1. These two appeals arise out of the common order of the Commissioner (Appeals), Coimbatore, in the case of Jawahar Mills Ltd., Salem, for the assessment years 1975-76 and 1976-77.
2 & 3. [These paras have not been reproduced here as they deal with a minor issue not covered in the synopsis.] 4. The next question relates to the claim for allowance of incremental liability towards gratuity, in excess of the insurance premia already allowed by the ITO. The facts are not in dispute. The assessee had established a gratuity fund knows as 'Jawahar Mills Ltd. Employees Gratuity Fund' from 1-12-1972. However, approval was asked for and obtained for 'Group Gratuity-cum-Life Assurance Scheme' as such, as seen from a copy of the Commissioner's order in C. No. 207(44)73 dated 3-12-1973. The trust deed itself provides that the intention is to provide for payment of gratuity by taking insurances on the lives of employees. It is in pursuance of this provision that the Group Insurance Scheme was entered into. The scheme covers the gratuity payable to persons whose services are terminated or come to an end on the death, resignation or retirement of an employee during the period covered by the policy. The amount of premium is only a fraction of the incremental liability towards gratuity. It is because the policy covers death, resignation, retirement or termination during the years, while the incremental liability takes into account the discounted value of the expected future liability of all the employees that the ITO allowed the actual payment of gratuity and payment of premia apparently under Section 36(1)(v) of the Act and did not allow the incremental liability as in his -view, the assessee did not have a larger liability then the premia payable by it. He, therefore, allowed the premium. He also allowed actual gratuity payments which were neither covered by the policy nor had been allowed on provision basis in the past. The assessee pointed out before the first appellate authority that the incremental liability had been determined on an actuarial basis. The incremental amount, as certified by the actuary (LIC), was claimed by the assessee in a separate letter for both the years. Such incremental liability was at Rs. 20,71,900 for the assessment year 1975-76 in the place of the premia already allowed and Rs. 27,22,633 for the assessment year 1976-77. The ITO had confined the allowance to actual payment of premia for both the years, at Rs. 3,27,915 for the assessment year 1975-76 and Rs. 2,83,383 for the assessment year 1976-77. The actual payment of gratuity made to the employees, to the extent of Rs. 50,528, was allowed by him in the assessment for the assessment year 1976-77 while a similar claim of Rs. 43,693 for the assessment year 1975-76 was rather inconsistently disallowed. In the first appeal, the Commissioner (Appeals) found that there was a pre-existing approved gratuity fund. A mere provision for payment to such fund would have qualified for deduction under Section 40A(7)(i)(i) of the Act. Even if no provisions were made, it would be allowable, according to the first appellate authority, under Section 36(1 )(v) which authorises the allowance of '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'. He was of the view that under the mercantile system of accounting 'paid' includes what is payable. He also relied on Section 43(2) of the Act for his view. He pointed out that it is a statutory liability. He directed allowance of excess of incremental liability over the premium paid as further deduction for both the years.
5. In the departmental appeal, it is contended that only actual gratuity payment and premia will qualify for deduction under Section 36(1)(v). It was further claimed that it could not be allowed under Section 40A(7)(b)(i) as no provision had been made. These arguments were repeated before us. The learned counsel referred to the decision of the Patna High Court in CIT v. Nirmal Kumar Base & Bros.  119 ITR 537 wherein it was held that an accrued liability is admissible as a deduction under the mercantile system of accounting whether it has been provided or not. He also relied upon the decision of the Calcutta High Court in CIT v. Eastern Spinning Mills Ltd.  126 ITR 686 wherein the entire estimated liability created by a statute was found to be deductible under Section 37 of the Act notwithstanding the special provision under Section 36(1)(v) or (v) in respect of the same.
It was pointed out that the claim was supported by the certificate of the actuarial. In respect of statutory liability, it can legitimately be presumed to be a charge, whether it is actually provided or not, since the assessee has been following a mercantile system of accounting. This is precisely what the first appellate authority has done. Further as decided by a Special Bench of the Appellate Tribunal in Soft Beverages (P.) Ltd. v. ITO, the liability itself constitutes a provision, following the rationale of the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT  82 ITR 363. That is the view taken in the assessee's case itself for the assessment year 1973-74 in IT Appeal No. 329/Mad./l977-78 dated 23-9-1980 (C-Bench) to which one of us was a party. What is, therefore, required is the satisfaction of other conditions like a pre-existing approved gratuity fund in the case of Section 40A(7)(b)(i) or a fund constituted within the stipulated date followed by payments in instalments as required under Section 40A(7)(b)(i). In the assessee's case Section 40A(7)(b)(i)will apply, as there was an approved gratuity fund prior to the end of the accounting year for both the years. It was contended that the authorities overlooked the fact that the insurance covered only the liability in respect of persons dying or leaving service during the accounting year and not the entire liability.
6. We have carefully considered the records as well as arguments. What is claimed is an incremental liability actuarially ascertained. There has also been a pre-existing approved gratuity fund. Section 40A(7), no doubt, refers to 'provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund'. Admittedly no such provision was made in the accounts.
Since the liability is both statutory and contractual in the assessee's case and since the assessee is maintaining accounts on a mercantile basis, there cannot be any doubt that the incremental liability is a charge on the assessee's profits, whether a provision as such is made or not. It is unnecessary to cite authorities for this proposition as it is too well established. The only dispute is whether this legal position is sufficient to justify the inference that such a charge would constitute a provision within the meaning of Section 40A(7)(6)(ii). The departmental stand, which was accepted by the Special Bench in the case of Soft Beverages (supra) was that the expression 'provisions', in Section 40A(7), did not mean that such a provision should necessarily be made in the 'books of account' maintained by the assessee and that the word would cover a claim for deduction to meet a liability, following the decision of the Supreme Court in the case of Kedarnath Jute (supra). All that Section 40A(7) requires is that in case of a provision for gratuity it should satisfy the conditions laid down therein. It was for this reason that another Bench of this Tribunal in IT Appeal No. 822 (Bom.) of 1978-79 dated 25-9-1980 (published at 459 of December 1980 issue of "Taxes and Planning" from Bombay) held that even a subsequent reversal of the provisions will not affect the assessee's right. We appreciate the anxiety of the revenue in such a case that the assessee has the use of the funds while claiming the deduction, a position which was specifically designed to be avoided when Section 40A(7) was enacted.
The remedy for the revenue, in such cases, if any, it would appear, is available under Part C of the Fourth Schedule to the Act which enables the Commissioner to withdraw the recognition for sufficient reasons. If the liability required to be funded under the terms of the approved gratuity fund has not been funded, there may be a violation of the conditions for recognition and a withdrawal of recognition may well be warranted under Rule 9 of Part C of the Schedule, which provides for the power to withdraw such recognition. At any rate, a rightful deduction under the law cannot be defeated by possible or even actual misuse of the provisions of Section 40A(7). We, however, hasten to add that we are making this comment not because we find any misuse to justify withdrawal but only to stress the fact that even circumstances warranting withdrawal of recognition could not justify the disallowance. If the recognition stands and the other conditions under Section 40A (7)(&) are satisfied, there is no escape from the deduction. It is for this reason that in the assessee's own case, we directed an allowance, initially on that basis for the assessment year 1973-74 in the common order in IT Appeal Nos. 329 and 2912/(Mad.) of 1977-78 dated 23-9-1980 though ultimately the order was amended to allow the same on payment basis, which is a non-controversial basis.
Hence the claim is admissible even under Section 40A(7)(7)0'). 1 this view it is not necessary to go into the argument of the learned Commissioner (Appeals) that the claims are admissible even under Section 36(1)(v) on the view that the word 'paid' in the claim included what is payable.
7. The learned departmental representative raised an additional argument in that the assessee has covered its liability for gratuity by insurance and the premia thereunder has been allowed. Hence, according to him, there is no case for any further allowance. This argument overlooks the fact that there is a further but certain obligation, additionally during the year (called incremental liability) which is actuarially measured (sic). The premium covers only the liability payable on death or retirement during the year. Only a part of the liability is covered. Besides, the first appellate authority has directed only the incremental liability inasmuch as he has allowed only the difference between the incremental liability and premia paid as further deduction. Hence, there cannot be any grievance on this account.
8. The orders of first appellate authority have, therefore, to be upheld on this point also.