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income-tax Officer Vs. Hoechst Pharmaceuticals Ltd. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1984)7ITD267(Mum.)
Appellantincome-tax Officer
RespondentHoechst Pharmaceuticals Ltd.
Excerpt:
.....(appeals) erred in holding that the initial contribution of rs. 57,29,637 payable to the gratuity fund of the assessee was allowable as deduction under section 36(1)(iv) of the income-tax act, 1961 ('the act'). the facts relating to this dispute are stated by the commissioner (appeals) in paragraph 6 of his order.the assessee-company constituted a gratuity fund for the first time with effect from 1-12-1975. this fund was given approval by the commissioner with effect from 1-12-1975. the initial contribution payable to the fund ^representing the accrued gratuity liability up to 1-12-1975 amounted to rs. 71,29,547. the assessee has been allowed to pay the aforesaid amount to the approved gratuity fand in not more than five annual instalments. the assessee actually paid the entire.....
Judgment:
1. to 13. [These paras are not reproduced here as they involve minor issues.] 14. The only other ground to be considered in this appeal states that the Commissioner (Appeals) erred in holding that the initial contribution of Rs. 57,29,637 payable to the gratuity fund of the assessee was allowable as deduction under Section 36(1)(iV) of the Income-tax Act, 1961 ('the Act'). The facts relating to this dispute are stated by the Commissioner (Appeals) in paragraph 6 of his order.

The assessee-company constituted a gratuity fund for the first time with effect from 1-12-1975. This fund was given approval by the Commissioner with effect from 1-12-1975. The initial contribution payable to the fund ^representing the accrued gratuity liability up to 1-12-1975 amounted to Rs. 71,29,547. The assessee has been allowed to pay the aforesaid amount to the approved gratuity fand in not more than five annual instalments. The assessee actually paid the entire amount in five annual instalments beginning with the year 1975 and ending in the year ; 1979. The assessment year 1972-73, a sum of Rs. 5,54,744 has already been allowed as deduction representing the incremental liability for gratuity in respect of the calendar year 1971. Besides, the assessee has debited a sum of Rs. 8,48,176 to the profit and loss account of the year under consideration as gratuity liability which appears to have been allowed. The balance of Rs. 57,29,634 out of the aforesaid sum of Rs. 71,29,547 was separately debited to the profit and loss account of the year under consideration and claimed as deduction towards the gratuity liability. The claim of the assessee was that the initial contribution was payable to an approved gratuity fund. The ITO negatived the claim on the ground that the assessee had not transferred the amount to the gratuity fund during the year under consideration and also because the liability pertained to earlier years.

15. The assessee appealed to the Commissioner (Appeals) and contended that the claim of the assessee should have been allowed. The Commissioner (Appeals) found that the gratuity fund created by the assessee has been approved by the Commissioner with effect from 1-12-1975 and the sum of Rs. 71,29,547 has been quantified as initial contribution payable to the approved fund on 1-12-1975. He noted that the assessee was following the mercantile system of accounting and so any liability which has accrued during the previous year was deductible while computing the business income. He referred to Section 36(1)(v) which says that any sum paid by way of contribution towards an approved gratuity fund is eligible for deduction. He also referred to Section 43(2) of the Act which defines 'paid' as meaning 'incurred' in cases following the mercantile system of accounting. In this view of the matter, he held that the entire initial contribution payable by the assessee to the approved gratuity fund accrued as a liability during the year under consideration and was admissible as deduction under Section 36(1)(v). He observed that the mere fact that the assessee did not actually pay the amount during the year under consideration but.

paid in five instalments annually, as permitted by the Commissioner, would not make any difference to the aliowability of the assessee's claim because of the mercantile system of accounting followed by the assessee. Hence, he allowed the deduction.

16. Shri T.S. Srinivasan urged before us that the learned Commissioner (Appeals) erred in his decision inasmuch as he ignored the provisions of Section 40A(7) of the Act. He urged that Section 40A(7) prohibited the deduction of any sum which was not actually paid but merely kept as a provision and so the action of the Commissioner (Appeals) was not tenable. Shri S,E. Dastur, on the other hand, supported the order of the Commissioner (Appeals). He stated that the amount has been rightly allowed by the Commissioner (Appeals) under Section 36(1)(v) and also contended that the amount was deductible even after considering the provisions of Section 40A(7). He relied on Section 40A(7)(b)(i) in support of his contention. His point was that the amount under consideration, even if it is taken to be a provision, has been made for the purpose of payment by way of contribution towards an approved gratuity fund that has become payable during the previous year and so, it was admissible as a deduction under Section 40A(7)(b)(i) also.

17. We have considered the contentions of both the parties as well as the facts on record. We find that Section 36(1)(v) allows as a deduction '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'. On a plain reading of this section it is clear that this section allows as a deduction any sum paid to an approved gratuity fund. Section 43(2) says 'paid' includes 'incurred' in cases where mercantile system of accounting is followed. Thus, the position is that if there is an approved gratuity fund, then any amount actually paid to it or which has in fact accrued as a liability for payment by way of contribution to it becomes allowable for deduction. Thus, under Section 36(1)(v), amounts actually paid or liabilities definitely incurred during the previous year under consideration are deductible if they represent contribution to approved gratuity fund. This is so even if the liability which accrued during the previous year related to the services received by the assessee in the earlier years. Vide Board's Circular No. 30(XLVII-18), dated 30-11-1964 [see Taxman's Direct Taxes Circulars Vol. 1, 1980 edn., pp. 207-08].

18. Prior to the enactment of Section 40A(7) with retrospective effect from the assessment year 1973-74, liabilities in respect of gratuity which accrued during the previous year was held to be admissible deduction under Section 37 of the Act, even though there was no approved gratuity fund, provided the conditions in Section 37 were fulfilled. This liability was allowable on the basis of actual payment under cash system of accounting and on the basis of accrued liability in cases of mercantile system of accounting, subject to the condition that the liability was quantified on a scientific basis like actuarial valuation. In other words, even a provision made towards gratuity liability in a case having no approved gratuity fund was being allowed as deduction under Section 37 provided the quantum of deduction was determined on an actuarial basis, vide the decisions in the cases of (SC) and Tata Iron and Steel Co. Ltd. v. D.V. Bapat, ITO [1975] 101 ITR 292 (Bom.).

19. After coming into force of Section 40A(7) with effect from the assessment year 1973-74, the above position has changed materially, as pointed out by the Madras High Court in the case of CIT v. Andhra Prabha (P.) Ltd. [1980] 123 ITR 760 : ...The amendment superseded the general principle as regards the liability for gratuity and, therefore, after the first day of April, 1973, the question of deducibility of a similar claim would have to be found within the four corners of Sections 36 and 40A... (p. 772) It is, therefore, necessary to look into the provisions of Section 40A(7) more closely with a view to understand its implications.

20. Section 40A(1) says that its provisions will have effect notwithstanding anything contained to the contrary in any other provisions of the Act. This means that Section 40A has ah overriding effect. Section 40A(7) enacts a prohibition regarding deduction of provision for gratuity liability which would have been otherwise allowable under Section 36(1)(iv) or Section 37 read with Section 43(2). Clause (a) of Section 40A(7) says that no deduction shall be allowed in respect of any provision for the payment of gratuity by whatsoever name it is called. Its effect is that provisions for gratuity liability which would have been otherwise allowable under Section 36(1)(v) or Section 37 under the law prior to the amendment will no longer be admissible as a deduction. Then Clause (b) of Section 40A(7) enacts certain exceptions to Clause (a). To our mind, Clause (b) is a proviso to Clause (a), so much so, that a case falling within Clause (b) will not be hit by Clause (a). This fact, however, does not mean that whatever falls within Clause (b) has to be automatically allowed as a deduction. When a case comes under Clause (b), it only means that it goes out of the purview of Section 40A(7). The question always remains whether it is allowable under Section 36(1)(i) or Section 37. Thus, the prohibitory provisions of Section 40A(7)(a) does not apply to cases coming under Clause (b) and such cases are to be considered under the other provisions of the Act without any further reference to Section 40A(7).

21. Section 40A(7)(fc) makes two exceptions to the prohibition enacted by Clause (a). In the present case, we are not concerned with the second exception, because they relate to assessment years other than the assessment year 1976-77 which is under consideration. The argument of the learned counsel for the assessee before us is based on the first exception ; namely, that contained in Clause (b)(i) of Section 40A(7), which reads as under : any provision made by the assessee for 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 above provisions evidently contain two alternatives which can be read as below : A. Any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund that has become payable during the year.

B. Any provision made by the assessee for the payment of any gratuity that has become payable during the previous year. We are not concerned with the second alternative in this case, which apparently relates to the amounts that have become payable because of the actual retirement or death of some employees duryig the previous year under consideration. We are concerned in this case with the situation at A above. If the conditions stated in that situation are satisfied, then, obviously the case goes out of the purview of Section 40A(7).

22. In the case before us, the amount has not actually been paid but has been provided for payment by way of contribution towards a gratuity fund that has admittedly been approved under the Act. The amount of Rs. 71,29,547 has been determined payable on 1-12-1975 out of which a portion has already been paid and allowed as deduction. We are now concerned with the balance of Rs. 57,29,634 which has been provided for in the accounts. The amount has been actuarially determined. This amount has also become payable during the previous year in terms of the trust deed of the gratuity fund. Hence, it is clear that the facts of the case come under situation A above and the conditions therein are fulfilled so that the case goes out of the purview of Section 40A(7).

23. Once a case goes out of the purview of Section 40A(7), the other provisions of the Act come into play. The amount under consideration represents a sum determined on actuarial basis that has become payable during the year under consideration towards an approved gratuity fund and so is admissible as deduction under Section 36(1)(v) or Section 37.

In fact, if the provision relates to an approved gratuity fund envisaged under Section 36(1)(v), it cannot be hit by Section 40A(7) ; and so its operation is limited to the provisions claimed under Section 37 only. The mere fact that the amount in question has not yet been paid, does not stand in the way of allowing the deduction because of Section 43(2) and the fact that the assessee was following the mercantile system of account. Under the circumstances, we uphold the decision of the Commissioner (Appeals), on this point and reject this ground.

24. to 26. [These paras are not reproduced here as they involve minor issues.]


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