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 S. 256(1) of the IT Act, 1961:

(2.) THE assessee is a public utility company, engaged in the manufacture of cotton yarn. By a deed executed on 7th Sept., 1973, and registered on 12th Oct., 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 CIT with effect from the first of the aforesaid dates. Its liability to gratuity as on 31st Dec., 1975, as per actuarial valuation amounted to Rs. 36,54,088 and when compared to its liability as on 31st Dec., 1974, which amounted to Rs. 34,43,319, its incremental liability for the year ended 31st Dec., 1975, amounted to Rs. 2,10,769. Since the assessee had already made payments to the gratuity fund to the tune of Rs. 36,66,134 which exceeded its liability as on 31st Dec., 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 ITO negatived the assessee's claim for two reasons : (i) that the assessee had already made over payments to the gratuity fund 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 CIT(A) held that the quantum of balance in the fund as on 31st Dec., 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 s. 36(1)(v) r/w S. 43(2) of the IT Act. On appeal by the Department to the Tribunal, the Tribunal while agreeing with the view of the CIT(A) that the quantum of balance in the fund as on 31st Dec., 1975, was irrelevant to decide the issue, disapproved the second line of reasoning adopted by the CIT(A). According to the Tribunal, the incremental liability was towards contribution to an approved gratuity fund and 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 S. 40A(7)(b)(i) of the IT 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 S. 40A(7) of the IT Act. It has accordingly held that the assessee's claim for deduction of the sum of Rs. 2,10,769 should be allowed.

(3.) IN Vazir Sultan Tobacco Co. Ltd. vs. CIT (1981) 25 CTR (SC) 186 : (1981) 132 ITR 559 (SC), the distinction between "provision" and "reserve" is brought out in the following manner :