TaxTMI 
TaxTMI 
TaxTMI 
1985 (10) TMI 2
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....riods ending on March 31, 1972, March 31, 1973, and March 31, 1974, the assessee's liability was worked out at Rs. 64,31,286. Out of this amount, provision had been made during these years to the tune of Rs. 45,93,559. No provision had been made for the balance amount of Rs. 18,37,727. The claim for deduction was set up on the ground that this liability was ascertained by actuarial valuation and was deductible under section 37(1) of the Act. The Income-tax Officer allowed the deduction of a sum of Rs. 2,65,872 only which was actually paid by the assessee and the rest was disallowed on the ground of non-compliance with the provisions of section 40A(7) of the Act. The assessee preferred an appeal but the same was dismissed by the Commissioner of Income-tax (Appeals). The assessee thereafter preferred a second appeal to the Tribunal. The Tribunal, for the reasons mentioned, held that for the assessment year relating to 1973-74, actuarially ascertained liability for gratuity especially arising under the Payment of Gratuity Act, 1972, was an allowable deduction. The Tribunal had consistently taken the view that the assessee would not be eligible for deduction under section 37 in respect....
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....ent of gratuity to its employees to the extent of Rs. 20,00,000 during the relevant accounting year. With the coming into force of the Payment of Gratuity Act, 1972, with effect from September 16, 1972, a statutory liability was created on the company to pay gratuity to its employees as per the provisions of the said Act. The assessee company, therefore, arranged for actuarial quantification of its liability for gratuity to its employees. Pending the determination of such an actuarial valuation, the assessee had made a provision of Rs. 20,00,000 against the total accruing liability till the date of the preparation of the balance-sheet. At the time of the filing of the return of income for the assessment year 1973-74, the assessee added back this provision for gratuity amounting to Rs. 20,00,000 and claimed the total liability of Rs. 48,59,431 which was the actuarial determination of liability arising under the Payment of Gratuity Act, 1972, in the relevant accounting year. Before the Income-tax Officer, the assessee claimed deduction of the entire liability of Rs. 48,59,431 as determined actuarially. It was contended that the provisions of section 40A(7) of the Act were not applic....
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.... any other provision of this Act relating to the computation of income under the held '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 any other 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 approve 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....
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....the provisions of subsection (7)(a) of section 40A of the Act. The question was, therefore, answered in the negative and against the assessee. On behalf of the assessee in these appeals, it was submitted with reference to section 40A(7) of the Act, that the said section was a provision for disallowance and but for the said section, provision made by an assessee for payment of gratuity could be claimed as deduction under section 37 of the Act as expenditure incurred wholly and exclusively for the purpose of the assessee's business. Alternatively, it was urged that such a provision would have been claimed as deduction generally in determining the true profits and gains of business which could be subjected to tax under section 28 of the Act. It was emphasised on behalf of the assessee that deduction in respect of gratuity could be claimed de hors section 40A(7) which in effect provided for the disallowance of the deduction in respect of gratuity in certain circumstances. Therefore, it was urged, on behalf of the assessee, that this provision should be very strictly construed. And so construed, section 40A(7) could only apply if the assessee had made provision for payment of gratuity ....
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....f) Section 36(1)(viia) of the Act provided for deduction in respect of provision for doubtful debts made by certain financial institutions. There was no doubt that " provision " in section 36(1)(viia) of the Act meant an amount specifically set apart in the books of account of the assessee to meet the loss on doubtful debts. The word " provision " in section 40A(7) must also receive the same meaning, according to the assessee. (g) Section 34(3)(a) spoke of the creation of a development rebate reserve by debiting the profit and loss account and crediting the reserve account. Thus, the Income-tax Act itself contemplated, according to the assessee, a reserve as an appropriation or earmarking of profits by making entries for this purpose in the books of account. (h) The other clauses of section 40A spoke of " expenditure " and allowance But section 40A struck a different note and used the word provision Consequently, " provision " could not be equated with "expenditure " or " allowance" or " deduction ". In interpreting a taxing statute, it was submitted on behalf of the assessee, equitable considerations were entirely out of place, nor could taxing statute be interpreted on any pr....
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....ession " provision made by the assessee ". This court in Vazir Sultan's case observed at page 569 referring to the observations in the case of Metal Box: " ` The distinction between a provision and a reserve is in commercial accountancy fairly well known. Provisions made against anticipated losses and contingencies are charges against profits and, therefore, to be taken into account against gross receipts in the P. & L. account and the balancesheet. On the other hand, reserves are appropriations of profits, the assets by which they are represented being retained to form part of the capital employed in the business. Provisions are usually shown in the balancesheet by way of deductions from the assets in respect of which they are made whereas general reserves and reserve funds are shown as part of the proprietor's interest. (See Spicer and Pegler's Book-keeping and Accounts, 15th Edn., p. 42)'." It was emphasised that the concept of provision applied not only in respect of companies but also to individual assessees. Reliance was also placed on the observations of this court in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363, where it was emphasised that whether an assessee w....
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....ng the ambit of the section, then these payments mentioned therein are not deductible, according to the statute, in certain circumstances. Therefore, the heading of this section is a clear indication that certain payments and expenses which would be otherwise deductible would not be deductible except in certain circumstances indicated in the section. This is abundantly made clear by the non obstante expression used in sub-section (1) of section 40A. As noted before, the provisions of section 40A shall have effect notwithstanding anything to the contrary contained in any other provision of the Act. Payments of deductions or provision for deduction could have been eligible for deduction or could have been deducted either under section 28 or under section 37 of the Act. But the use of the non obstante expression makes it clear that if there is any legislative base dealing with the provision for gratuity, then the same would be applicable in spite of and notwithstanding any other provision of the Act. Read with the marginal notes of section 40A, the non obstante clause of sub-section (1) of section 40A has an overriding effect over the provisions of any other section by providing that ....
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....d to receive the payment during the year, the amount being a large one in one year and a small one in another year, the employer often finds it desirable and/or convenient to set apart for future use, a sum every year to meet the contingent liability as a provision for gratuity or a fund for gratuity. He might create an approved gratuity fund for the exclusive benefit of his employees under an irrevocable trust and make contributions to such fund every year. Contingent liabilities do not constitute expenditure and cannot be the subject-matter of deduction even under the mercantile system of accounting. Expenditure which was deductible for income-tax purposes is towards a liability actually existing at the time but setting apart money which might become expenditure on the happening of an event is not expenditure. (See in this connection, the observations of this court in Indian Molasses Co. (P) Ltd. v. CIT [1959] 37 ITR 66). A distinction is often made between an actual liability in praesenti and a liability de futuro, which for the time being is only contingent. The former is deductible but not the latter. Amounts set apart by way of provision or by way of a reserve or fund to mee....
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....certained and discounted on an accrued basis as falling on the assessee in the year of account could be deductible either under section 28 or section 37 of the Act. As there were several methods which the assessee might choose to adopt in meeting his liability to pay gratuity, the treatment which he would receive under the Income-tax Act would depend upon the method adopted by him. The assessee is only under an obligation to pay gratuity when it became due and payable. The other methods adopted by the assessee for meeting the liability for gratuity as and when it arose are provisions or arrangements made by him at his option. It is not obligatory on him to make any such provision and if no such arrangement or provision was made, no question arose to consider its deductibility or allowance under the Act. The intention of the legislature in enacting the provision of section 40A(7) would be apparent from the Notes on Clauses of the amendment where in paragraph 46, after referring to the provisions of section 37(1) and section 36(1)(v) of the Act, it was observed, inter alia, as follows : " A reading of these two provisions clearly shows that the intention has always been that deduc....
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.... 40A of the Act, what it means is that whatever is provided for future use by the assessee out of the gross profits of the year of account for payment of gratuity to employees on their retirement or on the termination of their services would not be allowed as deduction in the computation of profits and gains of the year of account. The provision of clause (a) was made subject to clause (b). The embargo is on deductions of amounts provided for future use in the year of account for meeting the ultimate liability to payment of gratuity. Clause (b)(i) excludes, from the operation of clause (a) contribution to an approved gratuity fund and amount provided for or set apart for payment of gratuity which would be payable during the year of account. Clause (b)(ii) deals with a situation where the assessee might provide by the spread-over method and provides that such provision would be excluded from the operation of clause (a) provided the three conditions laid down by the sub-clauses are satisfied. The submission of the assessee that if no provision is made by the assessee for gratuity, still the same will be deductible and section 40A(7) will have no application, would defeat the very pu....
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....bted the decision of the Allahabad High Court in Swadeshi Cotton Mills Co. Ltd. v. ITO [1978] 112 ITR 1038 and further observed that the question of deductibility of a claim for gratuity liability could not be allowed on general principles under any provisions of the Act. The aforesaid difficulties in accepting the contentions urged on behalf of the assessee were highlighted by the Calcutta High Court in the case of Peoples Engineering & Motor Works Ltd. v. CIT [1981] 130 ITR 174. It was pointed out that payment of gratuity was a statutory liability created under the Payment of Gratuity Act, 1972. It could normally be said to have arisen for the carrying on of the business. However, for gratuity to be deductible under the Act, it must fulfil the conditions laid down in section 40A(7). The deduction could not be allowed on general principles under any other section of the Act because sub-section (1) of section 40A makes it clear that the provisions of the section shall have effect notwithstanding anything to the contrary contained in any other provision of the Act relating to the computation of income under the head " Profits and gains of business or profession " or, in other words....