of the High Court rejecting the application for reference. The Supreme Court noted its earlier decision in Shree Sajjan Mills Ltd.'s case [1985] 156 ITR 585. On a concession by the parties that the matter should be disposed of as in the case of D. V. Bapat, ITO v. Tata Iron Steel Co. Ltd. [1986] 159 ITR 938 (SC), the matter was remanded to the High Court. As no one had appeared on behalf of the assessee, we invited Mr. R. N. Bajoria, learned advocate of this court, to act as amicus curiae in this proceeding. Mr. Bajoria drew our attention to a number of decisions of the Supreme Court as also of other High Courts. According to Mr. Bajoria, the controversy raised in this proceeding stood concluded by the said decisions which are considered hereafter. (a) Tata Iron Steel Co. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an estimate on actuarial basis of its liability for payment of gratuity and claimed deduction of the same under section 28 or 37 of the Income-tax Act, 1961. On these facts, it was held by a Division Bench of this court on reference that in the relevant assessment year, section 40A(7) of the Income-tax Act, 1961, had come into force with effect from April 1, 1973, and had been made applicable to the said assessment year 1973-74. Unless the conditions laid down in the said section 40A(7)(b) were fulfilled by the assessee, inter alia, by creation of an approved gratuity fund for the exclusive benefit of its employees under an irrevocable trust and by making payment of the prescribed amount to such fund within the prescribed time, the assessee would not be entitled to claim any deduction merely on the basis of an estimate on actuarial basis. (d) CIT v. Andhra Prabha P. Ltd. [1986] 158 ITR 416 (SC). In this case, in the assessment year 1969-70, the assessee which followed the mercantile system of accounting, provided for payment of gratuity to its employees, the liability for which arose under the Working journalists (Conditions of Service and Miscellaneous Provisions) Act, 1955, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 836 (SC). In this case, in the assessment year 1972-73, the assessee claimed deduction on account of provision made by it towards gratuity payable to its employees. The amount claimed was estimated on actuarial valuation. The claim was disallowed by the Income-tax Officer but allowed by the Appellate Assistant Commissioner. The decision of the Appellate Assistant Commissioner was affirmed by the Tribunal. An application for reference was rejected by the High Court. On an appeal before the Supreme Court, it was held that the law relating to the controversy had been laid down by the Supreme Court in respect of the assessment year involved, in its earlier decision in Shree Sajjan Mills Ltd. [1985] 156 ITR 585. The appeal was rejected. (g) CIT v. Pearey Lal Sons P. Ltd. [1986] 162 ITR 838 (SC). In this case, the assessee claimed a deduction on account of a provision made by it for payment of gratuity to its employees for the assessment year 1972-73. The claim was allowed by the Tribunal. An application of the Revenue for a reference on the order of the Tribunal was rejected by the High Court. On further appeal, it was held by the Supreme Court that the law on the controversy which ..... X X X X Extracts X X X X X X X X Extracts X X X X
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