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Petitioner: COMMISSIONER OF INCOME-TAX, CENTRAL V, CULCUTTA VS Respondent: MESSRS NEW SWADESHI MILLS OF AHMEDABAD LTD.
1986 P T D 704
1986 P T D 704
[Calcutta High Court (India)]
Before Sabyasachi Mukharji, Actg. C.J. and Suhas Chandra Sen, J
COMMISSIONER OF INCOME‑TAX, CENTRAL V, CULCUTTA
Versus
Messrs NEW SWADESHI MILLS OF AHMEDABAD LTD.
Income‑tax Reference No.646 of 1979, decided on 9th March, 1983.
Income‑tax‑‑‑
‑‑‑Liability to pay gratuity estimated on actuarial basis without making any provision for that liability‑‑ Assessee not entitled to deduction, The assessee's case was that the prohibition contained in section 40‑A (7), Indian Income‑tax Act, 1961 must be confined to a case where the assessee has actually set apart a sum by way of provision for the purpose of payment of gratuity. But in a case, as in the present, where no provision has been made for payment of gratuity the bar contained in section 40‑A (7) (a) will not apply and there is no legal impediment in allowing the claim of the assessee for deduction.
Held, the contention cannot be accepted. The prohibition in section 40‑A (7) is on deduction in respect of any provision (whether called as such or by any other, name) made by the assessee for the payment of gratuity. The amplitude of the section is indicated by the expression "whether called as such or by any other name". The sum may or may not be shown in the accounts as provision for payment of gratuity. If, it is not so shown, the result will be the same. The embargo, subject to clause (b), is on deduction of any amount for the payment of gratuity. The interpretation as suggested on behalf of the assessee will lead to a conclusion which will be extraordinary and repugnant to commonsense. It will also cause grave injustice to the assessees who have been prudent enough to set apart a sum for payment of gratuity. If the assessee's contention is to be accepted, then the result will be that a company which does not make any provision for payment of gratuity at all will be entitled to get a deduction on account of its statutory liability to pay gratuity on estimation without having to fulfil any condition; but ii a company makes a provision for payment of gratuity after making an actuarial valuation of its liability, it will not be able to get any deduction unless the requirements laid down in section 40‑A (7) (b) are fulfilled. Section 40‑A (7) cannot be interpreted in such a manner as would lead to absurdity. The section provides the method and manner in which the assessee can claim deduction on account of its statutory liability to pay gratuity even before its employees retire or their services are terminated in any manner. When there is a specific overriding provision in the Act dealing with the method and manner in which an assessee can claim deduction on account of its liability for payment of gratuity, there is no scope for invoking any general provision for allowance of such a claim. It follows that the assessee is not entitled to claim any deduction on account of its liability to pay gratuity estimated on actuarial basis without making any provision for that liability. Special rules have been made in the Income‑tax Act for this purpose and in order to claim that deduction, the assessee must follow the procedure and fulfil the condition laid down in the Act in this regard.
In the instant case, even if an assessment is made in accordance with the method of accounting regularly employed by the assessee as enjoined by section 145, Indian Income‑tax Act, 1961 the assessee will not be entitled to get this deduction. Under the mercantile system of accounting, which the assessee is following, the right to receive or the liability to pay trade debts or any other debt falls to be computed for tax purposes in the year in which the liability to pay or the right to receive, as the case may be, arises notwithstanding that the date for actual payment of the money is outside the year. Under the scheme of the Payment of Gratuity Act, however, the employee is not entitled to receive and the employer is not under a legal obligation to pay gratuity to its employees every year. The right to receive gratuity arises only on the retirement or on the termination of the service of an employee. Therefore, it is open to the assessee to claim this amount as a deduction when the liability to pay gratuity arises on the retirement or termination of service of an employee.
(b) Income‑tax
---Appeal before A. A. C.‑‑Question whether interest had at all been charged by I. T.O. and if so whether it should have been waived, raised along with other grounds of appeal‑‑Held, A . A . C . should not have dismissed appeal in limine.
130 I T R 174 (Cal.); 117 ITR 603 (Cal.); (1975) 101 I T R 292; 82 I T R 363 and (1954) 36 Tax Cas. 602.
A.N. Bhattacharji for the Revenue.
R.N. Bajoria with S.K. Bagaria for the Assessee.
JUDGMENT
SUHAS CHANDRA SEN, J.‑‑At the instance of the Commissioner of Income‑tax, Central‑V, Calcutta, the following two questions of law have been referred by the Tribunal under section 256 (1) of the I.T. Act to this Court:‑
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in directing the I.T.O. to allow the claim of Rs. 19,17,126 for deduction on account of liability for payment of gratuity based on actuarial valuation?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee is entitled to agitate in the quantum appeal the ground in respect of the order passed by the income‑tax Officer levying interest under section 215 of the I. T. Act, 1961?"
2. This case relates to the assessment year 1974‑75 for which the accounting period is the year ended 31st March, 1974.
3. The first question relates to the deduction of gratuity liability made on actuarial basis. The Income‑tax Officer did not allow that deduction on the ground that there was no accrued gratuity liability. On appeal the Appellate Assistant Commissioner confirmed the order of the I.T.O.
4. On further appeal the Tribunal held that since the liability was created on estimated actuarial valuation, the assessee was entitled to the deduction even though the assessee had not made any provision for payment of gratuity in its books of account. The second question relates to the charging of interest under section 215 of the I.T. Act, 1961. The Income‑tax Officer had charged an amount of Rs.31,49,378 as interest under section 215 of the I.T. Act. Before the Appellate Assistant Commissioner it was contended, on behalf of the assessee, that there was no direction in the order for charging such interest. In the assessment order there was a direction "charge interest if leviable." It was also argued that the Income‑tax Officer should have waived interest under section 215 (1), read with Rule 40 (I) (v). The Appellate Assistant Commissioner held that the Income‑tax Officer had directed charging of interest in the last paragraph of the assessment order. The Appellate Assistant Commissioner also held that the question of rate of interest was beyond the purview of section 246 and he was unable to entertain that contention. The Tribunal on further appeal held that since the point of leviability of interest under section 215 had been raised along with other grounds of appeal, it had to be entertained. The Tribunal, therefore, restored this point to the Appellate Assistant Commissioner for fresh disposal on merits.
5. Being aggrieved by the order of the Tribunal, the Commissioner of Income‑tax applied for referring a number of questions of law arising out of the order of the Tribunal and the Tribunal referred the two questions of law which we have set out earlier to this Court.
6. It has been argued by Mr. Bajoria, on behalf of the assessee, that the assessee was following the mercantile system of accounting. After the Payment of Gratuity Act was passed, there was a legal liability on the assessee for payment of gratuity. The assessee had made an estimate of that liability on actuarial basis for the relevant year of accounting and had claimed deduction of that amount on well‑established commercial principle. It is true that the assessee has not made any provision for payment of gratuity in its books of account. But whether any such provision was made or not was quite immaterial for the purpose of claiming this deduction under section 37 of the I.T. Act. Reliance in this connection has been placed on a judgment of the supreme Court in the case of Kedar Nath Jute Manufacturing Company Limited v. Commissioner of Income‑tax, Central Calcutta (1971) 82 I T R 363: (1971) Tax L R 1380). It was contended that the existence or absence of any provision in the books of account of the assessee cannot be decisive or conclusive in a matter like this. The assessee had a statutory obligation to pay gratuity and the assessee was entitled to claim deduction on account of that liability. It was further contended that section 40‑A (7) of the I. T. Act, 1961, which came into force, with effect from 1st April, 1973, was applicable only to those cases where any provision had been made by an assessee for payment of gratuity to his employees on their retirement or on termination of their employment for any reasons,. In a case, as in the case before us, where the assessee has not made any provision for payment of gratuity, the provisions of section 40‑A (7) will not apply and there was no legal impediment to allowance of this deduction to the assessee either under section 28 or under section 37.
7. In order to decide the controversy raised in this case, it is necessary to set out the relevant provisions in respect of gratuity made in the I.T. Act:‑‑
"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‑‑
(i) to (iv) ....................................................
(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."
"40‑A. (1) The provision, of this section shall have effect notwithstanding anything to the contrary in any other provision of this Act relating to the computation of income under the head "profits and gains of business or profession."
7. (a) Subject to the provision 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;
(ii) any provision made by the assessee for the previous year relevant to any assessment year commencing on or after the 1st day of April, 1973, but before the 1st day of April, 1976, to the extent the amount of such provision does not exceed the admissible amount, if the following conditions are fulfilled, namely:‑
(1) the provision is made in accordance with an actuarial valuation of the ascertainable liability of the assessee for payment of gratuity to his employees on their retirement or on termination of their employment for any reason;
(2) the assessee creates an approved gratuity fund for the exclusive benefit of his employees under an irrevocable trust, the application for the approval of the fund having been made before the 1st day of January, 1976; and
(3) a sum equal to at least fifty per cent of the admissible amount, or where any amount has been utilised out of such provision for the purpose of payment 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."
8. It is not necessary to set out the explanation to the section for our present purpose.
9. In the memorandum explaining the provisions in the Finance Bill, 1975, the underlying purpose of section 40‑A (7) was explained thus:‑
"Deduction in respect of reserves created or provisions made for payment of gratuity to employees:‑
Under section 36 (1) (v) of the I.T. Act, a deduction is allowed, in computing the taxable profits and gains of a business or profession in respect of any sum paid by the tax‑payer 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. Further, section 37 (1) provides that any expenditure, other than the expenditure of the nature described in sections 30 to 36, laid out or, expended wholly or exclusively for the purpose of the business or profession will be allowed as deduction in computing the taxable profits. A reading of these two provisions clearly shows that the intention has always been that deduction in respect of gratuities should be allowed either in the year in which the gratuity is actually paid or in the year in which contributions are made to an approved gratuity fund. A doubt has been expressed that the relevant provisions, as presently worded, do not secure the underlying objective and that a provision made by a tax‑payer in his accounts in respect of estimated service gratuity payable to employees will be deductible in computing the taxable income in a case where the provision has been made on a scientific basis in the form of an actuarial valuation. In order to remove uncertainty in the matter, it is proposed to specifically provide in the law that no deduction will be allowed, in the computation of profits and gains of a 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 of employment for any reason. This will, however, not apply in relation to a 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 relevant account year, or for the purpose of meeting actual liability in respect of payment of gratuity to the employees that has arisen during such year."
10. The question that has been raised before us is whether an assessee is entitled to get deduction on account of estimated liability for payment of gratuity on an actuarial valuation even without setting apart an amount by way of provision for this purpose.
11. The answer to the question that has been raised will depend upon the nature and the scope of the liability that has been cast upon an employer by the Payment of Gratuity Act, 1972. Under section 4(1) of the Act it has been provided:‑ Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years:‑
(a) on his superannuation, or
(b) on his retirement or resignation, or
(c) on his death or disablement due to accident or disease Provided that the completion of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement.
12. It has further been provided in section 4 (2) that the employer shall pay gratuity to an employee at the rate of fifteen days' wages based on the rate of wages last drawn by the employee concerned for every completed year of service or part thereof in excess of six months. There are also special provisions in respect of a piece‑rated employee and also of an employee employed in a seasonal establishment.
Section 4(3) of the Payment of Gratuity Act provides that the amount of gratuity payable to an employee shall not exceed twenty months wages.
Section 4(4) of the Payment of Gratuity Act provides that for the purpose of computing the gratuity payable to an employee who is employed, after his disablement, on reduced wages, his wages for the period preceding his disablement shall be taken to be the wages received by him during that period and his wages for the period subsequent to his disablement shall be taken to be the wages as so reduced.
Section 4(6) provides:
"Notwithstanding anything contained in subsection (1)‑‑
(a) the gratuity of an employee, whose services have been terminated for any act, wilful omission or negligence causing any damage or loss to, or destruction of property belonging to the employer, shall be forfeited to the extent of the damage or loss so caused;
(b) the gratuity payable to an employee shall be wholly forfeited:‑‑
(i) if the services of such employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part, or
(ii) if the services of such employee have been terminated for any act which constitutes an offence involving moral turpitude, provided that such offence is committed by him in the course of his employment."
13. The Payment of Gratuity Act is a social legislation under which an employee is entitled to get a lump sum on his superannuation or resignation or on his death or disablement. The amount payable is to be calculated by multiplying the last drawn salary by his years or service. The salary drawn in the earlier years is quite irrelevant for this purpose except in the case of an employee who, after his disablement, is employed on reduced wages. There is, however, a ceiling imposed under section 4(3) that an employee is not entitled to get more than a sum of twenty months' wages by way of gratuity.
14. The liability to pay is also hedged by a number of conditions. An employee must complete at least five years of service except in the case of death or disablement. The gratuity payable to an employee is also liable to be forfeited where damage or loss or destruction of property belonging to the employer has taken place due to any wilful omission or negligence of the employee to the extent of such loss or damage. The gratuity payable to an employee is liable to be wholly forfeited under section 4 (6) (b) if the service of an employee has been terminated for his riotous or disorderly conduct or any act of violence or for any act which constitutes an offence committed in course of his employment involving moral turpitude.
15. The liability to pay gratuity is a statutory liability which falls upon an assessee in course of carrying on of its business activities and is clearly an expenditure laid our wholly and exclusively for the purpose of the assessee's business. The only question that arises in this case is in what manner and in which year will the assessee get the benefit of this deduction.
16. Section 36(i)(v) specifically provides that any payment by way of contribution towards an approved gratuity fund created by an assessee for the exclusive benefit of his employees under an irrevocable trust shall be allowed as deduction in computing the assessee's business income.
17. The Payment of Gratuity Act came into force on 16th September, 1972. Section 40‑A (7) was introduced in the Income‑tax Act, with effect from 1st April, 1973, and was made applicable to the assessment year 1973‑74 and all the subsequent years. Section 40‑A is an overriding section and will apply notwithstanding anything contained in any other provisions of this Act relating to computation of income under the head "Profits or gains of business or profession". The section heading is "Expenses of payments not deductible in certain circumstances'". Section 40‑A (7) (a) prohibits deduction of any provision by whatever name called made by an assessee for the payment of gratuity to his employees on their retirement or termination of their employment for any reason. This is, however, subject to the provisions of clause (b). Clause (b) lays down the conditions which have to be fulfilled by an assessee in order to get out of the mischief of the provisions contained in section 40‑A (7) (a). A provision to pay an amount which has become due and payable during the previous year will have to be allowed. A provision for payment of gratuity of a sum by way of contribution towards an approved gratuity fund will also have to be allowed although the gratuity has not become payable during the relevant previous year. There are certain special provisions for the assessment years commencing on or after 1st April, 1973 but before the 1st April, 1976. For these assessment years in order to get a deduction a provision must be made in accordance with the actuarial valuation of the ascertainable liability for payment of gratuity on the retirement or termination of the service of the employees. An assessee will also have to create an approved gratuity fund for the exclusive benefit of the employees under an irrevocable trust. The application for the approval of the fund must be made before 1st January, 1976. The allowance must be restricted to a sum equal to at least 50% of the admissible amount or where any amount has been utilised out of such provision for the purpose of payment of any gratuity before the creation of the approved gratuity fund, a sum equal to at least 50% of the admissible amount as reduced by the amounts so utilised by the assessee. The assessee's case is that the prohibition contained in section 40‑A(7) must be confined to a case where the assessee has actually set apart a sum by way of provision for the purpose of payment of gratuity. But in a case, as in the case before us, where no provision has been made for payment of gratuity, the bar contained in section 40‑A(7)(a) will not apply and there is no legal impediment in allowing the claim of the assessee.
We are unable to uphold this contention.
18. The prohibition in section 40‑A(7) is on deduction in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity. The amplitude of the section is indicated by the expression "whether called as such or by any other name". The sum may or may not be shown in the accounts as provision for payment of gratuity. If it is not so shown, the result will be the same. The embargo, subject to clause (b); is on deduction of any amount for the payment of gratuity.
19. The interpretation as suggested on behalf of the assessee will lead to a conclusion which will be extraordinary and repugnant to commonsense. It will also cause grave injustice of the assessees who have been prudent enough to set apart a sum for payment of gratuity. If the assessee's contention is to be accepted, then the result will be that a company which does not make any provision for payment of gratuity at all will be entitled to get a deduction on account of its statutory liability to pay gratuity on estimation without having to fulfil any condition; but if a company makes a provision for payment o1 gratuity after making an actuarial valuation of its liability, it will not be able to get any deduction unless the requirements laid down it section 40‑A(7)(b) are fulfilled. In our opinion, sections 40‑A(7) should not be interpreted in such a manner as would lead to absurdity. The section provides the method and manner in which the assessee can claim deduction on account of its statutory liability to pay gratuity even before its employees retire or their services are terminated in any manner. When there is a specific overriding provision in the Act dealing with the method and manner in which an assessee can claim deduction on account of its liability for payment of gratuity there is no scope for invoking any general provision for allowance of such a claim,
20. A Division Bench of this Court in the case of People Engineering and Motor Work's Limited v. Commissioner of Income‑tax, West Bengal‑I1 (1980) 130 I T R 174: (1981 Tax L R 716) after an elaborate analysis of the provisions of the Income‑tax Act and the Payment of Gratuity Act held (at p. 720):
"The payment of gratuity is a statutory liability created fog those who are earning income from the business profits and gains by carrying on business or profession or by carrying on adventure or trade which are of the same nature. The computation of such income and the deductions to be allowed must be guide by the provisions of the I.T. Act and that care categorical will what are the deductions to be allowed and these deduction are provided in section 30 and section 37 and, notwithstanding these deductions, it is specifically provided under section 40‑A that certain conditions are to be fulfilled for payment of gratuity. Gratuity, being one of the deductions, normally can be said to have…
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