TaxTMI 
TaxTMI 
2020 (10) TMI 1079
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....ompany. As such the fund was created wholly and exclusively for the purpose of Business and should be allowed u/s. 37(1). Therefore, the said disallowance is completely unjustified and needs to be deleted. 2. That the ld. CIT(A) was wrong in confirming the action of the ld. Assessing Officer in making disallowance of Rs. 16,22,702/- u/s. 40(a)(ia) on account of non-deduction of TDS. The same should be restricted to 30% of the disallowance i.e. 4,86,811/- in view of the recent amendment in section 40(a)(ia). The ld. CIT(A) failed to consider the fact that the said amendment is curative in nature and comes into rescue whenever the disallowance u/s. 40(a)(ia) is warranted. Therefore, the said amendment should be treated as retrospective amendment and the disallowance should be restricted to 30% of total expenditure. 3. That the assessee craves to leave or add, alter, amend or withdraw any ground or ground(s) of appeal before or at the time of hearing. 3. Ground no. 1 raised by the assessee relates to disallowance of Rs. 4,68,092/- u/s. 36(1)(v) on account of unapproved Gratuity Expenses. 4. Brief facts qua the issue are that on perusal of records furnished by the assessee, it wa....
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.... of this Court in the case of Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 at pages 67 and 68 which were reiterated and referred to in the decision of this Court in Vazir Sultan Tobacco Co. Ltd.'s case (supra). In these appeals, we are not concerned with the distinction between 'provision' and 'reserves'. We are concerned with the true meaning and purport of the expression 'provision made by the assessee'. This Court in Vazir Sultan Tobacco Co. Ltd.'s case (supra) referring to the observations in the case of Metal Box Co. of India Ltd. (supra). "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 profit and loss account and the balance sheet. 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 balance sheet by way of deductions from the assets in respect of which they are made wh....
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....er IV of the Act which deals with computation of total income. It is under the sub-heading of a group of sections dealing with the computation of profits and gains of business or profession. The said group of sections begin with section 28 and go up to section 40D. Section 40A is with the marginal note under the heading 'Expenses or payments not deductible in certain circumstances'. If the marginal note or heading is any indication, and it certainly is a relevant factor to be taken into consideration in construing 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 eligib....
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....employer. An employer might pay gratuity when the employee retires or his service is terminated and claim the payment made as an expenditure incurred for the purpose of business under section 37. He might, if he followed the mercantile system, provide for the payment of gratuity which became payable during the previous year and claim it as an expenditure on the accrued basis under section 37. Since the amount of gratuity payable in any given year would be a variable amount depending upon the number of employees who would be entitled 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 purpos....
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....essee. (3) Provision made by setting aside an advance sum every year to meet the contingent liability and gratuity as and when it accrued by way of provision for gratuity or by way of reserve or fund for gratuity was not allowed as an expenditure of the year in which such sum was set apart. (4) Contribution made to an approved gratuity fund in the previous year was allowed as deduction under section 36(1)(v). (5) Provision made in the profit and loss account for the estimated present value of the contingent liability properly ascertained 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." 27. 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 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 s....
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....any other name) made by the assessee for the payment of gratuity to his employees on their retirement or termination of their services for any reason. The expression 'provision' has not been defined in the Act and is not used in any artificial sense but in its ordinary meaning. This is clear from the words (whether called as such or by any other name) occurring in sub-section. According to Webster, 'provision' in its ordinary sense means 'something provided for future use'. 30. On a plain construction of clause (a) of sub-section (7) of section 40A, 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 fu....
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....sessee had relied. Another case upon which the assessee relied was Swadeshi Cotton Mills Co. Ltd. v. ITO [1978] 112 ITR 1038 (All.). This case arose out of the assessment year 1973-74 to which the provision of section 40A(7) was applicable. The Allahabad High Court, however, took the view that bar created by the said provision did not apply since the conditions laid down had to be fulfilled in future. It did not take into consideration the provision of section 155(13) of the Act. The Madras High Court in CIT v. Andhra Prabha (P.) Ltd. [1980] 123 ITR 760 has doubted the decision of the Allahabad High Court in Swadeshi Cotton Mills Co. Ltd.'s case (supra) 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. 34. 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 Engg. & Motor Works Ltd. (supra). It was pointed out that the payment of gratuity was a statutory liability created under the Payment of Gratuity Act. It could normally be said to have arisen for the carryin....
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....l propositions. In such a situation, a practical approach is to accept the view which is favourable to the assessee, as against the stand of the revenue. Unless strong reasons exist, normally the earlier decision of a Division Bench should be followed by the subsequent Bench. The latter Bench, if it disagrees with the earlier view, can only refer the question to a larger Bench. But, this is done only in rare cases where public interest requires reconsideration of the earlier view if the earlier view is patently erroneous. 11. Apart from the decision of this Court in Karnataka State Warehousing Corpn.'s case (supra), the decisions of the Calcutta and Gujarat High Courts also support the assessee's case. CIT v. Eastern Spg. Mills Ltd. [1980] 126 ITR 686 is the decision of the Calcutta High Court. In pursuance of a statutory requirement under the West Bengal Employees' Payment of Compulsory Gratuity Act, 1971, a special liability was incurred by the assessee and the provision made to meet this liability was claimed as a deduction under section 37. A reasonable amount was allowed as a deduction by the ITO. The High Court held that a prudent estimate of the liability was e....
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....tive and against the revenue." 8. Thus, we note that the payment made by the assessee to the Life Insurance Corporation under Group Gratuity Scheme would be an allowable expenditure as held by the Hon'ble Supreme Court in the case of Shri Sajjan Mills (supra) therefore respectfully following the judgment of Hon'ble Supreme Court in the case of Sajjan Mills (supra), we allow ground no. 1 raised by the assessee. 9. Ground no. 2 raised by the assessee relates to disallowance of Rs. 16,22,702/- u/s. 40(a)(ia) of the Act on account of non-deduction of TDS. 10. Brief facts qua the issue are that on perusal of records furnished by the assessee during the course of assessment proceedings it was noticed by the assessing officer that the assessee has made payments to the tune of Rs. 17,47,505/- on account of Label Printing to three different parties. However, no TDS has been made on the same. During the Assessment proceedings, the assessee had been asked to explain why this amount of Rs. 17,47,505/- should not be disallowed for non-deduction of TDS u/s. 40(a)(ia) of the Act. However, since the assessee during the assessment proceedings could not offer any satisfactory explanation ....
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....the Act is not limited only to the amount outstanding and this provision equally applies in relation to the expenses that had already been incurred and paid by the assessee; that disallowance under Section 40(a)(ia) of the Act of 1961 as introduced by the Finance (No. 2) Act, 2004 with effect from 01.04.2005 is applicable to the case at hand relating to the assessment year 2005-2006; and that the benefit of amendment made in the year 2014 to the provision in question is not available to the appellant in the present case. These answers practically conclude the matter but we have formulated Question No. 4 essentially to deal with the last limb of submissions regarding the prejudice likely to be suffered by the appellant. 21. The suggestion on behalf of the appellant about the likely prejudice because of disallowance deserves to be rejected for three major reasons. In the first place, it is clear from the provisions dealing with disallowance of deductions in part D of Chapter IV of the Act, particularly those contained in Sections 40(a)(ia) and 40A(3) of the Act, that the said provisions are intended to enforce due compliance of the requirement of other provisions of the Act and to ....