SAKTHI TEXTILES LTD. v. INCOME TAX OFFICER
[Citation -1986-LL-0731-7]

Citation 1986-LL-0731-7
Appellant Name SAKTHI TEXTILES LTD.
Respondent Name INCOME TAX OFFICER
Court ITAT
Relevant Act Income-tax
Date of Order 31/07/1986
Assessment Year 1981-82
Judgment View Judgment
Keyword Tags termination of employment • payments not deductible • approved gratuity fund • business or profession • computation of income • incremental liability • provision for payment • actual liability
Bot Summary: As pointed out by the Supreme Court the two provisions even taking into account s. 40A take care of the claim for deduction based on payment to an approved gratuity fund, and provision for payment to an approved fund and provision for payment for which a liability has arisen. The assessee has based its claim for deduction only with reference to the provisions of s. 40A, which are as under : Subject to the provisions of cl. According to the assessee, as long as a provision is made for purposes of payment of a sum by way of contribution to an approved gratuity fund, then such provision is an admissible deduction, whether the gratuity to which such provision relates becomes payable during the previous year or not. In the case of Andhra Prabha Ltd., their Lordships had explained the provisions of s. 40A as under : The effect of the statutory provisions may be described as follows : Sec. The prohibition does not extend to the following cases : provision of for contribution to approved gratuity fund, or provision for payment of gratuity for which liability has arisen during the year. Clause lays down the conditions which have to be fulfilled by an assessee in order to get out of the mischief of the provisions contained in s. 40A. A provision to pay an amount which has become due and payable during the previous year will have to be allowed. A doubt has been expressed that the relevant provisions, as presently worded, do not secure the underlying objective and that a provision made by a taxpayer in his accounts in respect of estimated service gratuity payable to employees will be deductible in computing the taxable income in a case where the provision has been made on a scientific basis in the form of an actuarial valuation.


GEORGE CHERIYAN, A.M. ORDER This appeal is by assessee and relates to asst. yr. 19 81-82. accounting year of assessee-company ended on 31st Dec., 19 80. assessee had sought as deduction sum of Rs. 7,25,972 being provision made towards incremental liability of gratuity payable in respect of accounting periods as indicated below : Rs. (a) 31st Dec., 19 75 3,27,457 (b) 31st Dec., 19 76 1,72,583 (c) 31st Dec., 19 77 2,25,932 Total 7,25,972 incremental liability for each of years had been determined on actuarial basis. ITO disallowed claim on ground that assessee had not actually made any contribution to employees' gratuity fund. According to ITO, provisions of s. 40A (7) (b) (ii) of IT Act, 19 61, would apply and conditions therein were not satisfied (sic). 2. assessee appealed to CIT (A). It was submitted that claim was actually liability which was present and existing. Reliance was placed before CIT (A) on decision of Madras High Court in case of CIT vs. Andhra Prabha (P) Ltd. ( 19 80) 123 ITR 760. CIT (A) negatived claim of assessee observing as under : "As pointed out by me earlier company had constituted gratuity fund and this was approved by CIT, Madras, to have effect from 19 th Dec., 19 3. liability to pay incremental amounts for years 19 75, 19 76 and 19 77 was to fund and arose at end of respective years. year under review is calendar year 19 80, during which time contribution for 19 75, 19 76 and 19 77 were not of relevance. Even decision relied on by learned representative does not help to him. As pointed out by Supreme Court two provisions even taking into account s. 40A (7) take care of (a) claim for deduction based on payment to approved gratuity fund, and (b) provision for payment to approved fund and provision for payment for which liability has arisen. appellant's case cannot apparently come under (a) above. It cannot, in my opinion, be covered under (b) above also since liability to pay arose very much earlier than year 19 80. case before Madras High Court was for allowance of claim to gratuity under working Journalists Act of 19 55. It was special piece of legislation applicable to select category of employees and final decision taken in that case was for allowance under s. 28 of Act; in view of these special features present in that case, I am afraid that I will be unable to support contention of learned representative. In result order of ITO on this aspect is confirmed." 3. assessee is in appeal before us. case was urged at length. learned counsel for assessee, apart from relying on decision of Madras High Court in case of Andhra Prabha (P) Ltd. (supra) also relied on decision of Calcutta High Court in case of CIT vs. New Swadeshi Mills of Ahmedabad Ltd. ( 19 84) 147 ITR 163 and in particular, observations at p. 171. He also adverted to notes on clauses whereby provisions of s. 40A (7) were amended by Finance Act, 19 75, but with retrospective effect from 1st April, 19 73. learned counsel submitted that he was placing reliance only on provisions of s. 40A (7) (b) (i) for claiming deduction. According to him, assessee's case squarely fell within such provision and deduction had to be allowed. 4. learned Departmental Representative, on other hand, relied on decision of Supreme Court in case of Shree Sajjan Mills Ltd. vs. CIT ( 19 85) 156 ITR 585. According to learned Departmental Representative, observations of Supreme Court in aforesaid case placed matter beyond all doubts, and in issue had to be decided in favour of Revenue. 5. We have considered rival submissions. assessee has based its claim for deduction only with reference to provisions of s. 40A (7) (b) (i), which are as under : "(7) (a) Subject to provisions of cl. (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by assessee for payment of gratuity to his employees on their retirement or on termination of their employment for any reason. (b) Nothing in cl. (a) shall apply in relation to - (1) any provision made by assessee for purpose of payment of sum by way of any contribution towards approved gratuity fund, or for purpose of payment of any gratuity, that has become payable during previous year." According to assessee, as long as provision is made for purposes of payment of sum by way of contribution to approved gratuity fund, then such provision is admissible deduction, whether gratuity to which such provision relates becomes payable during previous year or not. learned counsel submitted, words 'that has become payable during previous year' should be read as applicable only to second limb of s. 40A (7) (b) (i), i.e., 'for purpose of payment of any gratuity' and would not be applicable to first limb, viz., 'provisions which are made'. He submitted that even if notes on clauses on which reliance was placed by Revenue are read, intention of enacting s. 40A (7) (b) (i) is clear from first part of notes of clauses (i.e., set out in ( 19 75) 98 ITR (St) 19 4) and such intention is clearly spelt out by terms in which s. 40A (7) (b) (i) is worded and by use of disjunctive 'or' as occurring therein. He submitted that there was no scope for reading word 'or' as 'and' in aforesaid provision, though he very fairly stated that it was accepted principle of statutory interpretation that where circumstances so required words 'or and 'and' could be read vice versa. In case of Andhra Prabha (P) Ltd. (supra), their Lordships had explained provisions of s. 40A (7) as under : "The effect of statutory provisions may be described as follows : Sec. 36(1) (v) provides for deduction of any amount paid by way of contribution towards approved gratuity fund created by employer. Sub-s. (7) of s. 40A prohibits deduction of provision for gratuity. But prohibition does not extend to following cases : (a) provision of for contribution to approved gratuity fund, or (b) provision for payment of gratuity for which liability has arisen during year." (p. 766) learned counsel had emphasised that aforesaid elucidation of provisions clearly supported his view. So also observations of Calcutta High Court in case of New Swadeshi Mills of Ahmedabad Ltd. (supra), which were relied on by learned counsel, were as under : "The Payment of Gratuity Act came into force on 16th September, 19 72. Sec. 40A (7) was introduced in IT Act w.e.f. 1st April, 19 73, and was made applicable to asst. yr. 19 73-74 and all subsequent years. Sec. 40A is overriding section and will apply notwithstanding anything contained in any other provisions of this Act relating to computation of income under head 'Profits or gains of business or profession'. section heading is 'Expenses or payments not deductible in certain circumstances'. Sec. 40A (7) (a) prohibits deduction of any provision by whatever name called made by assessee for payment of gratuity to his employees on their retirement or termination of their employment for any reason. This is, however, subject to provisions of cl. (b). Clause (b) lays down conditions which have to be fulfilled by assessee in order to get out of mischief of provisions contained in s. 40A (7) (a). provision to pay amount which has become due and payable during previous year will have to be allowed. provision for payment of gratuity of sum by way of contribution towards approved gratuity fund will also have be allowed although gratuity has not become payable during relevant previous year ..." (p. 171) It was stressed that theses observations also supported stand. 6 . We are of view that there is considerable force in argument placed by learned counsel based on aforesaid observations of Calcutta and Madras High Courts. 7 . In Shree Sajjan Mills Ltd.'s case (supra), Supreme Court had occasion to consider intention of legislature in enacting s. 40A (7) with reference to notes on clauses and their Lordships observed as under : "The intention of legislature in enacting provision of s. 40A (7) would be apparent from Notes on Clauses of amendment wherein paragraph 46, after referring to provisions of s. 37(1) and s. 36(1) (v) of Act, it was observed (( 19 75) 98 ITR (St) 19 4), inter alia, as follows : 'A reading of these two provisions clearly shows that intention has always been that deduction in respect of gratuities should be allowed either in year in which gratuity is actually paid or in year in which contributions are made to approved gratuity fund. doubt has been expressed that relevant provisions, as presently worded, do not secure underlying objective and that provision made by taxpayer in his accounts in respect of estimated service gratuity payable to employees will be deductible in computing taxable income in case where provision has been made on scientific basis in form of actuarial valuation. In order to remove uncertainty in matter, it is proposed specifically provide in law that no deduction will be allowed, in computation of profits and gains of business or profession, in respect of any reserve created or provision made for payment of gratuity to employees on retirement or on termination of employment for any reason. This restriction will, however, not apply in relation to provision made for purpose of payment of sum by way of contribution towards approved gratuity fund that has become payable during relevant year, or for purpose of meeting actual liability in respect of payment of gratuity to employees that has arisen during such year.' This intention and purpose of legislature was carried into effect by inserting sub-s. (7) in s. 40A by ensuring overriding effect over other provisions of Act. Therefore, in interpreting or in trying to find out meaning of that provision, one should, if possible, and in this case it is not at all strain, give effect to that intention and not to make nonsense of that intention. Clause (a) of said sub-section provides that no deduction will be allowed in respect of any provision (whether called as such or by any other name) made by assessee for payment of gratuity to his employee son their retirement or termination of their services for any reason. expression 'provision' has not been defined in Act and is not used in any artificial sense but in its ordinary meaning. This is clear from words 'whether called as such or by any other name' occurring in sub-section. According to Webster, 'provision' in its ordinary sense, means 'something provided for future use'. On plain construction of cl. (a) of sub-s. (7) of s. 40A of Act, what it means is that whatever is provided for future use by assessee out of gross profits of year of account for payment of gratuity of employees on their retirement or on termination of their services would not be allowed as deduction in computation of profits and gains of year of account. provision of cl. (a) was made subject to cl. (b). embargo in on deductions of amounts provided for future use in year of account for meeting ultimate liability to payment of gratuity. Clause (b) (i) excludes from operation of cl. (a) contribution to approved gratuity fund and amount provided for or set apart for payment of gratuity which would be payable during year of account ..." (p. 600) Their Lordships of Supreme Court have stated that intention as set out in notes on clauses was carried into effect by inserting s. 40A (7). We have supplied emphasis to certain portion of notes on clause which states that restriction would not apply in relation to provision made for purpose of payment of sum by way of contribution towards approved gratuity fund that has become payable during relevant year. Supreme Court, after setting out this portion of notes on clause, has catergorically stated that intention was carried into effect by inserting s. 40A (7) and that in interpreting section, effect should be given to intention. In later portion in elucidating cl. (b) (i), it has been stated in judgment that cl. (b) (i) excludes from operation of cl. (a) contribution to approved gratuity fund and amount provided for or set apart for payment of gratuity which would be payable during year of account. On reading of observations of Supreme Court, which was have set out, we consider that Court has laid done that even provision to be admissible deduction should relate to payment of gratuity which would be payable during year of account. In view of this which would be payable during year of account. In view of this pronouncement by Supreme Court, we would hold that on facts assessee is not entitled to deduction claimed of Rs. 7,25,972. 8. In result, appeal is dismissed. *** SAKTHI TEXTILES LTD. v. INCOME TAX OFFICER
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