INCOME-TAX OFFICER Vs. PALANI ANDAVAR MILLS LIMITED

JUDGEMENT

(1.) At the instance of the Department, the Tribunal referred the following questions for the opinion of this court under section 256(1) of the Income-tax Act, 1961 :

(2.) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal should not have confirmed the Income-tax Officer's disallowance of the sum of Rs. 2,10,769 as not an allowable deduction either under section 40A(7)(b)(i) or under section 36(1)(v) or under section 37 -

(3.) The assessee is public utility company, engaged in the manufacture of cotton yarn. By a deed executed on September 7, 1973, and registered on October 12, 1973, it created an irrevocable trust to provide a fund for future payments of gratuity to its employees and the said fund was approved by the Commissioner of Income-tax with effect from the first of the aforesaid dates. Its liability to gratuity as on December 31, 1975, as per actuarial valuation amounted to Rs. 36,54,088 and when compared to its liability as on December 31, 1974, which amounted to Rs. 34,43,319, its incremental liability for the year ended December 31, 1975, amounted to Rs. 2,10,769. Since the assessee had already made payments to the gratuity find to the tune of Rs. 36,66,134 which exceeded its liability as on December 31, 1975, it did not make any provision in its accounts towards its incremental liability for that year. The assessee, however, made a claim for deduction in its adjustment statement for the year 1976-77 of the sum of Rs. 2,10,769. The Income-tax Officer negatived the assessee's claim for two reasons : (i) that the assessee had already made over payments to the gratuity find by reason of which it was no more under obligation to provide for anything towards its incremental liability for that year; and (ii) that the assessee itself had not made provision in its accounts in respect of its incremental liability. On appeal, the Commissioner of Income-tax (Appeals) held that the quantum of balance in the fund as on December 31, 1975, was irrelevant to decide the allowability or otherwise of the assessee's claim. He also held that the incremental liability was an expenditure of the year and the same was, therefore, allowable under section 36(1)(v) read with section 43(2) of the Income-tax Act. On appeal by the Department to the Tribunal, the Tribunal while agreeing with the view of the Commissioner of Income-tax (Appeals) that the quantum of balance in the fund as on December 31, 1975, was irrelevant to decide the issue, disapproved the second lien of reasoning adopted by the Commissioner of Income-tax (Appeals). According to the Tribunal, the incremental liability was towards contribution to an approved gratuity fund it cannot be deemed to be a statutory liability. The Tribunal, however, held that the assessee was still entitled to succeed. According to the Tribunal, a provision made under section 40A(7)(b)(i) of the Income-tax Act, 1961, for the purpose of payment of a sum by way of contribution towards any approved gratuity fund is deductible. The Tribunal is also of the view that a mere claim made in the adjustment statement would amount to a "provision" within the meaning of section 40A(7) of the income-tax Act. It has accordingly held that the assessee's claim for deduction of the sum of Rs. 2,10,769 should be allowed.