TMI Blog1983 (3) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... period is the year ended 31st March, 1974. The first question relates to the deduction of gratuity liability made on actuarial basis. The ITO did not allow the deduction on the ground that there was no accrued gratuity liability. On appeal, the AAC confirmed the order of the ITO. On further appeal, the Tribunal held that since the liability was created on estimated actuarial valuation, the assessee was entitled to the deduction even though the assessee had not made any provision for payment of gratuity in its books of account. The second question relates to the charging of interest under s. 215 of the I.T. Act, 1961. The ITO had charged an amount of Rs. 31,49,378 as interest under s. 215 of the Act. Before the AAC, it was contended, on behalf of the assessee, that there was no direction in the order for charging such interest. In the assessment order, there was a direction " charge interest if leviable ". It was also argued that the ITO should have waived interest under s. 215(1) read with r. 40(1)(v). The AAC held that the ITO had directed charging of interest in the last paragraph of the assessment order. The AAC also held that the question of rate of interest was beyond th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons in respect of gratuity made in the I.T. Act : " 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-... (v) any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust;" " 40A. (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head 'Profits and gains of business or profession '... (7) (a) Subject to the provisions of clause (b), 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. (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 paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, will be allowed as deduction in computing the taxable profits. reading of these two provisions clearly shows that the intention has always been that deduction in respect of gratuities should be allowed either in the year in which the gratuity is actually paid or in the year in which contributions are made to an approved gratuity fund. A doubt has been expressed that the relevant provisions, as presently worded, do not secure the underlying objective and that a provision made by a taxpayer in his accounts in respect of estimated service gratuity payable to employees will be deductible in computing the taxable 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... destruction of, property belonging to the employer, shall be forfeited to the extent of the damage or loss so caused ; (b) the gratuity payable to an employee shall be wholly forfeited (i) if the services of such employee have been terminated for his riotous or disorderly conduct or any other act of violence on his part, or (ii) if the services of such employee have been terminated for any act which constitutes an offence involving moral turpitude , provided that such offence is committed by him in the course of his employment. " The Payment of Gratuity Act is a social legislation under which an employee is entitled to get a lump sum on his superannuation or resignation or on his death or disablement. The amount payable is to be calculated by multiplying the last drawn salary by his years of service. The salary drawn in the earlier years is quite irrelevant for this purpose except in the case of an employee, who, after his disablement, is employed on reduced wages. There is, however, a ceiling imposed under s. 4(3) that an employee is not entitled to get more than a sum of twenty months' wages by way of gratuity. The liability to pay is also hedged in by a number of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill have to be allowed. A provision for payment of gratuity of a sum by way of contribution towards an approved gratuity fund will also have to be allowed although the gratuity has not become payable during the relevant previous year. There are certain special provisions for the assessment years commencing on or after 1st April, 1973, but before the 1st April, 1976. For these assessment years in order to get a deduction a provision must be made in accordance with the actuarial valuation of the ascertainable liability for payment of gratuity on the retirement or termination of the service of the employees. An assessee will also have to create an approved gratuity fund for the exclusive benefit of the employees under an irrevocable trust. The application for the approval of the fund must be made before 1st January, 1976. The allowance must be restricted to a sum equal to at least 50% 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 50% of the admissible amount as reduced by the amounts so utilised by the assessee. The assessee's cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otor Works Ltd. v. CIT [1981] 130 ITR 174, after an elaborate analysis of the provisions of the I.T. Act and the payment of Gratuity Act, held (p. 179): "The payment of gratuity is a statutory liability created for those who are earning income from the business profits and gains by carrying on business or profession or by carrying out adventure or trade which are of the same nature. The computation of such income and the deductions to be allowed must be guided by the provisions of the I.T. Act and those are categorical with what are the deductions to be allowed and these deductions are provided in s. 30 and s. 37 and, notwithstanding these deductions, it is specifically provided under s. 40A that certain conditions are to be fulfilled for payment of gratuity. Gratuity, being one of the deductions, normally can be said to have arisen for carrying on the business, which is specifically excluded, and there is no question of conflict in this regard." In the light of the principles laid down in that case, we are of the opinion that the assessee is not entitled to claim any deduction on account of its liability to pay gratuity estimated on actuarial basis without making any provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd justifiability of the second method of accounting was explained by Lord Radcliffe in the well-known case of Owen (H.M. Inspector of Taxes) v. Southern Railway of Peru Ltd. [1956] 36 TC 602; [1957] 32 ITR 737 (HL). In that case, the appellant company was operating its railway in Peru. There was a statutory scheme in Peru for payment of retirement benefits which is very similar to the scheme of the Payment of Gratuity Act. Under the Peruvian law, the railway company was bound to pay its employees in Peru prescribed compensation payments upon the termination of their services with the company, subject to the fulfilment by the employee of certain conditions. The amount to be paid depended on: (a) length of service, and (b) rate of pay at the end of the period of service, except that a reduction in pay would not affect the amount to which an employee was entitled by reference to the period of service already performed. In that case the company set apart a sum of money in its accounts and claimed that, upon proper principles of commercial accountancy, the amounts of compensation calculated to have accrued due to each employee from year to year as deferred remuneration should be allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : " What the appellant claims the right to do is to charge against each year's receipts the cost of making provision for the retirement payments that will ultimately be thrown upon it by virtue of the fact that it has had the benefit of its employee's services during that year. As a corollary it will not make any charge to cover the actual payments made in the year in respect of retirement benefits. Only by such a method, it is said, can it bring against the receipts of the year the true cost of the services that it has used to earn those receipts. Generally speaking, this must, I think, be true. For, whereas it is possible that any one of its many employees may forfeit his benefit and so never require a payment, the substantial facts of the situation are that when the company has paid every salary and wage that is due for current remuneration of the year it has not by any means wholly discharged itself of the pecuniary burden which falls upon it in respect of the year's employment. This is a long-term application of the practice by which provision for holidays with pay in the coming year is charged in part against the receipts of the previous year." But in the case before us, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of sales tax had accrued during the year of assessment even though it had to be discharged at a future date." It was further held at p. 367 of the report : "The main contention of the learned Solicitor-General is that the assessee failed to debit the liability in its books of account and, therefore, it was debarred from claiming the same as deduction either under section 10(1) or under section 10(2)(xv) of the Act. We are wholly unable to appreciate the suggestion that if an assessee under some misapprehension or mistake fails to make an entry in the books of account and although, under the law, a deduction must be allowed by the Income-tax Officer, the assessee will lose the right of claiming or will be debarred from being allowed that deduction. Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. The assessee who was maintaining accounts on the mercantile system was fully justified in claiming deduction of the sum of Rs. 1,49,776, being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, it is, obviously, not payable for the services rendered in the last year (sic). Section 40A(7) recognises the assessee's right to make a provision every year in its books of account for payment of gratuity. In order to claim the benefit of deduction, the assessee must fulfil the conditions laid down in s. 40A(7). In our opinion, on the facts of this case, the assessee is not entitled to claim the deduction of Rs. 19,71,126 on account of its estimated liability for payment of gratuity based on actuarial valuation. We shall now briefly refer to some of the decisions that were cited before us. In the case of CIT v. Eastern Spinning Mills Ltd. [1980] 126 ITR 686 (Cal), it was held by a Division Bench of this court (p. 704): "The fact that under cl. (v) of sub-s. (1) of s. 36 of the Act, the sum paid by the assessee by way of contribution towards approved gratuity fund for the exclusive benefit of the employee is deductible does not, in our opinion, affect the position. The assessee claimed its right to deduct this sum because this amount was a special liability which, we have noticed before, was created for the first time in 1971. If the assessee had dominion over the money, suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll the circumstances of the case. It is not clear whether the ITO has charged interest at all in this case. The endorsement at the foot of the assessment order " charge interest, if leviable " indicates that the ITO was assigning the responsibility for levying of interest to somebody else. The AAC has not gone into the question whether interest was at all leviable in the facts of this case and whether the ITO had at all exercised his discretion in this matter. point similar to the one raised in this case was decided by a Division Bench of this court in the case of CIT v. Lalit Prasad Rohini Kumar [1979] 117 ITR 603 (Cal). It was held in that case (p. 618) " The ITO has the power and indeed the duty to charge interest under the circumstances mentioned in ss. 215 and 217 of the Act, but the ITO has the discretion to waive or reduce such interest in the circumstances mentioned in r. 40 of the I.T. Rules, 1962. Such discretion, in our opinion, in the facts and circumstances of the section read with the rules, imposes a duty on the ITO to consider whether circumstances in the record warrant any waiver or reduction. Such consideration must be made from the facts on the record without b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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