Commissioner of Income Tax vs Narbada Valley Chemical Industries Pvt. Ltd.

G.T. Nanavati, J.—The Tribunal has referred the following questions to this Court under s. 256(1) the IT Act :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee would be entitled to claim deduction of the amount of gratuity of Rs. 1,71,000 against its assessable business profits under s. 37 or in the alternative under s. 28 of the IT Act, 1961 ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure of Rs. 22,089 cannot be treated as entertainment expenditure disallowable as such under s. 37(2B) of the IT Act. 1961 ?"

The points which arise for our consideration in this reference are covered by the decision of the Supreme Court and by this Court respectively and therefore, it is not necessary to state the facts or to give reasons in support of our opinion. The question whether the assessee would be entitled to deduction for its gratuity liability under other provisions of the Act is now finally settled by the decision of the Supreme Court in Shree Sajjan Mills Ltd. Vs. Commissioner of Income Tax, M.P., Bhopal and Another, , wherein it is held that for gratuity to be deductible, the conditions laid down in s. 40A(7) had to be fulfilled. The deduction could not be allowed on general principles under any other section of the Act, because sub-s. (1) of s. 40A made it clear that the provisions of section had 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." In other words s. 40A had effect notwithstanding anything contained in ss. 30 to 39 of the Act. The Supreme Court has further held that the right to receive gratuity is a contingent right and the liability to pay gratuity continues to be a contingent liability qua the employer. It is further held that contingent liabilities do not constitute expenditure and cannot be the subject-matter of deduction even under the mercantile system of accounting. In view of this clear decision of the Supreme Court, the question No. 1 will have to be answered in the negative.

This Court in Commissioner of Income Tax Vs. Gujarat State Finance Corporation, and Commissioner of Income Tax, Gujarat II Vs. Patel Brothers and Co. Ltd., has held that expenditure incurred in providing tea, coffee and refreshments to its staff members and constituents or customers in the normal course of business is admissible for deduction as expenditure. As the finding of fact which had been recorded was to the effect that the expenditure which was incurred by the assessee was not high or lavish, this Court held that the expenditure having not been incurred for giving any lavish parties, it could not be considered to be an expenditure incurred for entertainment and therefore, was admissible for deduction as expenditure. In this case also the Tribunal has found that the assessee had incurred the expenditure for providing tea, refreshment, messing, etc. to the customers and that there was no material on record to show that any such expenditure was either lavish or extravagant. Thus, the assessee was entitled for deduction of this amount.

In the result, question No. 1 is answered in the negative i.e., in favour of the Revenue and against the assessee and question No. 2 is answered in the affirmative i.e., against the Revenue and in favour of the assessee.