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1981 (4) TMI 163
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....of Rs.1,06,889 was arrived at by the actuarial valuation of the liability as on 30th June, 1974 by taking into account the number of employees as on 30th June, 1974 their salaries and the number of years of service of such employees. 2. After the expiry of the accounting year 30th June, 1974 and before the assessment was completed, s. 40A(7) was inserted in the IT Act, 1961, by Finance Law, s. 40A(7)(a) provided that 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 its employees on their retirement or termination on their services for any reason. But the categories of provisions made by the assessees in their accounts were saved by that law. We need concentrate only on the second category because the first category has no application to the facts of this case. However, we will reproduce below both categories: "40A(7)(b) Nothing in cl. (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 duri....
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....loyee shall not be allowed as a deduction in computing the income of the assessee of the previous year in which the sum is so paid". 3. Though the last day of application for approval of the fund was 1st day January, 1976, the assessee had constuited the fund on 24th July, 1975 and had applied on that day itself for approval. The approval was given by the CIT w.e.f. 28th July, 1975 itself by his order dt. 26th October, 1976. Though the assessee need pay only half of the admissible amount by 1st April, 1976, it has paid to the fund the full admissible amount of Rs. 1,06,889 on 9th September, 1975 itself. Reckoning by the date of payment, it falls within the next asst. yr. 1976-77. But the assessee claimed the provision of Rs. 1,06,839 as a deduction in the assessment for the asst. yr. 1975-76 itself. The ITO refused the deduction. He was prepared to allow only the incremental liability as a deduction, as expression not found in the Act or the Rules by which he meant only the current year's liability worked out by finding out the increase, if any, in the gratuity liability during the current year. That increase is to be found out by taking an actuarial valuation of the liability as....
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....ared before us. 6. The Deptl. Rep. argued that the accounting year ended on 30th June, 1974 (2nd yeat of liability) that on that day there was not even an idea or intention to constitute any gratuity fund, that therefore, Rs. 1,06,889 is only a mere provision in the accounts and that this being the second year of statutory liability only an incremental liability could be allowed as a deduction, and that the full liability by taking into account the full service of the employees can if at all to be allowed can be allowed only in the first year of liability, which is the assessee. yr. 1974-75. The argument of the Deptl. Rep. was that the judge-made law before the enactment of s. 40A(7) is that in mercantile system of accounting, a provision for payment of gratuity at a future date could be allowed u/s. 37 as a deduction in the second year of liability only to the extent of incremental liability in the current year, that the enactment of s. 40A(7) has not made any change in that Judge-made law, that s. 40(A)(7) was only enacted to ensure that even that provision which can be allowed as a deduction, under Judge-made law, is here-after allowed as deduction only if an approved gratuity ....
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....s put under such obligation to create a fund and handover moneys to such fund for no benefit. However, we need not identify the particular section of IT Act, 1961 under which these two provisions are deductible. Such indentification is not necessary for the purpose of disposal of this appeal. It may be that it s deductible u/s 28 of the Act or s. 36 (i)(v) or s. 37 or s. 40A(7) itself. All that we need hold in this case is that those provisions so saved are certainly deductible items in the computation of business income. 9. Therefore, the main question or aspect is whether the provision of Rs. 1,06,889 sought to be deducted is a provision so saved. We hold that it is a provision so saved by s. 40A(7)(b)(ii). The amount of Rs. 1,06,889 does not admittedly exceed the admissible amount. The provision is made in accordance with actuarial valuation. All other conditions are also satisfied. 10. The further question or aspect is whether such provision is deductible in the year in which the provision is made. There can be no dispute about it that it is deductible in the very same year itself. Otherwise, there was no necessity to save such provision. Further, the Explanation 2 clearly sh....
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....Southern Railway of Peru Ltd. vs. owan Inspector of Taxes (1957) 32 ITR 737 (HL) have held that the liabilities for gratuity though payable in future in "properly ascertainable" and that though each separate liability for each employee is uncertain, "the aggregate can be fixed with some precision". It is this provision towards such liability which is now allowed under the law. Rule 2 of Part C of Schedule IV enables the CIT to withdraw approval already granted to a fund which such withdrawal is warranted by circumstances and it stands to reason that the non-payment of amount, already provided within reasonable time would amount to such circumstance. It is for this reason that the provision for payment of any approved gratuity itself is allowed, while as pointed out by the Madras High Court, actual payment is allowed u/s. 36 cl. (i) such cl. (v). It must be pointed out that if Revenue's contention is accepted, Revenue itself will find a lot of difficulties as to the extent of the amount that will have to be allowed for a deduction in the year in which any payment is made to retiring employment out of the provisions. Such payment will naturally be out of both the initial payment, now....