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TMI Blog1980 (3) TMI 114X X X X Extracts X X X X X X X X Extracts X X X X ..... 150 but an amount of Rs. 4,955 was allowed by the ITO in the original assessment without any dispute. Therefore, the amount which is in dispute for these two assessments made for the same year is Rs. 24,195. For the asst. yr. 1975-76, the gratuity amount to be considered is Rs. 13,812. For the rest of the two years respectively, the amount is Rs. 8,098 and Rs. 2,166 which is arrived at by deducting from the total claim of Rs. 5,878 the sum of Rs. 3,712 allowed by the ITO in the assessment. We have stated these amounts because the grounds of appeal for each year on the quantum of gratuity to be considered are confusing and do not give the correct figures. 2. For the asst. yr. 1974-75, there is also a ground in ITA No. 648 of 1977-78 regarding the disallowance of Rs. 250 paid as professional tax. For the asst. yr. 1976-77 there is a ground involving an amount of Rs. 2,000 upheld by the AAC as disallowance out of miscellaneous expenses, under the subhead 'general charges'. The issue of allowability of professional tax is also raised as ground No.2 for the asst. yr. 1977-78. 3. In so far as the main issue is concerned, we have heard the parties. The claim of the assessee is that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atuity for the services rendered by all the employees in a year was contingent liability, such a liability can be taken into account as a trading expense because it was sufficiently ascertainable and capable of valuation and under the mercantile system of accounting, profit cannot be properly estimated without taking into account such a liability. 6. CBDT issued a circular dt. 21st Sept., 1970, 78 ITR 13 (Statutes), following the decision of the Supreme Court in the case of Metal Box Company of India Pvt. Ltd(1). The Board stated that the liability ascertained respect of an estimated service gratuity payable to the employees could not be considered as a contingent liability and provision for such gratuity may be treated as admissible deduction under s. 37(1) of the IT Act, 1961. Subsequently, in the case of Bombay Dyeing and Manufacturing Co. Ltd. vs. CIT(2), it was urged before the Supreme Court that the decision in the case of Metal Box Company of India(1), should be reconsidered because the Supreme Court had taken the view in Standard Mill Co. Ltd(7), that a provision for payment of gratuity was a contingent liability and cannot be deducted as debt for purposes of WT Act. How ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct could be claimed. 9. While this position was obtaining, the Finance Bill, 1975, in cl. (6) 98 ITR 129, Statutes) sought to introduce sub-s. (7) to s. 40A of the IT Act, 1961 w.e.f. 1st April, 1973 and this clause merely provided that no deduction shall be allowed in respect of any reserve created or provision made by the assessee for the payment of gratuity to his employees provided that nothing in this sub-section shall apply in relation to a provision made for payment or contribution to an approved gratuity fund. Notes on cl. 6, (98 ITR 168 Statutes) stated "under the new sub-s. (7), no deduction will be allowed, in the computation of the profits and gains of business or profession, in respect of any reserve created or provision made for the payment of gratuity to the employees on retirement or on termination to employment for any reason. This restriction will, however, not apply in relation to any provision 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 the actual liability in respect of payment of gratuity to the employees that has arisen during th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any gratuity before the creation of the approved gratuity fund, a sum equal to at least fifty per cent, of the admissible 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 1st day of April, 1977. Expln 1: For the purpose of sub-cl. (ii) of cl. (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 c. (h) of r. 2 of Part A of the payment of such gratuity for each year of his service in respect of which such provision is made. "Expln. 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 977. It is noteworthy that there is no provision as such for reopening an assessment where a claim had been allowed under s. 37 so as to enforce the conditions prescribed by s. 40A(7). 12. Now on the above position of law, we have to consider the claim of the assessee on the facts and in the circumstances available to us. We first dispose of the appeals relating to the asst. yr. 1974-75 and 1975-76. It is clear that to these years, the provisions of s. 40A(7)(b)(ii) are applicable. Therefore, the assessee created a trust on 24th Dec., 1975 known as Dewan Shah Sons Private Limited Employees Gratuity Fund, Jagadhri. This trust deed appears in the assessee's paper book at pages 3 to 19. The assessee also deposited 50 per cent of the gratuity payable for the asst. yrs. 1974-75 and 1975-76 before 1st day of April, 1976 and filed an application before the CIT Haryana, Rohtak which was received by him on 29th Dec., 1975. Since the assessee had fulfilled the conditions, the CIT by his order bearing P. No. 230(2)/76-77(J) dt. Sept., 20, 1978, granted approval to the fund. Thus the assessee had complied with the provisions of s. 40A(7) and became entitled to deductions in respect of gra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s circular are as under:- "It has been represented to the Board that the professional tax is not being allowed as a revenue expenditure under s. 37(1) of the IT Act, 1961, as its deduction is not covered by the specific provisions of s. 40(a)(ii) of the IT Act. S. 40(A)(ii) of the IT Act authorises disallowance of any sum paid on account of any rate of tax levied on the profits or gains of any business or profession or assessed at a proportion or, otherwise on the basis of any such profits and gains. The professional tax levied by local authorities cannot normally be considered to fall within s. 40(A)(ii) of the IT Act. In order to fall in this category, it would be necessary that the rate of tax is levied on the profits or gains of the business, profession or vocation and it should be assessed at a proportion or otherwise, on the basis of such profits or gains. In other words, what the section essentially seeks to convey is to prohibit the deduction of taxes on income. Professional taxes are levied under entry 60 of List II of the Constitution of India which speaks of taxes on profession, rates callings and employments. Art. 276 of the Constitution makes it clear that such taxe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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