Agrawal Minerals (Goa) Pvt. Ltd. vs Commissioner of Income Tax

D.R. Dhanuka, J.—At the instance of the assessee, Messrs. Agrawal Minerals (Goa) Pvt. Ltd., Goa, the Income Tax Appellate Tribunal, Nagpur Bench, Nagpur, has referred the following questions to this court u/s 256(1) of the Income Tax Act, 1961, for opinion :

"(1) Whether, on the facts and in the circumstances of the case, the sum of Rs. 92,271 paid by the assessee to Messrs. G.N. Agrawal (Hindu undivided family) in respect of the staff of G.N. Agrawal, Hindu undivided family, was an allowable deduction under the Income Tax Act ?

(2) Whether, on the facts and in the circumstances of the case, the sum of Rs. 23,298 credited by the assessee to the accounts of the individual members of the staff was an allowable expenditure under the Income Tax Act ?"

The relevant facts having a bearing on the subject-matter of this reference are as under :

During the accounting year pertaining to the assessment year 1973-74, the assessee made a provision of Rs. 1,15,569 on account of staff retirement gratuity and debited the same to the profit and loss account. The said sum of Rs. 1,15,569 consists of a sum of Rs. 23,298 in respect of staff directly recruited by the assessee and Rs. 92,271 towards liability of gratuity in respect of staff employed by the assessee through the Hindu undivided family of G.N. Agrawal. Both the categories of employees were employed by the assessee at the material time. G.N. Agrawal, Hindu undivided family, is an associate concern of the assessee. Both the above referred provisions were considered by the authorities below as part and parcel of the total provision made by the assessee in respect of its own liability to pay staff retirement gratuity aggregating to Rs. 1,15,569. No liability for payment of gratuity had actually arisen during the assessment year. In other words, the afore referred amount of gratuity debited by the assessee in its profit and loss account had not in fact become payable during the assessment year. Thus, the above referred amount was merely in the nature of a provision made by the assessee for the purpose of payment of the amount of gratuity in future.

The Income Tax Appellate Tribunal reached the conclusion that Section 40A(7) of the Income Tax Act, 1961, was clearly attracted in view of the fact that the assessee had merely made provision for the said amount. Section 40A(7) of the Act is applicable to the assessment year 1973-74. The assessee did not comply with the conditions prescribed by the said section for availing of the benefit of the said provision. The Income Tax Tribunal allowed the appeal of the Revenue and held that the afore referred amount of Rs. 92,271 was not deductible in view of the bar created by Section 40A(7) of the Act.

During the course of its order dated December 19, 1977, the Income Tax Tribunal observed that the fact that the assessee had transferred the custody of the said amount to its associate concern, i.e., G.N. Agarwal, Hindu undivided family, did not make any difference to the applicability of Section 40A(7) of the Act. Section 40A(7) of the Act has overriding effect over all other provisions of the subject wherever applicable.

Learned counsel for the assessee has submitted that the assessee had incurred an expenditure in the sum of Rs. 92,271 referred to in question No. 1 for the purposes of carrying on its business and that the said amount was therefore an allowable deduction u/s 37(1) of the Income Tax Act, 1961. Learned counsel for the assessee relied on the ratio of the judgment of the High Court of Kerala in the case of Commissioner of Income Tax Vs. High Land Produce Co. Ltd., in support of his submission. Learned counsel for the assessee submitted that the said sum of Rs. 92,271 could not be considered as a "provision" within the meaning of the said expression used in Section 40A(7) of the Income Tax Act, 1961, in view of the fact that the assessee had not retained the said amount with itself but had already passed on the same to G.N. Agrawal, Hindu undivided family. Learned counsel also relied on the ratio of the judgment of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd., Hyderabad and Others Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad, . In the alternative, learned counsel for the assessee submitted that the assessee had rightly invoked Sub-clause (b)(i) of Section 40A(7) of the Income Tax Act, 1961, and the Tribunal was not right in holding that the reliance of the assessee on the said provision was misplaced.

By Section 6 of the Finance Act of 1975, Section 40A(7) was inserted in the Income Tax Act, 1961, with effect from April 1, 1973. The said section is applicable to the assessment under consideration. The said provision is a special provision on the subject of "provision made" for payment of gratuity to employees on their retirement or termination of their employment for any reason and allowability of deduction in respect thereof. Section 40A(7) of the Act in terms provides that the provisions of Section 40A shall have effect notwithstanding anything to the contrary contained in any other provision of the Act relating to the computation of income under the head "Profits and gains of business or profession". Thus, no general provision contained in the Income Tax Act, 1961, can be invoked when the special provision contained in Section 40A(7) of the Act is attracted. After the introduction of Section 40A(7) of the Act in the statute, the assessee can claim deduction on account of the provision made for gratuity only if the assessee has complied with all the conditions prescribed in Sub-section (2) of Section 40A of the Act. The above referred judgment of the High Court of Kerala cited by the learned counsel in the case of CIT v. High Land Produce Co. Ltd. [1976] 102 ITR 802 pertains to the assessment year 1970-71. In the said judgment, no discussion is to be found with reference to interpretation and legal effect of Section 40A(7) of the Act. Section 40A(7) of the Act is applicable with effect from assessment year 1973-74 and is not applicable to assessments of earlier years. This judgment is therefore not relevant for our purpose. It is not possible to accept the submission made by learned counsel for the assessee that the said amount of Rs. 92,271 does not represent a "provision made" on account of staff retirement gratuity. It is not disputed that the amount of gratuity had not become payable by the assessee during the assessment year 1973-74. Merely because the custody of the said amount was transferred by the assessee to its associate concern for being paid to the members of the staff employed by the assessee through the said associate concern at a future date as and when payable, it does not follow that the assessee had made provision in respect of its liability on account of gratuity within the contemplation of Section 40A(7) of the Act. We have gone through all the three orders passed in this very case, i.e., the assessment order passed by the Income Tax Officer, the order of the Appellate Assistant Commissioner and the order of the Tribunal. The assessee rightly described the character of the said amount as a provision made in respect of its liability to pay gratuity in future partly in respect of the employees directly recruited by the assessee and partly in respect of the employees recruited by the assessee through its sister concern as aforesaid.

Clause (b)(i) of Section 40A(7) reads as under :

"(b) Nothing in Clause (a) shall apply in relation to -

(i) any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year."

It is not the case of the employees that the assessee has made any contribution towards employees'' gratuity fund as referred. If there is no approved gratuity fund or if there is no irrevocable trust, the question of applicability of Clause (b) of Section 40A(7) cannot arise. The latter part of Clause (b)(i) of Section 40A(7) of the Act has no application in this case as the amount of gratuity had not become payable during the previous year. The Tribunal has rightly observed in its order :

". . . . the material liability for gratuity had not arisen during the year, i.e., the gratuity had not become payable during the year."

Having regard to the admitted facts of this case, the emphasis of learned counsel for the assessee on the use of the words "his employees" in Section 40A(7)(a) of the Act appears to be meaningless. The assessee has throughout accepted its liability to pay the amount of gratuity to the employees falling in both the categories referred to hereinabove. It is not permissible to this court to permit the assessee to raise disputed questions of fact in this reference at this stage.

In light of the above discussion, we answer question No. 1 in the negative and in favour of the Revenue.

As regards question No. 2, it is agreed between counsel that the same is covered in favour of the Revenue by the judgment of the Supreme Court in the case of Shree Sajjan Mills Ltd. Vs. Commissioner of Income Tax, M.P., Bhopal and Another, . We accordingly answer question No. 2 also in the negative and in favour of the Revenue.

Having regard to the facts of the case, there shall be no order as to costs.