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TMI Blog1981 (4) TMI 161X X X X Extracts X X X X X X X X Extracts X X X X ..... ,889 for payment of such gratuity. This figure of Rs. 1,06,889 was arrived at by the actuarial valuation of the liability as on 30-6-1974 by taking into account the number of employees as on 30-6-1974, their salaries and the number of years of service of such employees. 2. After the expiry of the accounting year on 30-6-1974 and before the assessment was completed, section 40A(7) was inserted in the Income-tax Act, 1961 ('the Act') by the Finance Act, 1975, with retrospective effect from 1-4-1973. The law [section 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 of their services for any reason. But two categories of provisions made by the assessee in his accounts were saved by that law. We need to 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 : "(7)(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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir employment for any reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity to any employee 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 1-1-1976, the assessee had constituted the fund on 24-7-1975 and had applied on that day itself for approval. The approval was given by the Commissioner with effect from 28-7-1975 by his order dated 26-10-1976. Though the assessee need pay only half of the admissible amount by 1-4-1976 it has paid to the fund the full admissible amount of Rs. 1,06,889 on 9-9-1975 itself. Reckoning by the date of payment it falls within the next assessment year 1976-77. But the assessee claimed the provision of Rs. 1,06,889 as a deduction in the assessment for the assessment year 1975-76 itself. The ITO refused the deduction. He was prepared to allow only the incremental liability as a deduction, an expression not found in the Act or the Rules, but by whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsideration. So the President was pleased to constitute a Special Bench for disposal of this department appeal. An intervener from Calcutta has also appeared before us. 6. The departmental representative argued that the accounting year ended 30-6-1974 (second year 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, be allowed only in the first year of liability, which is the assessment year 1974-75. The argument of the departmental representative was that the judgemade law before enactment of section 40A(7) is that in mercantile system of accounting, a provision for payment of gratuity at a future date could be allowed under section 37(1) as a deduction in the second year of liability only to the extent of incremental liability in the current year ; that the enactment of section 40A(7) has not made any change in that judgemade law ; tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd sought to be saved. It cannot be imagined that the assessees were put under such obligation to create a fund and hand over moneys to such fund for no benefit. However, we need not identify the particular section of the Act under which these two provisions are deductible. Such identification is not necessary for the purpose of disposal of this appeal. It may be that it is deductible under section 28(i) or section 36(1)(v) or section 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, on the main question or aspect 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 section 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conditions : (i) creation of an approved gratuity fund, and (ii) provision for payment to any approved fund. As further pointed out by the High Court, the Supreme Court in Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 and the House of Lords in Southern Railway of Peru Ltd. v. Owen (Inspector of Taxes) [1957] 32 ITR 737 have held that the liabilities for gratuity though payable in future is '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 the Fourth Schedule enables the Commissioner to withdraw approval already granted to a fund when 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 a 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 under section 36(1)(v). It must be pointed out that if the revenue's contention is accepted, rev ..... X X X X Extracts X X X X X X X X Extracts X X X X
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