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Commissioner of Income-tax Vs. New Swadeshi Mills of Ahmedabad Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 645 of 1977
Judge
Reported in(1984)39CTR(Cal)220,[1984]147ITR163(Cal)
ActsIncome Tax Act, 1961 - Sections 36(1), 37, 40(1), 40A(7), 215, 215(1) and 246; ;Payment of Gratuity Act, 1972; ;Income Tax Rules, 1962
AppellantCommissioner of Income-tax
RespondentNew Swadeshi Mills of Ahmedabad Ltd.
Appellant AdvocateA.N. Bhattacharji, Adv.
Respondent AdvocateR.N. Bajoria and ;S.K. Bagaria, Advs.
Cases ReferredTata Iron & Steel Co. Ltd. v. D.V. Bapat
Excerpt:
- suhas chandra sen, j. 1. at the instance of the commissioner of income-tax, central-v, calcutta, the following two questions of law have been referred by the tribunal under section 256(1) of the i.t. act, to this court.'1. whether, on the facts and in the circumstances of the case, the tribunal was justified in directing the income-tax officer to allow the claim of rs. 19,71,126 for deduction on account of liability for payment of gratuity based on actuarial valuation ? 2. whether, on the facts and in the circumstances of the case, the tribunal was right in holding that the assessee is entitled to agitate in the quantum appeal the ground in respect of the order passed by the income-tax officer levying interest under section 215 of the income-tax act, 1961?' 2. this case relates to the.....
Judgment:

Suhas Chandra Sen, J.

1. At the instance of the Commissioner of Income-tax, Central-V, Calcutta, the following two questions of law have been referred by the Tribunal under Section 256(1) of the I.T. Act, to this court.

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in directing the Income-tax Officer to allow the claim of Rs. 19,71,126 for deduction on account of liability for payment of gratuity based on actuarial valuation ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee is entitled to agitate in the quantum appeal the ground in respect of the order passed by the Income-tax Officer levying interest under Section 215 of the Income-tax Act, 1961?'

2. This case relates to the assessment year 1974-75 for which the accounting period is the year ended 31st March, 1974.

3. The first question relates to the deduction of gratuity liability made on actuarial basis. The ITO did not allow the deduction on the ground that there was no accrued gratuity liability. On appeal, the AAC confirmed the order of the ITO.

4. On further appeal, the Tribunal held that since the liability was created on estimated actuarial valuation, the assessee was entitled to the deduction even though the assessee had not made any provision for payment of gratuity in its books of account. The second question relates to the charging of interest under Section 215 of the I.T. Act, 1961. The ITO had charged an amount of Rs. 31,49,378 as interest under Section 215 of the Act. Before the AAC, it was contended, on behalf of the assessee, that there was no direction in the order for charging such interest. In the assessment order, there was a direction 'charge interest if leviable'. It was also argued that the ITO should have waived interest under Section 215(1) read with Rule 40(1)(v). The AAC held that the ITO had directed charging of interest in the last paragraph of the assessment order. The AAC also held that the question of rate of interest was beyond the purview of Section 246 and he was unable to entertain that contention. The Tribunal, on further appeal, held that since the point of leviability of interest under Section 215 had been raised along with other grounds of appeal, it had to be entertained. The Tribunal, therefore, restored this point to the AAC for fresh disposal on merits.

5. Being aggrieved by the order of the Tribunal, the Commissioner applied for referring a number of questions of law arising out of the orderof the Tribunal and the Tribunal referred the two questions of law, which we have set out earlier to this court.

6. It has been argued by Mr. Bajoria, on behalf of the assessee^ that the assessee Was following the mercantile system of accounting. After the Payment of Gratuity Act was passed, there was a legal liability on the assessee for payment of gratuity. The assessee had made an estimate of that liability on actuarial basis for the relevant year of accounting and had claimed deduction of that amount on well-established commercial principles. It is true that the assessee had not made any provision for payment of gratuity in its books of account. But whether any such provision was made or not was quite immaterial for the purpose of claiming this deduction under Section 37 of the I.T. Act. Reliance in this connection was placed on a judgment of the Supreme Court in the case of Kedamaih Jute Mfg. Co. Ltd. v. CIT : [1971]82ITR363(SC) . It was contended that the existence or absence of any provision in the books of account of the assessee cannot be decisive or conclusive in a matter like this. The assessee had a statutory obligation to pay gratuity and the assessee was entitled to claim deduction on account of that liability. It was further contended that Section 40A(7) of the I.T. Act, 1961, which came into force with effect from 1st April, 1973, was applicable only to those cases where any provision had been made by an assessee for payment of gratuity to his employees on their retirement or on termination of their employment for any reason. In a case, as in the case before us, where the assessee has not made any provision for payment of gratuity, the provisions of Section 40A(7) will not apply and there was no legal impediment to allowance of this deduction to the assessee either under Section 28 or under Section 37.

7. In order to decide the controversy raised in this case, it is necessary to set out the relevant provisions in respect of gratuity made in the I.T. Act :

'36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28--...

(v) 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;'

'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 be allowed in respect of any provision (whether called as such or by anyother 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 1st 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 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...'

8. It is not necessary to set out the Explanation to the section for our present purpose.

9. In the memorandum explaining the provisions in the Finance Bill, 1975, the underlying purpose of Section 40A(7) was explained thus (See page 194 of 98 ITR (St.)):

'Deduction in respect of reserves created or provisions made for payment of gratuity to employees.--Under Section 36(1)(v) of the Income-tax Act, a deduction is allowed, in computing the taxable profits and gains of a business or profession, in respect of any sum paid by the taxpayer as an employer by way of contribution towards an approved gratuity fundcreated by him for the exclusive benefit of his employees under an irrevocable trust. Further, Section 37(1) provides that any expenditure, other than the expenditure of the nature described in Sections 30 to 36, laid out or expended wholly or exclusively for the purpose of the business or profession, will be allowed as deduction in computing the taxable profits. A reading of these two provisions clearly shows that the intention has always been that deduction in respect of gratuities should be allowed either in the year in which the gratuity is actually paid or in the year in which contributions are made to an approved gratuity fund. A doubt has been expressed that the relevant provisions, as presently worded, do not secure the underlying objective and that a provision made by a taxpayer in his accounts in respect of estimated service gratuity payable to employees will be deductible in computing the taxable income in a case where the provision has been made on a scientific basis in the form of an actuarial valuation. In order to remove uncertainty in the matter, it is proposed to specifically provide in the law that no deduction will be allowed, in the computation of profits and gains of a business or profession, in respect of any reserve created or provision made for the payment of gratuity to the employees on retirement or on termination of employment for any reason. This restriction will, however, not apply in relation to a provision made for the purpose of payment of a sum by way of contribution towards an approved gratuity fund that has become payable during the relevant account year, or for the purpose of meeting actual liability in respect of payment of gratuity to the employees that has arisen during such year.'

10. The question that has been raised before us is whether an assessee is entitled to get deduction on account of estimated liability for payment of gratuity on an actuarial valuation even without setting apart an amount by way of provision for this purpose.

11. The answer to the question that has been raised will depend upon the nature and the scope of the liability that has been cast upon an employer by the Payment of Gratuity Act, 1972. Under Section 4(1) of the Act, it has been provided :

'Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years,--

(a) on his superannuation, or

(b) on his retirement or resignation, or

(c) on his death or disablement due to accident or disease ;

Provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement...'

12. It has further been provided in Section 4(2) that the employer shall pay gratuity to an employee at the rate of fifteen days' wages based on the rate of wages last drawn by the employee concerned for every completed year of service or part thereof in excess of six months. There are also special provisions in respect of a piece-rated employee and also of an employee employed in a seasonal establishment.

13. Section 4(3) of the Payment of Gratuity Act provides that the amount of gratuity payable to an employee shall not exceed twenty months' wages.

14. Section 4(4) of the Payment of Gratuity Act provides that for the purpose of computing the gratuity payable to an employee who is employed, after his disablement, on reduced wages, his wages for the period preceding his diablement shall be taken to be the wages received by him during that period and his wages for the period subsequent to his disablement shall be taken to be the wages as so reduced.

15. Section 4(6) provides :

'Notwithstanding anything contained in Sub-section (1),--

(a) the gratuity of an employee, whose services have been terminated for any act, wilful omission or negligence causing any damage or loss to, or destruction of, property belonging to the employer, shall be forfeited to the extent of the damage or loss so caused ;

(b) the gratuity payable to an employee shall be wholly forfeited-

(i) if the services of such .employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part, or

(ii) if the services of such employee have been terminated for any act which constitutes an offence involving moral turpitude, provided that such offence is committed by him in the course of his employment.'

16. The Payment of Gratuity Act is a social legislation under which an employee is entitled to get a lump sum on his superannuation or resignation or on his death or disablement. The amount payable is to be calculated by multiplying the last drawn salary by his years of service. The salary drawn in the earlier years is quite irrelevant for this purpose except in the case of an employee, who, after his disablement, is employed on reduced wages. There is, however, a ceiling imposed under Section 4(3) that an employee is not entitled to get more than a sum of twenty months' wages by way of gratuity.

17. The liability to pay is also hedged in by a number of conditions. An employee must complete at least five years of service except in the case of death or disablement. The gratuity payable to an employee is also liable to be forfeited where damage or loss or destruction of propertybelonging to the employer has taken place due to any wilful omission or negligence of the employee to the extent of such loss or damage. The gratuity payable to an employee is liable to be wholly forfeited under Section 4(6)(b) if the service of an employee has been terminated for riotous or disorderly conduct or any act of violence or for any act which constitutes an offence committed in the course of his employment involving moral turpitude.

18. The liability to pay gratuity is a statutory liability which falls upon an assessee in the course of carrying on of its business activities and is clearly an expenditure laid out wholly and exclusively for the purpose of the assessee's business. The only question that arises in 'this case is in what manner and in which year will the assessee get the benefit of this deduction.

19. Section 36(1)(v) specifically provides that any payment by way of contribution- towards an approved gratuity fund created by an assessee for the exclusive benefit of his employees under an irrevocable trust shall be allowed as deduction in computing the assessee's business income.

20. The Payment of Gratuity Act came into force on 16th September, 1972. Section 40A(7) was introduced in the I.T. Act with effect from 1st April, 1973, and was made applicable to the assessment year 1973-74 and all the subsequent years. Section 40A is an overriding section and will apply notwithstanding anything contained in any other provisions of this Act relating to computation of income under the head ' Profits or gains of business or profession '. The section heading is ' Expenses or payments not deductible in certain circumstances'. Section 40A(7)(a) prohibits deduction of any provision by whatever name called made by an assessee for the payment of gratuity to his employees on their retirement or termination of their employment for any reason. This is, however, subject to the provisions of Clause (b). Clause (b) lays down the conditions which have to be fulfilled by an assessee in order to get out of the mischief of the provisions contained ins. 40A(7)(a). A provision to pay an amount which has become due and payable during the previous year will have to be allowed. A provision for payment of gratuity of a sum by way of contribution towards an approved gratuity fund will also have to be allowed although the gratuity has not become payable during the relevant previous year. There are certain special provisions for the assessment years commencing on or after 1st April, 1973f but before the 1st April, 1976. For these assessment years in order to get a deduction a provision must be made in accordance with the actuarial valuation of the ascertainable liability for payment of gratuity on the retirement or termination of the service of the employees. An assessee will also have to create an approvedgratuity fund for the exclusive benefit of the employees under an irrevocable trust. The application for the approval of the fund must be made before 1st January, 1976, The allowance must be restricted to a sum equal to at least 50% 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 50% of the admissible amount as reduced by the amounts so utilised by the assessee. The assessee's case is that the prohibition contained in Section 40A(7) must be confined to a case where the assessee has actually set apart a sum by way of provision for the purpose of payment of gratuity. But in a case, ~as in the case before us, where no provision has been made for payment of gratuity, the bar contained in s, 40A(7)(a) will not apply and there is no legal impediment in allowing the claim of the assessee. We are unable to uphold this contention.

21. The prohibition in Section 40A(7) is on deduction in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity. The amplitude of the section is indicated by the expression 'whether called as such or by any other name'. The sum may or may not be shown in the accounts as provision for payment of gratuity. If it is not so shown, the result will be the same. The embargo, subject to Clause (b); is on deduction of any amount for the payment of gratuity.

22. The interpretation as suggested on behalf of the assessee will lead to a conclusion which will be extraordinary and repugnant to commonsense. It will also cause grave injustice to the assessees who have been prudent enough to set apart a sum for payment of gratuity. If the assessee's contention is to be accepted, then the result will be that a company which does not make any provision for payment of gratuity at all will be entitled to get a deduction on account of its statutory liability to pay gratuity on estimation without having to fulfil any condition; but if a company makes a provision for payment of gratuity after making an actuarial valuation of its liability, it will not be able to get any deduction unless the requirements laid down in Section 40A(7)(b) are fulfilled. In our opinion, Section 40A(7) should not be interpreted in such a manner as would lead to absurdity. The section provides the method and manner in which an assessee can claim deduction on account of its statutory liability to pay gratuity even before its employees retire or their services are terminated in any manner. When there is a specific overriding provision in the Act dealing with the method and manner in which an assessee can claim deduction on account of its liability for payment of gratuity, there is no scope for invoking any general provision for allowance of such a claim.

23. A Division Bench of this court in the case of Peoples Engineering and Motor Works Ltd. v. C/T : [1981]130ITR174(Cal) , after an elaborate analysis of the provisions of the I.T. Act and the payment of Gratuity Act, held (p.179):

'The payment of gratuity is a statutory liability created for those who are earning income from the business profits and gains by carrying on business or profession or by carrying out adventure or trade which are of the same nature. The computation of such income and the deductions to be allowed must be guided by the provisions of the I.T. Act and those are categorical with what are the deductions to be allowed and these deductions are provided in Section 30 and Section 37 and, notwithstanding these deductions, it is specifically provided under Section 40A that certain conditions are to be fulfilled for payment of gratuity. Gratuity, being one of the deductions, normally can be said to have arisen for carrying on the business, which is specifically excluded, and there is no question of conflict in this regard.'

24. In the light of the principles laid down in that case, we are of the opinion that the assessee is not entitled to claim any deduction on account of its liability to pay gratuity estimated on actuarial basis without making any provision for that liability. Special rules have been made under the I.T. Act for this purpose and in order to claim that deduction, the assessee must follow the procedure and fulfil the condition laid down in the Act in this regard.

25. It has been contended on behalf of the assessee that it was entitled to claim deduction on account of its liability to pay gratuity estimated on an actuarial basis because it was following the mercantile system of accounting. But in the case before us, even if an assessment is made in accordance with the method of accounting regularly employed by the assessee as enjoined by Section 145, the assessee will not be entitled to get this deduction. Under the mercantile system of accounting, the right to receive or the liability to pay trade debts or any other debt falls to be computed for tax purposes in the year in which the liability to pay or the right to receive, as the case may be, arises notwithstanding that the date for actual payment of the money is outside the year. Under the scheme of the Payment of Gratuity Act, however, the employee is not entitled to receive and the employer is not under a legal obligation to pay gratuity to its employees every year. The right to receive gratuity arises only on the retirement or on the termination of the service of an employee. This right may be affected, destroyed or cut down under the circumstances mentioned in Section 4(6) of the Act which we have set out earlier. Therefore, it is open tothe assessee to claim this amount as a deduction when the liability to pay gratuity arises on the retirement or termination of service of an employee.

26. Another method of accounting is to make a provision every year for the discounted value of the assessee's liability for the payment of gratuity based on an actuarial valuation after taking into account all the contingencies. The assessee, in its profit and loss account, is entitled to calculate the net profit after ascertaining and deducting the estimated liability under the Payment of Gratuity Act. It is not necessary in this case to go into the controversy whether the liability is a liability in praesenti or not. Section 40A(7) has specifically recognised the assessee's right to follow this method of accounting and get the benefit of deduction in the computation of its business income provided the conditions laid down in that section are fulfilled.

27. The advantage and justifiability of the second method of accounting was explained by Lord Radcliffe in the well-known case of Owen (H.M. Inspector of Taxes) v. Southern Railway of Pern Ltd. [1956] 36 TC 602 ; [1957] 32 ITR 737 . In that case, the appellant company was operating its railway in Peru. There was a statutory scheme in Peru for payment of retirement benefits which is very similar to the scheme of the Payment of Gratuity Act. Under the Peruvian law, the railway company was bound to pay its employees in Peru prescribed compensation payments upon the termination of their services with the company, subject to the fulfilment by the employee of certain conditions. The amount to be paid depended on : (a) length of service, and (b) rate of pay at the end of the period of service, except that a reduction in pay would not affect the amount to which an employee was entitled by reference to the period of service already performed.

28. In that case the company set apart a sum of money in its accounts and claimed that, upon proper principles of commercial accountancy, the amounts of compensation calculated to have accrued due to each employee from year to year as deferred remuneration should be allowed as a deduction. In the House of Lords, Earl Jowit and Lord Radcliffe and Lord Tucker were of the opinion that, where a number of similar contingent obligations arose from trading, there was no rule of law which prevented the deduction of a provision for them in ascertaining annual profits if a sufficiently accurate estimate could be made; but that the provision claimed by the company throughout the proceedings was not a permissible deduction by reason of the absence of discount factor and other factors.

29. In that case, Lord Radcliffe observed at p. 640 (see also p. 753 of 32 ITR):

'Now, the question is, how ought the effects of this statutory scheme to be reflected in the appellant's accounts of the annual profits arising from its trade? One way, which is certainly the simplest one, is to let the payments made fall entirely as expanses of the year of payment and ignore any question of making provision for the maturing obligation during the years of service that precede it. This is what the company seems to have done up to the year ending 30th June, 1947, and it is the system which is, according to the Crown, the only one which the law of income tax permits. It has one considerable advantage : no element of estimate or valuation appears in the profit assessment and nothing is charged to profits except the actual cash outgoing. But, when this has been conceded, I think that there is the very serious disadvantage to be set against the cash basis that it affords a comparatively inefficient method of arriving at the true profits of any one year. The retirement benefit is not, obviously, paid to obtain the services given in the year of retirement. The incidence of retirement payments must be variable from year to year, and they may inordinately depress the profits of one year just as they may inordinately inflate the profits of another. It is true that the company carries on business from one year to another, but it is not charged on the average of its annual profits. Tax rates and allowances themselves vary and, apart from that, to charge tax on a profit unduly accelerated or unduly deferred is, in my opinion, no more respectable an achievement than to admit that the annual accounts of business do in some cases require the introduction of estimates or valuations if a true statement of profit is to be secured.'

30. The advantage of the second method was explained at p. 641 of the report (see also p. 754 of 32 ITR):

'What the appellant claims the right to do is to charge against each year's receipts the cost of making provision for the retirement payments that will ultimately be thrown upon it by virtue of the fact that it has had the benefit of its employee's services during that year. As a corollary it will not make any charge to cover the actual payments made in the year in respect of retirement benefits. Only by such a method, it is said, can it bring against the receipts of the year the true cost of the services that it has used to earn those receipts. Generally speaking, this must, I think, be true. For, whereas it is possible that any one of its many employees may forfeit his benefit and so never require a payment, the substantial facts of the situation are that when the company has paid every salary and wage that is due for current remuneration of the year it has not by any means wholly discharged itself of the pecuniary burden which falls upon it in respect of the year's employment. This is a long-term application of the practice by which provision for holidays with pay in the coming year is charged in part against the receipts of the previous year.'

31. But in the case before us, the assessee has not made any provision for payment of gratuity in the coming years and charged it against the receipt of this year. If an assessment is made, according to the method of accounting regularly employed by the assessee, its claim for deduction on account of its liability for payment of gratuity has to be disallowed.

32. It has, however, been contended, on behalf of the assessee, that the liability to pay gratuity is a statutory liability. This has fallen upon the assessee in the course of the carrying on of its business. Therefore, the claim for deduction on account of its statutory liability must be allowed even though this liability was not shown in the assessee's books of account. In support of this contention reliance was placed on the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT : [1971]82ITR363(SC) . In that case, the Supreme Court held that an assessee was entitled to claim deduction on account of a liability arising under the Sales Tax Act even though the assessee had failed to debit that liability in its books of account.

33. In that case, it was held by Grover J. at p. 366:

'Now under all sales tax laws including the statute with which we are concerned, the moment a dealer makes either purchases or sales which are subject to taxation, the obligation to pay the tax arises and taxability is attracted. Although that liability cannot be enforced till the quantification is effected by assessment proceedings, the liability for payment of tax is independent of the assessment. It is significant that in the present case, the liability had even been quantified and a demand had been created in the sum of Rs. 1,49,776 by means of the notice dated 2lst November, 1957, during the pendency of the assessment proceedings before the Income-tax Officer and before the analisation of the assessment. It is not possible to comprehend how the liability would cease to be one because the assessee had taken proceedings before higher authorities for getting it reduced or wiped out so long as the contention of the assessee did not prevail with regard to the quantum of liability, etc. An assessee who follows the mercantile system of accounting is entitled to deduct from the profits and gains of the business such liability which had accrued during the period for which the profits and gains were being computed. It can again not be disputed that the liability to payment of sales tax had accrued during the year of assessment even though it had to be discharged at a future date.'

34. It was further held at p. 367 of the report:

'The main contention of the learned Solicitor-General is that the assessee failed to debit the liability in its books of account and, therefore, it was debarred from claiming the same as deduction either under Section 10(1) or under Section 10(2)(xv) of the Act. We are wholly unable to appreciate the suggestion that if an assessee under some misapprehensionor mistake fails to make an entry in the books of account and although, under the law, a deduction must be allowed by the Income-tax Officer, the assessee will lose the right of claiming or will be debarred from being allowed that deduction. Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. The assessee who was maintaining accounts on the mercantile system was fully justified in claiming deduction of the sum of Rs. 1,49,776, being the amount of sales tax which it was liable under the law to pay during the relevant accounting year. It may be added that the liability remained intact even after the assessee had taken appeals to higher authorities or courts which failed.'

35. In that case a deduction was claimed on account of the assessee's liability to pay sales tax. It has to be noted that there is no provision like Section 36(1)(iv) or Section 40A(7) in respect of an assessee's liability to pay sales tax. Moreover, the liability to pay sales tax arises as soon as the sale is effected. The Supreme Court has pointed out that the liability is unconditional and the assessment process is only a method of quantifying the tax liability. In that view of the matter, the Supreme Court pointed out that the assessee was fully justified in claiming deduction of the amount of sales tax ' which it was liable under the law to pay during the relevant accounting year '.

36. In the case before us, however, the liability to pay gratuity under the statute will arise on superannuation or death or termination of service of an employee for any reason. The assessee was not liable under the law to pay the amount claimed as deduction during the relevant accounting year. The assessee is claiming deduction of the discounted value of that liability made on actuarial basis. We have set out earlier in this judgment the circumstances which could affect, destroy or cut down the right of an employee to receive gratuity. It will not be correct to say that the assessee has an accrued liability to pay a sum of Rs. 19,71,216 to its employees during the relevant year of account ended on 31st March, 1974. Lord Radcliffe in Owen (H, M. Inspector of Taxes v. Soitthern Railway of Peru Ltd. [1956] 36 TC 602 ; [1957] 32 ITR 737 , observed at p. 641 (see also p. 754 of 32 ITR):

' I agree that it is arbitrary to describe such an adjustment as accruing in respect of that year's service, but on the other hand it is a provision which is required in that year to take account of the increased burdenwhich the year's salary for the year's service has thrown upon the employer.'

37. The assessee is under a legal obligation to pay gratuity to its employees on their retirement or termination of service and is entitled on that account .to set apart a sum of money out of its profits every year to meet that liability. Although gratuity is payable on retirement or termination of service, it is, obviously, not payable for the services rendered in the last year (sic). Section 40A(7) recognises the assessee's right to make a provision every year in its books of account for payment of gratuity. In order to claim the benefit of deduction, the assessee must fulfil the conditions laid down in Section 40A(7). In our opinion, on the facts of this case the assessee is not entitled to claim the deduction of Rs. 19,71,126 on account of its estimated liability for payment of gratuity based on actuarial valuation.

38. We shall now briefly refer to some of the decisions that were cited before us. In the case of CIT v. Eastern Spinning Mills Ltd. : [1980]126ITR686(Cal) , it was held by a Division Bench of this court (p. 704):

'The fact that under Clause (v) of Sub-section (1) of-s, 36 of the Act, the sum paid by the assessee by way of contribution towards approved gratuity fund for the exclusive benefit of the employee is deductible does not, in our opinion, affect the position. The assessee claimed its right to deduct this sum because this amount was a special liability which, we have noticed before, was created for the first time in 1971. If the assessee had dominion over the money, such money was not beyond the reach of the assessee, and there was a possibility of misuse, it was sought to be urged on behalf of the revenue. But upon the possible contingency of misuse by the assessee the rights of the parties under the Act cannot be decided. It seems that the legislature has taken note of that possibility by Sub-section (7) of Section 40A of the Act, 1961.'

39. There the assessee had made a provision for payment of gratuity on actuarial basis in accordance with the statutory provisions of the West Bengal Employees' Payment of Compulsory Gratuity Act, 1971, which had created a special liability for the first time in 1971. The entire provision was claimed as permissible business expenditure in the assessment year 1972-73. It has to be noted that in that case the assessee had actually made a provision in its accounts in respect of this liability. This case does not throw any light on the point at issue before us.

40. The case of Tata Iron & Steel Co. Ltd. v. D.V. Bapat, ITO : [1975]101ITR292(Bom) , is also of no assistance to the assessee. In that case, in the assessment year 1972-73 the assessee-company claimed a deduction of a sum of Rs. 1,28,09,135 on the footing that the said amount represented its gratuity liability on actuarial valuation. The ITO originally acceptedthe claim of the assessee and thereafter sought to disallow the claim in view of a circular issued by the CBDT, In that case, the assessee-company had actually made a provision for payment of gratuity in its books of account. The Bombay High Court did not have any occasion to consider the scope of Section 40A(7) and did not go into the question whether the assessee could claim any deduction on account of its estimated gratuity liability without making any provision for it in its books of account.

41. Therefore the cases cited at the Bar do not advance the case of the assessee in any way. In view of what has been stated above and in view of the specific provisions of Section 40A(7), in our opinion, the assessee is not entitled to get any deduction on account of its statutory liability for payment of gratuity in the facts of this case.

42. The second question is with regard to charging of interest under Section 215 of the I.T. Act. The ITO in his discretion can charge interest under Section 215 in an appropriate case but it must appear that the discretion was exercised in a proper manner and having regard to all the circumstances of the case. It is not clear whether the ITO has charged interest at all in this case; The endorsement at the foot of the assessment order 'charge interest, if leviable' indicates that the ITO was assigning the responsibility for levying of interest to somebody else. The AAC has not gone into the question whether interest was at all leviable in the facts of this case and whether the ITO had at all exercised his discretion in this matter. A point similar to the one raised in this case was decided by a Division Bench of this court in the case of CIT v. Lalit Prasad Rohini Kumar : [1979]117ITR603(Cal) . It was held in that case (p. 618) :

'The ITO has the power and indeed the duty to charge interest under the circumstances mentioned in Sections 215 and 217 of the Act, but the ITO has the discretion to waive or reduce such interest in the circumstances mentioned in r. 40 of the I.T. Rules, 1962. Such discretion, in our opinion, in the facts and circumstances of the section read with the rules, imposes a duty on the ITO to consider whether circumstances in the record warrant any waiver or reduction. Such consideration must be made from the facts on the record without being moved by the assessee but if other facts which are not on the record have to be examined for proper consideration then such consideration should be moved by the assessee. We are further of the opinion that it must appear that such consideration has been made by the ITO, it may be manifest from the order itself or it may be found out aliunde from the records or it may follow as in certain circumstances as the inevitable consequences from the facts on the record placed. How it should so appear must depend upon the facts and circumstances of the case.'

43. The question that arises in this case, in the first place, is whether the interest has at all been levied by the ITO and if so, whether, in the facts of this case, the charge of interest should have been waived. This point was raised with the other grounds of appeal relating to the assessment order before the AAC. The assessee was not trying to get the amount of interest reduced but the case of the assessee was that in the facts of this case interest should not have been charged at all and, in any event, the ITO had not passed any order charging interest. Therefore, in view of the principles laid down in the case of CIT v. Lalit Prasad Rohini Kwwiar : [1979]117ITR603(Cal) , an appeal to the AAC on this ground should not have been dismissed in limine.

44. We are, therefore, of the opinion that the Tribunal was right in holding that the order was appealable and the Tribunal was right in sending the matter back to the AAC for fresh consideration. The first question, therefore, is answered in the negative and in favour of the Revenue. The second question is answered in the affirmative and in favour of the assessee. Each party to pay and bear its own costs.

45. Learned advocate for the assessee prays orally for leave to appeal to the Supreme Court. We do not think that the question involved is a question of public importance which need be decided by the Supreme Court. Leave for appeal to the Supreme Court is refused.

Sabyasacht Mukharjt, J.

46. I agree.


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