TUTTAPULLUM ESTATES Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee is a registered firm. In the course of the assessment proceedings for the assessment year 1973-74, it claimed that a sum of Rs. 1,96,402 towards gratuity liability should be deducted while computing the income. In the course of completing the assessment, the Income-tax Officer allowed the claim of the assessee to the extent of Rs. 30,328 on the ground that only the incremental liability can be allowed and disallowed the balance of Rs. 1,66,074. On appeal by the assessee before the Appellate Assistant Commissioner, he took the view that gratuity liability can be allowed only if the conditions prescribed in section 40A(7) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), are fulfilled and that though a trust had been created and the assessee had taken a policy for group insurance with the Life Insurance Corporation, the provision was not made on an actuarial basis but on the basis of fifteen day's salary for each year of completed service and consequently, the conditions prescribed under section 40A(7) of the Act had not been fully satisfied. In the result, the disallowance made by the Income-tax Officer was affirmed by the Appellate Assistant Commissioner. On further appeal by the assessee before the Tribunal, it held that the actual provision that would qualify for deduction during the year would be the incremental liability relevant to the assessment year and dismissed the appeal, confirming the disallowance by the authorities below. Under section 256(1) of the Act, the following question of law has been referred to this court for its opinion :

(2.) UNDER section 40A(7)(a) of the Act, no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for payment of gratuity to his employees on their retirement or on termination of their employment for any reason. However, under section 40A(7)(b), two exceptions are provided. The first exception under section 40A(7)(b)(i) covers cases where provision is made be way of contribution towards an approved gratuity fund or in respect of payment of gratuity that has become payable during the previous year. To put it differently, contributions to approved gratuity fund or liability in respect of gratuity payable during the previous year would be deductible. The second exception had been provided to relieve the hardship caused by the introduction of that sub-section and that permits allowance of such provisions relevant to the assessment years 1973-74 to 1975-76, subject to certain conditions which are (1) provision should be made as per the actuarial valuation of the ascertainble liability of the assessee for payment of gratuity, (2) an approved gratuity fund should have been created and its approval sought before January 1, 1976, and (3) actual payment as contribution to the fund before April 1, 1977 (Sic) of at least 50% of the assessee's liability less actual utilisation. In this case, it is not in dispute that section 40A(7)(b)(ii) would stand attracted and the assessee had to establish that the conditions specified in section 40A(7)(b)(ii) and referred to above are fulfilled. We find from the order of the Appellate Assistant Commissioner that the assessee had conceded that the provision for gratuity made is not based on any actuarial valuation. It may be that the assessee had created a gratuity trust on August 1, 1975, and a sum had also been handed over to the trust on September 24, 1975, and the trust, in turn, had handed over the administration of the trust to the Life Insurance Corporation of India on March 1, 1976. Even so, as the assessee had not complied with the first of the conditions, referred to above, it cannot claim the benefit of deduction in respect of the entirety of the provision made for the gratuity and the actual provision that would qualify for deduction during the year would only be the incremental liability relevant to the assessment year and no more. The claim of the assessee under the head "General charges" was for Rs. 1,96,402 towards gratuity liability up to March 31, 1973, but the actual liability for the assessment year 1973-74 was only Rs. 30,328. In other words, the allowable deduction by way of provision for payment of gratuity has to be confined to the incremental liability of Rs. 30,328. We, therefore hold that the Tribunal was right in the view it took and answer the question in the affirmative and against the assessee. The Revenue will be entitled to the costs of this reference. Counsel's fee Rs. 500.