TMI Blog2020 (10) TMI 1079X X X X Extracts X X X X X X X X Extracts X X X X ..... )(ia) is prospective in nature. Hence the amendment in the second proviso to Sec. 40(a)(ia) is prospective in nature therefore, disallowance should not be restricted to 30% of the total disallowance therefore we dismiss the ground raised by the assessee. - ITA No. 85/Kol/2020 - - - Dated:- 16-9-2020 - A.T. Varkey, Member ( J ) And Dr. A. L. Saini, Member ( A ) For the Appellant : A. K. Tulsiyan, FCA For the Respondents : Dhrubajyoti Roy, JCIT ORDER Dr. A. L. Saini, Member ( A ) 1. The captioned appeal filed by the assessee, pertaining to assessment year 2012-13, is directed against the order passed by the Commissioner of Income Tax (Appeal)-18, Kolkata, in appeal no. CIT(A)-Kolkata-18/10117/2017-18/2019-20/, which in turn arises out of an assessment order passed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961 (in short the Act ) dated 17/03/2015. 2. The grounds of appeal raised by the assessee are as follows: 1. That the ld. CIT(A) was wrong in confirming the action of the ld. Assessing Officer in making disallowance of ₹ 4,68,092/- u/s. 36(1)(v) on account of unapproved Gratuity Expenses. The same was paid to LIC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,092/- claimed by the assessee was disallowed. 5. Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A) who has confirmed the addition made by the Assessing Officer. Aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us. 6. We have heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials available on record. The ld. Counsel for the assessee has relied on the submissions made before the authorities below and on the other hand the ld. DR has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity. We note that the issue raised by the assessee is whether contribution to group gratuity scheme made by the assessee to Life Insurance Corporation of India (LIC-Group Gratuity Scheme) is an allowable expenditure? It is as allowable expenditure as held by the Hon'ble Supreme Court in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any assessee either by any law or even by the canons of accounting practice to make any provision in the books of account in respect of the liability to pay gratuity. Consequently, an assessee might claim as deduction in his income-tax assessment the liability in respect of gratuity even though he might not have made any provision or other entry in his books of account in respect of gratuity. 20. It was the assessee's case that section 40A(7) was not a complete code in respect of gratuity. Section 40A contained only a series of specific and limited disallowances. If an item of expenditure was not covered by section 40A, it was not as if it could not be claimed as deduction at all. On the contrary, if section 40A did not apply, there was no bar at all to claiming the expenditure as deduction either under section 28 or under section 37 of the Act provided it was incurred wholly and exclusively for the purpose of business. It was further submitted that section 40A(7) could not possibly be considered to be a complete code with regard to the allowance of deduction for gratuity, inter alia, because section 40A(7) merely provided for disallowance if provision of gratuity was mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1975 with retrospective effect from 1-4-1973. It is necessary to appreciate the purpose and object intended to be achieved by this sub-section in order to arrive at the true meaning of the provision. 22. Payment of gratuity as commonly under stood is the payment made to the employee by the employer on his retirement or termination of his service for any reason. It is made voluntarily by the employer as a regular practice or pressure of trade or business either under an agreement with the employees or on the understanding of the trade and after the enactment of the Payment of Gratuity Act which came into force on 16-9-1972, as a statutory liability under the said Act. Although payment of gratuity is made on retirement or termination of service, it was not for the service 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. 23. The right to receive the payment accrued to the employees on their retirement or termination of their services and the liability to pay gratuity became the accrued liability of the assessee when the employees retir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and valued as necessary could be taken into account as trading expenses if these were sufficiently certain to be capable of being valued. An estimated liability under a gratuity scheme even if it amounted to a contingent liability if properly ascertainable and its present value was fairly discounted was deductible from the gross profits while preparing the profit and loss account. In view of this decision and other decisions that followed it, it became permissible for an assessee if he so chose to provide in his profits and loss account for the estimated liability under a gratuity scheme by ascertaining its present value on accrued basis and claiming it as an ascertained liability to be deducted in the computation of the profits and gains of the previous year. 26. It would, thus, be apparent from the analysis aforesaid that the position till the provisions of section 40A(7) were inserted in the Act in 1973 was as follows: (1) Payments of gratuity actually made to the employee on his retirement or termination of his services were expenditure incurred for the purpose of business in the year in which the payments were made and allowed under section 37. (2) Provision ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income in a case where the provision has been made on a scientific basis in the form of an actuarial valuation. In order to remove uncertainty in the matter, it is proposed to specifically provide in the law that no deduction will be allowed, in the computation of profits and gains of a business or profession, in respect of any reserve created or provision made for the payment of gratuity to the employees on retirement or on termination of employment for any reason. This restriction will, however, not apply in relation to a provision made for the purpose of payment of a sum by way of contribution towards an approved gratuity fund that has become payable during the relevant account year, or for the purpose of meeting actual liability in respect of payment of gratuity to the employees that has arisen during such year. - [1975] 98 ITR (St.) 194 29. This intention and the purpose of the Legislature was carried into effect by inserting sub-section (7) in section 40A by ensuring the overriding effect over the other provisions of the Act. Therefore, in interpreting or in trying to find out the meaning of that provision, one should, if possible and in this case it is not at all stra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... absurd result, and even where the assessee has not chosen to adopt the spread-over method and has not provided for the present value of the contingent liability attributable to the year of account by charging it on the profits of the year, the assessee would still be entitled to claim as deduction from the gross profits of the year the said estimated liability which he could have provided for but he has not chosen to do so. 32. Where the intention of the Legislature in enacting the provision in question was to put an embargo on the deduction, the interpretation suggested by the assessee defeats that purpose. 33. Kedarnath Jute Mfg. Co. Ltd.'s case (supra) referred to hereinbefore dealt with a different situation. The accrual of sales tax liability in that case did not depend on the option of the assessee to make or not to make it for the year. The case of the Bombay High Court in Tata Iron Steel Co. Ltd. v. D.V. Bapat, ITO [1975] 101 ITR 292 was a case on which reliance was placed on behalf of the assessee where provision was made but was a case before the enactment of section 40A (7) arising out of the assessment year 1972-73. Similarly CIT v. High Land Produce Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... name) made by the assessee for the payment of gratuity. The amplitude of the section was indicated by the use of the expression 'whether called as such or by any other name'. It was further reiterated that the interpretation suggested on behalf of the assessee would lead to a conclusion which would be extraordinary and repugnant to commonsense. It will also cause grave injustice to the assessee who have been prudent enough to set apart a sum for payment of gratuity. 36. The principle that fiscal statutes should be strictly construed does not rule out the application of the principles of reasonable construction to give effect to the purpose or intention of any particular provision as apparent from the scheme of the Act, with the assistance of such external aids as are permissible under the law. 37. For the aforesaid reasons, it is not possible to accept the assessee's contentions. The questions referred to the High Court were, therefore, rightly answered in the negative by the High Court. The appeals, accordingly, fail and are dismissed with costs. 7. Our view is fortified, by the judgment of Hon'ble High Court of Karnataka, on the identical facts, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of commercial expediency and, hence, deductible under section 37. After referring to a few decisions and the principle applicable to the case, the High Court held: ... It is obvious that in the instant case, when contribution was made by the assessee-company for the provident fund amount of the employees even when there was no recognised fund in existence, it would be justifiable on the ground of commercial expediency, so as to keep their workers satisfied and to see to it that the workers get the benefit of provident fund, and thus this was a payment made for the purpose of earning the profits of the business by the assessee or in the course of earning profits of the business by the assessee. ... (p. 707) 13. In the instant case, the provision made by the assessee is to meet its statutory obligation, since this statutory corporation is obliged to pay pension to its employees under the rules governing it; there is no dispute about this fact. The concept of commercial expediency is not foreign to a statutory corporation like the instant assessee which is obliged to carry on a venture which any other commercial enterprise also can carry on. 14. In these circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve already noted in our earlier para and the same is not being repeated for the sake of brevity. We note that the short question before us raised by the assessee is that the disallowance should be restricted to 30% of the total disallowance i.e. ₹ 4,86,811/- (30% of ₹ 16,22,702/- as per amended provision of Income Tax Act). The amendment made by Finance Act, 2014 is curative in nature and should have retrospective effect. Therefore, the important aspect to be examined is that whether insertion of second proviso to Sec. 40(a)(ia) is retrospective or prospective in nature. We note that the said issue raised by the assessee is no longer res integra, recently the Hon'ble Supreme Court in the case of Shree Choudhary Transport Company Vs. Income Tax Officer CIVIL APPEAL No. 7865 OF 2009, dated 29th July, 2020 held that amendment in the second proviso to Sec. 40(a)(ia) is prospective in nature. The important findings of the Hon'ble Supreme Court is given below: 20. Before finally answering the root question in the matter as to whether the payments in question have rightly been disallowed from deduction, we may usefully summarise the answers to Question Nos. 1 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laxation too, cannot now raise a grievance of alleged hardship. Thirdly, as noticed, the appellant had shown total payments in Truck Freight Account at ₹ 1,37,71,206/- and total receipts from the company at ₹ 1,43,90,632/-. What has been disallowed is that amount of ₹ 57,11,625/- on which the appellant failed to deduct the tax at source and not the entire amount received from the company or paid to the truck operators/owners. Viewed from any angle, we do not find any case of prejudice or legal grievance with the appellant. 21.1. Hence, answer to Question No. 4 is clearly in the affirmative i.e., against the appellant and in favour of the revenue that the payments in question have rightly been disallowed from deduction while computing the total income of the assessee-appellant. Conclusion 22. For what has been discussed hereinabove, this appeal fails and is, therefore, dismissed with costs. Hence the amendment in the second proviso to Sec. 40(a)(ia) is prospective in nature therefore, disallowance should not be restricted to 30% of the total disallowance i.e. ₹ 4,86,811/- (30% of ₹ 16,22,702/-), therefore we dismiss the ground raised ..... X X X X Extracts X X X X X X X X Extracts X X X X
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