1. By this reference under Section 256(1) of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), the Income-tax Appellate Tribunal, Indore Bench, has referred the following questions of law to this court for its opinion:
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in disallowing the appellant-company's claim for gratuity amounting to Rs. 10,10,453 in the A.Y. 1974-75 ?
(2) Whether the deduction of liability for the provision of gratuity arose in the A.Y. 1974-75 relevant to the accounting year ended June 30, 1973, only or in the A.Y. 1973-74 in respect of the provision for liability for the earlier years, when the provisions of the Gratuity Act, 1972, came into force; w.e.f. September 16, 1972, and the applicant is maintaining books of account on mercantile basis ?
(3) Whether Section 40A(7) of the I.T. Act, 1961, does not permit the deduction of gratuity liability under Section 40A(7)(b)(i) for the purpose of payment of gratuity, that has become payable during the previous year on account of the Gratuity Act, 1972, came into force w.e.f. September 16,1972, in view of the fact that the applicant maintains the books of account on mercantile basis and the deduction is claimed on the basis of actuarial valuation though the provision for the gratuity liability in respect of the earlier years not made in the accounting year relevant to the A.Y. 1974-75?'
2. The material facts giving rise to this reference briefly are as follows :
The assessee is a limited company carrying on the business of manufacture and sale of sugar. The assessment year in question is 1974-75, for which the relevant accounting year ended on 30th June, 1973. While framing the assessment, the ITO disallowed two amounts of deduction claimed by the assessee, (I) a sum of Rs. 6,543 which was said to represent the gratuity liability accrued in the year of account, and (2) a sum of Rs. 10,03,910, which was said to represent the liability towards gratuity pertaining to the years earlier to the year of account. In the year of account, the appellant-company had created a provision of Rs. 45,062 towards gratuity and debited the same to the profit and loss account. The ITO found that the actual payments made in the year on account towards gratuity amounted to Rs. 38,519 only. Deduction to that extent was allowed by the ITO. The balance of Rs. 6,543 was disallowed on the ground that the requirements prescribed by Section 40A(7) of the Act had not been complied with by the assessee. The assessee claimed deduction of theaforesaid two sums on the ground that the Payment of Gratuity Act came into force on 16th September, 1972, and that as a result thereof, the assessee had become liable for the payment of gratuity amounting to Rs. 10,03,910 for the earlier years and Rs. 6,543 for the year of account. The contention of the assessee was that the provision of Rs. 10,03,910 was not made in the year of account as the provision of Rs. 10,20,739 had already been made in the preceding year and that the said deductions should, therefore, be allowed under Sections 37(1) of the Act. On appeal, the Commissioner (Appeals) held that the question of admissibility of the aforesaid deductions had to be considered in the light of the provisions of Section 40A(7) of the Act and that the assessee had admittedly not complied with the requirements of that section. The Commissioner (Appeals) further held that the amount in question was not allowable as a deduction under s 37(1) of the Act. In this view of the matter, the claim of the assessee for the said deductions was rejected by the Commissioner (Appeals). The assessee thereupon preferred a second appeal before the Tribunal. The Tribunal also held that since the assessee had failed to comply with the requirements of Section 40A(7) of the Act, it was not entitled to deduction of the aforesaid amounts. The Tribunal, therefore, dismissed the appeal. Hence, at the instance of the assessee, the aforesaid questions of law have been referred to this court for its opinion.
3. The first contention raised on behalf of the assessee was that the claim for deduction was allowable under Section 37(1) of the Act. Now, Sub-section (7) of Section 40A of the Act was inserted by the Finance. Act, 1975, with effect from 1st April, 1973. The material part of that provision reads as Under :
'40A. (7)(a) Subject to the 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;
(ii) any provision made by the assessee for the previous year relevant to any assessment year commencing on or after the first 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 actuarialvaluation of the ascertainable liability of the assessee for payment ofgratuity to his employees on their retirement or on termination of theiremployment 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.... '
4. The aforesaid provision makes it clear that after 1st April, 1973, any claim for deduction in respect of gratuity would have to be founded within the ambit of the aforesaid provisions and Section 37 of the Act would not be applicable. In this connection, we may refer to the decision reported in Peoples Engineering & Motor Works Ltd. v. CTT : 130ITR174(Cal) , and to a decision of this court in Misc. Civil Case No. 263 of 1980 (CIT v. Sajjan Mitts Ltd, (see p. 185 supra], with which we respectfully agree.
5. It was then contended that Section 40A(7) of the Act would be attracted only when a provision for gratuity was made by an assessee in his account books. A similar contention was advanced on behalf of an assessee in Misc. Civil Case No. 263 of 1980 (see p. 185 supra], and was rejected by a Division Bench of this court. We see no reason to take a view different from that taken in Misc. Civil Case No. 263 of 1980.
6. Lastly, it was contended that the claim of the assessee was covered by the provisions of Sub-clause (i) of Clause (b) of Sub-section (7) of Section 40A of the Act. It was urged that the claim of the assessee was based on an actuarial valuation of the-liability of the assessee for payment of gratuity arising under the provisions of the Payment of Gratuity Act, 1972, which came into force on 16th September, 1972, i.e., in the relevant accounting year of the assessee, which ended on 30th June, 1973. It is true that before the insertion of Sub-section (7) in Section 40A of the Act, several High Courts had held that where an assessee makes an actuarial valuation of the present value of his future liability, he is entitled to deduct such present value in arriving at his business profits for each accounting year. However, as already observed, after the insertion of Sub-section (7) in Section 40A of the Act, any claim for gratuity would have to be founded on the provisions of that sub-section. On behalf of the assessee, it was, therefore, urged that Sub-clause (i) of Clause (b)of Sub-section (7) of Section 40A was attracted. The contention is untenable. That provision, in our opinion, is attracted only when a provision has been made by an 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. The amount of deduction claimed by the assessee could not be said to be the amount of gratuity that bad become payable in the year of account, on account of the coming into force of the Payment of Gratuity Act, 1972. Under the Act, the assessee was required to make payment of gratuity to its employees on the termination of their employment. The deduction of Rs. 10,03,910 claimed by the assessee was not and could not be held to be a provision for the purpose of payment of gratuity that had become payable during the year of account. In our opinion, the provisions of Sub-clause (i) of Clause (b) of Section 40A(7) of the Act are attracted in the case of a provision made for the purpose of meeting the actual liability of an assessee that has arisen in a particular year of account in respect of payment of gratuity to the employees of an assessee.
7. For all these reasons, our answer to question No. 1 referred to this court is in the affirmative and against the assessee. Learned counsel for the parties agreed that in view of our answer to question No. 1, it was not necessary to answer questions No. 2 and 3. We, therefore, decline to answer these questions.
8. Reference answered accordingly. Parties to bear their own costs of this reference.