TMI Blog1994 (10) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 1973-74, it claimed that a sum of Rs. 2,23,224 be deducted from the assessable income in the assessment year 1973-74. The Income-tax Officer disallowed the same on finding that a sum of Rs. 1,92,871 representing provision for gratuity related to earlier years ending on March 31, 1972, and the assessee had not complied with the provisions of section 40A(7) of the Act in respect of the incremental liability represented by the balance of Rs. 31,353. On appeal, the Appellate Assistant Commissioner held that since the assessee had paid Rs. 1,92,871 into a trust in the year 1975, the liability crystallised only in that year and could not be related to the assessment year 1973-74. With regard to the balance, the Appellate Assistant Commissioner held that the claim could be considered only if the conditions provided under section 40A(7) were fulfilled. The Appellate Tribunal on further appeal by the assessee, however, found that the gratuity scheme of the assessee had been approved by the Commissioner of Income-tax with effect from April 1, 1975, by his order dated December 17, 1978. Thus, according to the Tribunal, the provisions of section 40A(7)(b)(ii) of the Act would apply to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y person (other than an apprentice) employed on wages, not exceeding a specified sum of money per mensem or such higher amount as the Central Government may, having regard to the general level of wages by notification, specify, in any establishment, factory, mine, oilfield, plantation, port, railway company or shop, to do any skilled, semi-skilled or unskilled, manual, supervisory, technical or clerical work, whether the terms of such employment are express or implied, and whether or not such person is employed in a managerial or administrative capacity from exploitation except such persons who hold a post under the Central Government or a State Government and are governed by any other Act or by any rules providing for payment of gratuity (see definition of " employee " in section 2(e) of the Payment of Gratuity Act, 1972) and made such employee entitled to gratuity on the termination of his employment after he had rendered continuous service for not less than five years on his superannuation, or on his retirement or resignation, or on his death or disablement due to accident or disease, in the last case the period of completion of continuous service of five years was/is not necess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the controlling authority for deciding the dispute. (c) The controlling authority shall, after due inquiry and after giving the parties to the dispute a reasonable opportunity of being heard, determine the matter or matters in dispute and if, as a result of such inquiry any amount is found to be payable to the employee, the controlling authority shall direct the employer to pay such amount, or, as the case may be, such amount as reduced by the amount already deposited by the employer. (d) The controlling authority shall pay the amount deposited, including the excess amount, if any, deposited by the employer, to the person entitled thereto. (e) As soon as may be after a deposit is made under clause (a), the controlling authority shall pay the amount of the deposit-- (i) to the applicant where he is the employee ; or (ii) where the applicant is not the employee, to the nominee or, as the case may be, the guardian of such nominee or heir of the employee if the controlling authority is satisfied that there is no dispute as to the right of the applicant to receive the amount of gratuity. (5) For the purpose of conducting an inquiry under sub-section (4), the controlling au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 approved 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 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 per cent. of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n made by it for the purposes 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 had/has become payable during the previous year relevant to the assessment year 1973-74, i.e., assessment year commencing on or after the 1st day of April, 1973, but before the 1st day of April, 1976, deduction to the extent of the amount not exceeding the admissible amount on fulfilling conditions : (1) the provision was/is made in accordance with the 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) on the assessee creating 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) by paying to the said fund a sum equal to at least fifty per cent. of the admissible amount, or where any amount had 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in section 40A(7) of the Act. (see Peoples Engineering and Motor Works Ltd. v. CIT [1981] 130 ITR 174 (Cal)). The provisions of section 40A of the Act will have effect not withstanding anything to the contrary contained in any other provisions of the Act relating to computation of income under the head " Profits and gains of business or profession ". They would have effect notwithstanding anything contained in sections 30 to 39 of the Act and as prescribed under clause (a) of sub-section (7) thereof 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. This provision, however, is subject to the prescription contained in clause (b) thereof. 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 payment of gratuity which would be payable during the year of account. Clause (b)(ii) deals with a situation where the assessee makes provision by the spread over method and provides that such provision would be exclud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw and stated (headnote) : "Although payment of gratuity is made on retirement or termination of service, it is not for the services rendered during the year in which the payment is made but it is made in consideration of the entire length of service and its ascertainment and computation depend upon several factors. The right to receive the payment accrues to the employees on their retirement or termination of their services and the liability to pay gratuity becomes an accrued liability of the assessee, when the employees retire or their services are terminated. Until then, the right to receive gratuity is a contingent right and the liability to pay gratuity continues to be a contingent liability qua the employer. Contingent liabilities do not constitute expenditure and cannot be the subject-matter of deduction even under the mercantile system of accounting. Expenditure which is 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. " Testing the facts of the case on the touchstone of the law as above, had the assessee claimed deduction in r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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