TMI Blog1981 (2) TMI 106X X X X Extracts X X X X X X X X Extracts X X X X ..... claim for deduction was made in the course of assessment proceedings. The ITO observed that though the AAC has allowed a similar claim of the assessee in the assessment year 1975-76, yet the said decision of the AAC had not been accepted by the department and appeal has been filed before the Tribunal. Hence, he did not agree to deduct the aforesaid sum of Rs. 27,330 while computing the business income and completed the assessment, accordingly. 3. The assessee appealed to the Commissioner (Appeals) and contended that its claim should have been allowed. However, the assessee reduced its claim from Rs. 27,330 made before the ITO to only Rs. 7,541 representing the incremental liability for gratuity relating to the services rendered by the eligible employees of the assessee during the year under consideration. Reliance was placed on several decisions of the Tribunal including the one passed in the case of Empire Dyeing Mfg. Co. Ltd [IT Appeal No. 1875 (Bom.) of 1975]. The case of the assessee was, that the conditions laid down in section 40A(7) of the Income-tax Act, 1961 ('the Act') for getting the deduction for the provision for liability applied only to a case where provision fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Kabra, the learned representative for the assessee, urged before us that the claim regarding the deduction of the aforesaid sum of Rs. 7,541 deserved to be accepted. He placed a copy of the order dated 17-4-1978 of the Tribunal in the case of this very assessee for the assessment year 1975-76, wherein a similar claim was allowed as a deduction on the same ground as now pleaded before us. He stated that the decision of the Special Bench of the Tribunal referred to by the Commissioner (Appeals) in his order was erroneous and required reconsideration. According to him, section 40A(7) applies only when a provision is made in the accounts while the Special Bench has extended the meaning of the word 'provision' to include claims for deductions even though no provision in the books of account was made for the same. He referred to the Schedule to the Companies Act, 1956, as well as the Dictionary of Accounts, Fifth edition, by Eric Cholar for the proposition that a provision, as understood under the Companies Act and principles of accountancy, can be made only by an entry in the books of account and in no other way. Consequently, he argued that if no entry to that effect is made in the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 2,480 was actually paid and allowed as a deduction. In the assessment year 1975-76, it appears that no payments have been actually made. However, a claim for deducting a liability of Rs. 14,680 was made which was allowed by the Tribunal on the ground that section 40A(7) did not apply as the assessee made no entries in its books of account regarding the provision of the liability. In the year under, consideration, as stated earlier, the liability for gratuity has been allowed on actual payment basis. In the notes on the balance sheet and the profit and loss account for the year ended 31-3-1976, the following comments of the auditors appear : "6. Provision for taxation for the accounting year ended 31st March, 1973, was made on the basis that the provision for gratuity would be allowed as a deduction in the computation of income and the assessment for that year has been completed on that basis. The Finance Act, 1975, has amended the Income-tax Act retrospectively and under this amendment, deduction in respect of provision for gratuity payable to employees on retirement or termination of their employment is conditional upon the company creating an approved gratuity fund before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents given and the conclusion arrived at therein. We have also considered the arguments of the learned representative for the assessee by which he tried to persuade us that the aforesaid decision of the Special Bench required reconsideration, but we do not find any force in any or those arguments for the reasons given hereinafter. 10. The judgment of the Special Bench of the Tribunal has to be read as a whole in its proper perspective. If so done, it is clear that the Special Bench referred to two types of deductions, namely, expenses and losses which arise out of voluntary actions of the assessee and those which arose without the volition of the assessee, like statutory obligations. The Special Bench observed that both the types of expenses can be allowed as deduction even though no entries in the books of the assessees are made in respect of them if, and only if the accounts are maintained on mercantile basis. Then, the Special Bench referred to the word 'provision' appearing in section 40A(7) and considering the content in and the purpose for which it was inserted in the Act, it came to the conclusion that its meaning was not confined only to the entries made in the books of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must look at the mischief which had to be cured as well as at the cure provided' [See also the observations of Goddard, CJ., in R. v. Paddington and St. Marylebone Rent Tribunal [1949] 65 TLR 200, 203. The position in law has been thus enunciated in the judgment of Das, Ag. CJ. (as he then was) in Bengal Immunity Co. Ltd. v. State of Bihar [1955] 2 SCR 603, 632. 'It is a sound rule of construction of a statute firmly established in England as far back as 1584 when Heydon's case [1584] 3 Co. Rep 7a was decided that . . . for the sure and true interpretation of all statutes in general (be they penal or beneficial, restrictive or enlarging of the common law) four things are to be discerned and considered :--- 1st. what was the common law before the making of the Act, 2nd. what was the mischief and defect for which the common law did not provide, 3rd. what remedy the Parliament hath resolved and appointed to cure the disease of the Commonwealth, and 4th. the true reason of the remedy ; and then the office of all judges is always to make such construction as shall suppress the mischief, and advance the remedy, and to suppress subtle inventions and evasions for continuance of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated that the assessee claimed the deduction in the computation of its net income. That case was one relating to an year when section 40A(7) has already come into force. It is in the background of these facts that the Madras High Court in Andhra Prabha (P.) Ltd's case made the observations quoted above. Thus, the Madras High Court has clearly stated that after section 40A(7) came into force, deductions for liability to pay gratuity could be allowed only if it came within the four corners of section 36(1)(v) or section 40A(7). After the observations quoted above, the Madras High Court has further commented as below : This decision of the Allahabad High Court is also inconsistent with the decision of this Court in CIT v. Carborundum Universal Ltd. [1979] 110 ITR 621, wherein we have pointed out that so long as there is a specific provision which regulates a claim, it is that provision that is to be resorted to and not the general principle of computation of profits. Further, recourse cannot be had to a residuary or general provision if the amount is not deductible as a result of non-compliance with a specific or particular provision. This aspect has not also been examined there." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim of the assessee has been rightly rejected. 14. We have considered the contention raised for the assessee that the system of accounting continued to be mercantile even in respect of the liability to pay gratuity. We do not find any force in the same because the facts, as stated earlier, point to the contrary. To repeat, the assessee agreed to the disallowance of the liability on accrual basis in the assessment year 1973-74. It did not create a gratuity fund envisaged under section 36(1)(v) as stated by the note of the auditors. It claimed deductions on the basis of actual payment which has been allowed year after year since 1973-74. It voluntarily stopped providing for the liabilities and making entries to that effect in its books of account. Under the circumstances, we hold that the assessee was, in fact, following the cash system of accounting so far as the liability to pay gratuity is concerned since the assessment year 1973-74 onwards. Hence, the question of allowing any deduction for that liability again on accrual basis does not arise at all. Having deliberately changed the system of accounting from mercantile to cash basis, insofar as the liability to pay gratuity was c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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