TMI Blog1987 (7) TMI 157X X X X Extracts X X X X X X X X Extracts X X X X ..... fect from 1-4-1973 to allow deductions for provisions made towards gratuity. The Income-tax Officer observed that even though the gratuity liability was an allowable deduction u/s 36(1)(iv) of the Income-tax Act, the said section was superseded with effect from1-4-1973by enacting section 40A (7) of the Income-tax Act. The assessee relied upon a decision of the Madras High Court in the case of CIT v. Andhra Prabha (P.) Ltd. [1980] 123 ITR 760 but the Income-tax Officer held that this decision was not applicable to the facts of the assessee's case. Another main reason shown by the Income-tax Officer was that though the liability in respect of Rs. 3,25,988 was for initial contribution, it related to earlier years and therefore could not be allowed as a deduction in the year under appeal. 3. When the matter reached the Commissioner (A) on appeal, apart from reiterating the contentions taken before the Income-tax Officer emphasis was laid upon the decision of the Madras High Court in the case of Andhra Prabha (P.) Ltd. to urge that the provision was allowable as a deduction and that the Income tax Officer misread the provisions of the Income-tax Act and mis-appreciated the Madras High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntal representative to support their view, actually supported the assessee's view. He pointed out that the Income-tax Officer disallowed the claim on the ground that it related to earlier years but even so under the Income - tax Rules 103 and 104 initial contribution made to a gratuity fund is always allowable as a deduction, initial contribution would always relate to back years and therefore the Income-tax Officer went against the very spirit of the Rules when he disallowed the claim of the assessee. He also pointed out that the Madras High Court had correctly interpreted the law and it could not be said that the Commissioner (A) was wrong in relying on it. He also submitted that the purpose of enacting section 40A (7) is no doubt to put an embargo on the allowance of provisions made for payment of gratuity not because was not allowable as a deduction but because gratuity payment, till it materialises, remains a contingent liability and it was to provide for the disallowance of contingent liability that section 40A (7) was enacted. At the same time, the contributions that became due for payment to approved gratuity funds having become ascertained and accrued liabilities, care was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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 percent 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 percent 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 ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, that provision will not be considered to be a mere provisions for a contingent liability. The question that has therefore to be asked in this case is whether by the grant of approval by the commissioner of Income-tax to the gratuity fund, under the provisions governing the gratuity fund, the liability to make the contribution had arisen or not ? If it had arisen, it became payable during the previous year and any provision made to discharge that liability is covered by clause (b) and not by clause (a) and therefore became payable. The departmental representative did not agree before us that under the approval granted by the commissioner of Income-tax with retrospective effect, the payment of contribution to the gratuity fund had not become an ascertained liability as distinct from contingent liability spoken of in clause (a) and that liability has to be allowed as a deduction under clause (b). The initial contribution that has to be made under the provisions of the gratuity fund, has now become payable during the previous year although it relates to the earlier years. Once the gratuity fund arises as a consequence of the grant of approval to the gratuity fund, the question for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r meeting the liability for gratuity in his account books, but in its ordinary sense. The embargo under 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." It will be seen from this head-note extracted from the judgment of the Supreme Court that the Supreme Court pointed out that clause (b)(i) excludes from the operation of clause (a) contribution to an approved gratuity fund and the amount provided for or set apart for the payment of gratuity which would be payable during the year of account. We have therefore to see whether the provision made for the contribution to the contribution to the approved gratuity fund had become payable during the year of account or not. To repeat what we have said earlier, this is a cardinal question that arises in this case and in our view the liability to make the contribution to that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax Rules, we are of the opinion that the Commissioner (Appeals) is right in his conclusion. We, therefore, endorse his view. 7. The second ground raised by the revenue was that on the facts and in the circumstances of the case, the learned Commissioner (Appeals) was not justified in deleting the addition of Rs. 7,302 made by the Income-tax Officer towards commission paid to M/s. Chhabra Auto Industries. If we turn to the order of the Commissioner (A), this is all what he had observed in deleting the addition made by the Income-tax Officer : "M/s Chhabra Auto Industries were not examined by the ITO at any stage. The disallowance of Rs. 7,302 on account of commission paid to them is, therefore, deleted." But what we not find from the record is that despite several opportunities provided to the assessee the said person was never produced before the Income-tax Officer, on the other hand, this is what the Income-tax Officer had observed in regard to this : "The nature of commission payment to M/s Chhabra Industries was of the same nature as to the other two parties mentioned above. Assessee had filed an affidavit of M/s Jagjeet Singh partner of Mr. Jagjeet Singh in support ..... X X X X Extracts X X X X X X X X Extracts X X X X
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