1. This is a reference under Section 256(1) of the I.T. Act, 1961.
2. Facts as stated by the Income-tax Appellate Tribunal giving rise to the question of law referred by it are as follows. Assessee is a public limited company. Relevant assessment year is 19 73-74 for which the accounting year ended on 31st March, 1973. The assessee-company had entered into agreements with the workers' union for payment of gratuity by the 31st March, 1972. Company's practice was to account for gratuity on cash basis as and when paid. The company had made a provision in its books of account for payment of gratuity to its employees to the extent of Rs. 20,00,000 during the relevant accounting year. With the coming into force of the Payment of Gratuity Act, 1972, w.e.f. 16th September, 1972, a statutory liability was created on the company to pay gratuity to its employees as per the provisions of the said Act. The assessee-company, therefore, arranged for actuarial determination of its liability for gratuity to its employees. Pending the determination of such an actuarial valuation, the assessee had made a provision of Rs. 20,00,000 against the total accruing liability till the date of the preparation of the balance-sheet. At the time of filing the return of income for the assessment year 1973-74, the assessee added back this provision for gratuity amounting to Rs. 20,00,000 and claimed the total liability of Rs. 48,59,431 which was the actuarial determination of liability arising under the Payment of Gratuity Act in the relevant accounting year.
3. Before the ITO, the assessee claimed deduction of the entire liability of Rs. 48,59,431 as determined actuarially, It was contended that the provisions of Section 40A(7) of the I.T. Act were not applicable. The ITO disallowed the claim on the ground that there was non-compliance with the requirements of Section 40A(7) of the I.T. Act. The ITO allowed deduction only to the extent of actual payments made towards gratuity of the employees during the relevant accounting year. This amount came to Rs. 24,366. The assessee preferred an appeal against the ITO's order before the AAC. The AAC was of the view that the provisions of Section 40A(7) did not constitutea bar to the assessee's claim for deduction as the assessee had not made any provision in its books in respect of the amount of gratuity determined actuarially and the provision of Rs. 20,00,000 had also been added back in the statement of income. However, the AAC allowed deduction of Rs. 30,25,661 on this head which according to him constituted the assessee's liability for the relevanat accounting year.
4. The Department appealed against of the decision the AAC before the Appellate Tribunal. It was contended before the Tribunal that the assessee was not entitled to any deduction for gratuity except the amount actually paid because there was non-compliance with the statutory prosions of Section 40A(7) of the I.T. Act. The Tribunal held that the total liability for gratuity actuarially determined for the accounting year was Rs. 48,59,431. However, the assessee had made a provision of Rs. 20,00,000 without complying with the requirements of Section 40A(7) of the Act and, therefore, this sum of Rs. 20 lakhs could not be allowed as deduction. But the balance of Rs. 28,59,431 for which no provision was made in the books was allowable under Section 37(1) of the I.T. Act.
5. At the instance of the Department the following question has been referred to us for decision :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing the deduction of Rs. 28,59,431 under Section 37 of the Income-tax Act, 1961, out of the total of Rs. 48,59,431 made by the assessee towards liability for gratuity ?'
6. Provisions of the I.T. Act with which we are concerned for answering the question referred to us are Sections 37 and 40A. It will be useful to reproduce relevant provisions of Section 40A :
'40A. (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained 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 provisions of Clause (b), no deduction shall beallowed in respect of any provision (whether called as such or by any othername) made by the assessee for the payment of gratuity to his employeeson 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 ofApril, 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...'
7. Section 40A(1) reproduced above shows that this provision has an overriding effect on other provisions of the Act relating to computation of income under the head 'Profits and gains of business or profession'. This simply means that while computing income under the head 'Profits and gains of business or profession' and allowing various deductions provided for under the Act, the requirements of Section 40A will be mandatory in respect of the matters covered thereunder. Since Sub-section (7) of Section 40A refers to deductions on account of payment of gratuity to the employees of an assessee, Section 37 which is the residuary section for allowance of expenditure, will not be applicable. The Calcutta High Court in Peoples Engineering & Motor Works Ltd. v. CIT : 130ITR174(Cal) , has taken this view and we are in complete agreement with it.
8. Learned counsel for the assessee, however, laid great emphasis on the words 'in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity' occurring in Sub-section 7(a) of Section 40A. Learned counsel argued that for the operation of Sub-section 7(a) of Section 40A of the Act, it is imperative that the assessee should have made any provision for payment of gratuity. If, learned counsel urged, the assessee in its account books has not made any provision, the bar under Sub-section 7(a) will not apply and the amount of gratuity workedout by the actuarial method and claimed in the return is allowable under Section 37 of the I.T. Act. In fact this very reasoning was adopted by the Appellate Tribunal and a sum of Rs. 20,00,000 shown as provision in the profit and loss account was disallowed for non-compliance with Sub-section 7(a) of Section 40A while the balance was allowed as deduction.
9. Learned counsel referred to the definition of the word ' provision ' in Pt. Ill of Schedule VI of the Companies Act. He also referred to the case of Vazir Sultan Tobacco Co. Ltd. v. CIT : 132ITR559(SC) and Metal Box Co. of India Ltd. v. Their Workmen : (1969)ILLJ785SC . Perusal of the authorities mentioned above and the definition of the expression 'provision' under the Companies Act indicate that the word 'provision' has been considered in the aforesaid authorities in contradistinction to the expression 'reserves' for the specific purpose of preparation of a balance-sheet and profit and loss account by a company in compliance with Sections 209 to 215 of the Companies Act. The construction put by learned counsel for the assessee on the words ' any provision made by the assessee' occurring in Sub-section (7)(a) of Section 40A of the I.T. Act will lead to totally unreasonable and anomalous results. A company has to maintain regular books of account and prepare balance-sheet and profit and loss account under the provisions of Sections 209 and 210 of the Act. Sub-section (3) of Section 209 of the Companies Act is peremptory in this behalf and may be reproduced:
' For the purposes of Sub-sections (1) and (2), proper books of account shall not be deemed to be kept with respect to the matters specified therein, if there are not kept such books as are necessary to give a true and fair view of the state of the affairs of the company or branch office, as the case may be, and to explain its transactions.'
10. The assessee, therefore, had no option but to maintain accounts in accordance with the provisions of the Companies Act so that 'a true and fair view of the state of affairs of the company' for the relevant accounting years was available.
11. The assessee in the present case in accordance with its usual practice had made a provision of Rs. 20 lakhs towards gratuity but after the coming into force of the Payment of Gratuity Act sought to get its liability in that behalf determined by an actuary. It was only a fortuitous circumstance that the actuary did not submit his report to the company before the balance-sheet was drawn up. Had the report been received by the company before the drawing up of the balance-sheet and the profit and loss account, the company would have been liable under the Companies Act to show it in its account books. Merely because the balance-sheet was prepared earlier and the report of the actuary was received later, it could notbe said that no provision was or could be made in the account books and benefit of such a default on the part of the assessee-company to suitably amend the balance-sheet and its profit and loss account should be accorded to it by removing the bar contained in Section 40A(7)(a) of the I.T. Act. The effect of the construction put by learned counsel for the assessee with regard to Section 40A(7) will be that a company which faithfully complies with the provisions of the Companies Act will not be allowed any deduction unless it complies with the provisions of Section 40A(7); while a company which makes a default and suppresses the state of its financial health from the Governments and its shareholders, will be amply rewarded by allowance of deduction on account of gratuity without complying with the said provision. Such unreasonable consequences cannot be attributed to the statute.
12. The company maintains its accounts on mercantile basis. If, therefore, it claimed deduction on account of accrual of liability for gratuity, the same will be hit by the bar under Sub-section (7)(a) of Section 40A of the I.T. Act irrespective of the fact whether the account books of the assessee referred to this liability or not.
13. Thus in view of the non obstante clause in Section 40A of the I.T. Act no deduction was permissible under Section 37 of the Act for the assessee's liability for payment of gratuity to its employees without complying with the provisions of Sub-section (7)(a) of Section 40A of the Act.
14. We, therefore, answer the question referred to us in the negative and hold that the Tribunal was not justified in allowing the deduction of Rs. 28,59,431 under Section 37 of the I.T. Act, 1961, out of the total of Rs. 48,59,431 made by the assessee towards liability for gratuity.
15. Costs of this reference will be borne by the assessee-respondent. Counsel's fee Rs. 250, if certified.