Per Shri T. Venkatappa, Judicial Member - The assessee made a provision of gratuity amounting to Rs. 10,115 and debited to the profit and loss account. It was claimed as a deduction. The ITO found that the amount is not due in respect of any retired employees and it has not become payable. It is only a provision made in respect of existing employees who retire later and are eligible for gratuity. Further, no particular gratuity fund as per rules has also been formed and credited this amount therein. Thus, he disallowed the claim of the assessee.
2. On appeal, the Commissioner (Appeals) held that the sum of Rs. 10,115 provided for by the assessee is an allowable expenditure. Thus, he allowed the claim.
3. Against the same the revenue has preferred his appeal. The leaned departmental representative strongly urged that no gratuity fund as per rules has been formed by the assessee. There is no actuarial valuation. There is no liability for payment of any gratuity this year. Thus, the claim is not allowable as deduction. It was also submitted that section 40A (7) of the Income-tax Act, 1961, (the Act), applies and the conditions laid down therein are not satisfied. The learned counsel for the assessee strongly supported the order of the Commissioner (Appeals). He urged that the liability for gratuity is allowable as deduction under section 36 as well as under section 37 of the Act.
4. We have considered the rival submissions. From the assessment year 1973-74 onwards the allowability of any provision for gratuity is governed by section 40A (7). Section 40A (1) clearly states as under :
'(1) The provisions of this section shall have effect notwithstanding anything to the contrary contained any other provisions of this Act .......'
In view of the clear language therein it is clear that notwithstanding the other provisions it is only section 40A (7) which would be applicable. Unless the assessee fulfils the conditions laid down in section 40A (7) the deduction claimed cannot be allowed.
5. In Peoples Engg. & Motor Works Ltd. v. CIT : 130ITR174(Cal) the Calcutta High Court held that for gratuity to be deductible the assessee must fulfil the conditions said down in section 40A (7). The deduction cannot be allowed on general principles under any other section of Act because section 40A (1) would have effect notwithstanding anything contained in sections 30 to 37 of the Act including sections 36 and 37.
6. In CIT v. Andhra Prabha (P.) Ltd. : 123ITR760(Mad) the Madras High Court held that recourse cannot be had to a residuary or general provision of the amount is not deductible as a result of non-compliance with a specific or particular provision. The above ratio applies to the instant case. Thus, in our view, when there is a special provision the assessee cannot place any reliance on general provisions of the Act.
7. Under section 40A (7) (a) subject to the provisions of clause (b) no deduction shall be allowed in respect of any provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment. Exception to this provision is made under clause (b) (i) where clause (a) would not apply to 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. Clause (b) (ii) is not applicable for this year under consideration in this appeal as allowability thereunder would arise only for the assessment years 1973-74 to 1975-76.
8. In the instant case no approved gratuity fund has been created by the assessee. Further no gratuity has become payable during this year. Thus, the conditions mentioned in clause (b) (i) of section 40A (7) are not satisfied. Thus, no deduction is permissible under section 40A (7) (a).
9. The decision relied on by the assessee in CIT v. Mettur Spg. Mills : 140ITR991(Mad) , Andhra Prabha (P.) Ltd.s case (supra) and CIT v. Chamarchi Tea, Textile & Engg. Industries Ltd. : 137ITR281(Cal) are distinguishable as they relate to the assessment years 1969-70 to 1972-73 for which section 40A (7) is not applicable.
10. Since the conditions laid down in section 40A (7) have not been complied with the deduction of Rs. 10,115 claimed cannot be allowed, we reverse the order of the Commissioner (Appeals) and restore the addition of Rs. 10,115.
11 In the result, the appeal is allowed.