TMI Blog1989 (3) TMI 106X X X X Extracts X X X X X X X X Extracts X X X X ..... evocable deed of trust dated June 25, 1967. The gratuity fund was created in accordance with the provisions as contemplated under Part C of the Fourth Schedule to the Income-tax Act, 1961, in order to obtain advantage of exemption from tax with regard to the contributions to the gratuity fund. Application for recognition of the gratuity fund was made by a letter dated November 16, 1970, to the Commissioner. By communication C. No. 207(2) of 1968 dated September 18, 1971, the Commissioner of Income-tax, Madras 11, Madras-34, accorded approval to the gratuity fund with retrospective effect from June 25, 1967, which was the date of the trust deed. Consequent on such recognition, the initial contribution made by the petitioner to the gratuity fund was allowed as deduction in the assessment year 1968-69 and, thereafter, annual contributions made to the gratuity fund were allowed as deduction in the various assessment years up to and inclusive of the assessment year 1974-75. Consequent on the promulgation of the Payment of Gratuity Act, 1972 (Central Act 39 of 1972), with effect from September 16, 1972, the petitioner was obliged to recompute the amount available in the gratuity fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 which seek to restrict the contribution beyond the scope of the section are ultra vires. The petitioner further submitted before the first respondent that the excess payment in so far as it has been laid out wholly and exclusively for the purpose of business will have to be allowed as a deduction under sec tion 37. It was also contended that the Payment of Gratuity Act, 1972, having cast a statutory obligation on every employer to make payment of gratuity on a particular basis, the contribution so made to the gratuity fund in accordance with such statutory requirement will have to be allowed as deduction and the provisions of the Gratuity Act, the Income-tax Act and the Rules made thereunder should be construed harmoniously. Lastly, it was submitted that the Department of Company Affairs, New Delhi, having directed the companies to ascertain the gratuity liability and make suitable provisions in the companies' accounts, there is no justification for denying the relief of deduction and the provisions of the Income-tax Act should be so construed as not to deprive the company of the benefit of the deduction. By his order in C. 1241(55-56) of 1977-TN-11, dated January 19, 1978, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by it for the exclusive benefit of its employees under an irrevocable trust. This section does not contemplate any restriction on the amount of deduction and only provides that all amounts paid to the approved gratuity fund will be allowed as a deduction. In such circumstances, the respondents herein are not justified in their view that payments made in excess of the contribution contemplated under rule 103 cannot be allowed as a deduction. He further contended that it is not correct to say that rule 103 imposes a restriction on the amount of contribution to be allowed as deduction. A reading of rule 103 clearly points out that it only provides a limit for the ordinary annual contribution to be made by an employer to the approved gratuity fund. But it does not contemplate that only that amount will be allowed as a deduction and hence the order of the first respondent in so far as it states that rule 103 restricts the amount of deduction of the amount contributed to the gratuity fund is not justified in law. Another submission made by learned counsel was that if the interpretation given by the first respondent is tenable, then rule 103 goes beyond section 36(1)(v) and hence such vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to learned counsel for the petitioner, the provisions of section 36(1)(v) of the Income-tax Act, 1961, rule 103 of the Income-tax Rules and the provisions of the Payment of Gratuity Act have to be read harmoniously. If, however, a conflict arose, the rule must yield to the provisions of the Income-tax Act and the Payment of Gratuity Act. According to learned counsel, the first respondent was not correct in saying that the additional amount contributed to the approved gratuity fund consequent on the coming into force of the Payment of Gratuity Act, 1972, can, if at all, be considered for deduction only in the assessment year 1973-74 and not in the assessment years in question. According to learned counsel, the petitioner has been reworking the amount of contribution payable every year in accordance with the provisions of the various statutes as well as on the basis of the rules of the approved gratuity fund and paying the amounts payable on such calculation, and hence the amount claimed is legitimately and properly liable for deduction only in the assessment years in which they become payable and have been contributed to the approved gratuity fund. Learned counsel further subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und. According to learned standing counsel, in order that a gratuity fund may receive and retain approval, it shall satisfy the condition set out therein and the rules prescribed by the Board. Rule 9(1)(b) clearly provides that the Board may make rules limiting the ordinary annual and other contributions of an employer to the fund. Pursuant to these rules, the Board has stipulated in rule 103 of the Income-tax Rules, 1962, that the ordinary annual contribution by the employer to the fund shall not exceed 8 1/3 % of the salary of each employee during each year. Similarly, in rule 104 , the Board has prescribed that the initial contribution by the employer in respect of the past services of an employee shall not exceed 8 1/3 % of the employee's salary for each year of his past service with the employer. There is, therefore, no substance in the contention of the petitioner that section 36(1)(v) of the Income-tax Act, 1961, does not contain any restriction. According to learned standing counsel, section 36(1)(v) of the Income-tax Act, 1961, will have to be read harmoniously along with the other provisions of the Income-tax Act, 1961, viz., provisions in Part C of the Fourth Schedule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 8 1/3% of the salary of each employee during that year. It is, therefore, submitted that a combined reading of section 36(1)(v) of the Income-tax Act, 1961, and rule 103 made by the Board would show that the disallowance made by the Income-tax Officer is proper and in accordance with law. Learned standing counsel further submitted that the Income-tax Act, 1961, is a self-contained Act and that the Payment of Gratuity Act cannot override the provisions of the Income-tax Act, 1961. It is submitted that the interpretation placed by the petitioner on rule 103 is contrary to the literal meaning of the said rule. According to learned standing counsel, having regard to the clear and unambiguous meaning of the said rule, the petitioner cannot import the provisions of the Payment of Gratuity Act into the Income-tax Act in order to support his case for allowance of the excess amount as a deduction. Learned standing counsel further submitted that Parliament has specifically provided under rule 9(1)(b) of Part C of the Fourth Schedule to the Act that the Board can make rules limiting the ordinary annual contribution and other contributions by an employer to the gratuity fund. According to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contribution has to be made in the year in which the employee is admitted to the benefit of the fund. Section 4(2) of the Payment of Gratuity Act, 1972, states that for every completed year of service or part thereof in excess of six months, the employer shall pay gratuity to an employee at the rate of 15 days wages based on the rate of wages last drawn by the employee concerned. Section 14 of the Payment of Gratuity Act, 1972, provides as follows : "The provisions of this Act or any rule made thereunder shall have effect notwithstanding anything inconsistent therewith contained in any enactment, other than this Act or in any instrument or contract having effect by virtue of any enactment other than this Act." Thus, the provisions of the Payment of Gratuity Act override the provisions contained in the Income-tax Act, 1961. Consequent on the promulgation of the Payment of Gratuity Act, 1972, with effect from September 16, 1972, the petitioner was compelled to recompute the amounts available in the gratuity fund on the basis of the statutory obligation cast on it by the said Act. As the payment of gratuity depends upon the total length of service of the employees and is based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owards gratuity is a permissible business expenditure. The contention of the Department that the payment of gratuity is provided for in clause (v) of sub-section (1) of section 36 and, therefore, it can only be allowed in accordance with that provision was repelled by saying that the amount was already deductible under section 28 while computing the gross profit. Similar view was also taken by the Bombay High Court in Tata Iron and Steel Co. Ltd. v. D. V. Bapat, ITO [1975] 101 ITR 292, by the Delhi High Court in Dalmia Dadri Cement Ltd. v. CIT [1980] 126 ITR 851 and by the Karnataka High Court in Mysore Tobacco Co. Ltd. v. CIT [1978] 115 ITR 698. The Kerala High Court in CIT v. Standard Furniture Co. Ltd. [1979] 116 ITR 751 [FB] has clarified that the mere fact that a claim would not fall within section 36 would not automatically make it unsustainable under other provisions of the Act. It also remains to be seen whether section 40A would have effect notwithstanding anything contained in sections 30 to 37 including sections 36 and 37. Where, however, the contribution was of a special nature inasmuch as the entire provision for gratuity was a liability in praesenti capable of ascer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principles provided they do not go against the grain of the income-tax statute, or the fiscal concept of business income." While considering the incremental liability arising in the matter of contribution made to the gratuity fund, this court, in the case of CIT v. Madras Rubber Factory Ltd. (No. 2) [1984] 149 ITR 411, 414, restated the legal position on this point as under: "As pointed out by this court in CIT v. Sitalakshmi Mills Ltd. [1983] 141 ITR 415, it has now become well established that where an employer has a gratuity scheme rendering him liable to pay gratuity to workmen and where having regard to the liability which might arise under the scheme, the employer obtains a scientific actuarial calculation under which the present discounted value of the gratuity liability is ascertained and where the employer charges his profit and loss account with incremental value of the year and also makes a provision for that amount, the employer will be entitled to compute his net profits after deducting the figure of incremental liability. That the assessee will be entitled to deduct the incremental liability for payment of gratuity during the accounting year, if he had made a cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of facts arising in these writ petitions, it is not possible to accept the arguments advanced on behalf of the respondents that contribution made towards gratuity fund is allowable only to the extent of 8 1/3 % of the employee's salary for each year. So also the argument advanced by learned standing counsel that the excessive contribution made towards gratuity liability beyond 8 % cannot be allowed under section 37 is also not acceptable. Similarly, the contention raised by learned standing counsel that the liability to contribute to the gratuity fund according to the Gratuity Act arose when the Gratuity Act came into force and hence the same cannot be allowed in the assessment years 1975-76 and 1976-77, when the actual payment was made, also cannot be accepted. In that view of the matter, we quash the order passed by the first respondent herein, the Commissioner of Income-tax, Tamil Nadu II, Madras-34 in C. S. No. 1241 (55-56) of 1977 dated January 19, 1978, and direct the respondents to allow further sums of Rs. 20,299 in the assessment year 1975-76 and Rs. 10,543 in the assessment year 1976-77 as claimed by the petitioner. Accordingly, the writ petitions are allowed wit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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