COMMISSIONER OF INCOME TAX Vs. RAJENDRA MILLS LIMITED

JUDGEMENT

(1.) AT the instance of the Department, the Tribunal referred the following question for the opinion of this Court under s. 256(1) of the IT Act, 1961, hereinafter referred to as the Act :

(2.) THE assessee is a textile mill. For the asst. yr. 1974-75 the accounting year ended on 31st March, 1974. THE assessee follows the mercantile system of accounting. THE Payment of Gratuity Act, 1972, had come into force in September, 1972. But the assessee made no provision in its accounts for the financial year ended 31st March, 1973, relevant to the asst. yr. 1973-74. THE assessee thereafter for the financial year ended 31st March, 1974, relevant to the asst. yr. 1974-75, made a provision for gratuity for its workers in its accounts on actuarial valuation for a sum of Rs. 24,05,655. THE liability as on 31st March, 1973, relevant to the asst. yr. 1973-74 based on actuarial valuation taking into consideration the number of workers, multiplied by 15 days of salary for each year and the number of years of service of each worker amounted to Rs. 17,87,330. So the incremental liability for this year came to Rs. 6,18,325 and both together came to Rs. 24,05,655 as on 31st March, 1974. THE gratuity trust deed was drawn up on 27th March, 1974. On 30th March, 1974, the assessee made a deposit of Rs. 17,87,330 in the Central Bank of India. For the balance of Rs. 6,18,325 a cheque was issued on 31st Oct., 1974, to place the amount in the monthly interest deposit account. On 28th March, 1975, the assessee wrote to the CIT for approval of the fund. After some correspondence, the CIT by order dt. 25th Jan., 1978, granted approval w.e.f. 30th March, 1976.

(3.) WITH a view to mitigating hardship in cases where the provisions have been made by the assessees in their accounts for the previous years relevant to the asst. yrs. 1973-74 to 1975-76 on the basis of their understanding of law and the clarification given by the Board in 1970, the new s. 40A(7) has made a saving provision. Under this provision, the prohibition regarding allowance of provisions for gratuity will not apply in relation to such amount of the provision as does not exceed an amount calculated at the rate of 8-1/3% of the salary as defined in r. 2(h) of Part A of the Fourth Schedule of each employee entitled to the payment of gratuity for each year of service in respect of which the provision is made, if certain conditions are fulfilled. These conditions are as under :