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Judgment
Prakash Krishna, J.—The Income Tax Appellate Tribunal, Allahabad Bench, Allahabad has referred the following question of law u/s 256(2) of the Income Tax Act, 1961 for opinion to this Court:
Whether on the facts and in the circumstances of the case, the Tribunal was legally justified in holding that the sum of Rs. 41,790 representing the premium paid to the LIC securing an insurance against the liabilities arising under the Payment of Gratuity Act, 1972 was not hit by the provisions of Section 40A(7)(a) of the Income Tax Act, 1961 and was an allowable deduction u/s 37(1) of the Act ?
The matter related to the assessment year 1984-85. Before the Assessing Officer, the assessee-corporation had claimed deduction for an amount of Rs. 41,790 representing the insurance premium paid to the LIC to insure against all the liabilities that might arise under the Payment of Gratuity Act, 1972. It claimed that the payment of the said amount was an allowable deduction u/s 37(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"). The said condition did not find favour either with the Assessing Officer or with the Commissioner of Income Tax (Appeals), in appeal. In further appeal, the Income Tax Appellate Tribunal has held that the said amount is a permissible deduction. The provisions of Section 40A(7) (a) are applicable in respect of any provision made for gratuity but the prohibition does not extend to payment of any gratuity which is allowable under Sub-clause (b) of Section 40A(7) of the Act. The Tribunal found that the amount represented the actual payment to the LIC and it was not a provision for gratuity. Ultimately, it was held that the amount was allowable u/s 37(1) and the prohibition contained in Section 40A(7)(a) was not applicable to the facts of the case.
Heard the learned Counsel for the parties.
The learned standing counsel for the Department contends that Section 40A of the Act will be applicable to the facts of the present case, as the same has overriding effect. Elaborating the argument, it was submitted that the said section opens with a non obstante clause and has an overriding effect over the other provisions of the Act relating to the computation of the income under the head "Profits and gains of business or profession". Shri S. K. Garg, the learned Counsel for the respondent-assessee, on the other hand, submits that the controversy is covered by a decision of Division Bench of the Madras High Court in the case of Kothari Sugars and Chemicals Ltd. Vs. Commissioner of Income Tax,
Considered the respective submissions of the learned Counsel for the parties and perused the record.
It has been found by the Assessing Officer that a sum of Rs. 41,790 has been debited as gratuity in the profit and loss account. It has been further found that there is no compliance with the provisions of Section 40A(7) of the Income Tax Act, which requires that the fund should be created and the same should be approved by the Commissioner of Income Tax. Due to the failure of the compliance with the provisions of Section 40A(7) of the Act, the claim of deduction was disallowed by the Assessing Officer and the assessment order was confirmed in first appeal. It may be noted that the Tribunal has not found on the facts as otherwise. The only question which survives for consideration is whether such deduction is allowable u/s 37(1) of the Act or not. We could lay our hands to an authoritative pronouncement of the apex court on the subject. The matter has been examined in depth by the apex court in the case of Shree Sajjan Mills Ltd. Vs. Commissioner of Income Tax, M.P., Bhopal and Another, and it has been held that the payment of gratuity is a statutory liability created under the Payment of Gratuity Act, 1972. It could normally be said to have arisen for the carrying on of the business. However, for gratuity to be deductible under the Act, it must fulfil the conditions laid down in Section 40A(7). The deduction could not be allowed on general principles under any other section of the Act because Sub-section (1) of Section 40A makes it clear that the provisions of the section shall have effect notwithstanding anything to the contrary contained in any other provisions of the Act relating to the computation of income under the head "Profits and gains of business or profession."
The said decision also sets out the object and purport of Sub-section (7) of Section 40A in the following words (page 601):
On a plain construction of Clause (a) of Sub-section (7) of Section 40A of the Act, what it means is that whatever is provided for future use by the assessee out of the gross profits of the year of account for payment of gratuity to employees on their retirement or on the termination of their services would not be allowed as deduction in the computation of profits and gains of the year of account. The provision of Clause (a) was made subject to Clause (b). The embargo is on deductions of amounts provided for future use in the year of account for meeting the ultimate liability to payment of gratuity. Clause (b)(i) excludes from the operation of Clause (a) contribution to an approved gratuity fund and amounts provided for or set apart for payment of gratuity which would be payable during the year of account. Clause (b)(ii) deals with a situation where the assessee might provide by the spread-over method and provides that such provision would be excluded from the operation of Clause (a) provided the three conditions laid down by the sub-clauses are satisfied.
(emphasis1 added)
The Supreme Court pointed out that the marginal note to Section 40A is equally relevant. It reads:
"Expenses or payments not deductible in certain circumstances", which means that payments and expenses which would otherwise be deductible would not be deductible except in certain circumstances indicated in the section. It further pointed out that the provisions in Section 40A have been given overriding effect by virtue of the non obstante expression used in Sub-section (1) thereof, it also made the following observations which bring out the nature and character of the employer''s liability for gratuity de hors Section 40A(7) (page 598):
Payment of gratuity as commonly understood is the payment made to the employee by the employer on his retirement or termination of his service for any reason. It it made voluntarily by the employer as a regular practice or pressure of trade or business either under an agreement with the employees or on the understanding of the trade and after the enactment of the Payment of Gratuity Act, 1972, which came into force on September 16, 1972, as a statutory liability under the said Act, Although payment of gratuity is made on retirement or termination of service, it was not for the service rendered during the year in which the payment is made but it is made in consideration of the entire length of service and its ascertainment and computation depend upon several factors.
The aforesaid judgment of the apex court came up for consideration before this Court in Kumson Motor Owners Union Ltd. Vs. Commissioner of Income Tax, wherein after noticing the judgment of Shree Sajjan Mills Ltd. Vs. Commissioner of Income Tax, M.P., Bhopal and Another, the following was held (page 605):
In order, therefore, that the provision for payment of gratuity be admissible as a deduction, it must be shown that the provisions was made strictly in the manner laid down in Clause (b) of Section 40A(7). As already observed, in the present case, the deposit was not made in approved gratuity scheme as found by the Tribunal. Indeed, the application for recognition of the gratuity fund itself was allowed later making it effective from May 24, 1978.
(emphasis supplied)
In view of the above discussion, it follows that the deduction of payment of gratuity can be allowed strictly on the fulfilment of the conditions of Clause (b) of Section 40A(7) of the Act. As already observed, in the present case, the assessee, as was found, does not fulfil the requirement of the aforestated provision. This being so, the Tribunal was not justified in allowing the deduction under any other section of the Income Tax Act. At the cost of repetition it may be stated here that so far as the provisions for gratuity are concerned, unless an assessee fulfils the conditions of Section 40A(7), it would not be entitled for deduction. By way of clarification it may be added that, if any, actual payment of the gratuity amount has been made by the assessee in the previous year relevant to the assessment year to its employees retiring or on attaining the age of superannuation, it would amount to business expenditure and consequently will be allowable deduction u/s 37 of the Act. So far as the view which we have taken above is concerned, it does not run contrary to the view taken by the Madras High Court in Kothari Sugars and Chemicals Ltd. Vs. Commissioner of Income Tax, relied upon by the assessee. In this case also, the actual payment of gratuity was held to be allowable deduction u/s 36(1)(v) of the Act. In that context the following observation made therein which was heavily relied upon by the learned Counsel for the assessee should be understood (page 865 of 227 ITR):
The liability, if any, arising during the accounting year, is fully covered by the payment of premium and for this reason it is allowable as a deduction u/s 37 of the Act though it may be considered even u/s 36(1)(v) of the Act.
Even otherwise also, we find that the attention of the hon''ble judges of the Madras High Court was not invited towards the binding precedent of the apex court in the case of Shree Sajjan Mills Ltd. Vs. Commissioner of Income Tax, M.P., Bhopal and Another, The ratio of the judgment of the Madras High Court should be read in the light of the law laid down by the apex court in the case of Shree Sajjan Mills Ltd. Vs. Commissioner of Income Tax, M.P., Bhopal and Another, Moreover, the Division Bench judgment of this Court in the case of Kumson Motor Owners Union Ltd. Vs. Commissioner of Income Tax, is also a binding precedent so far as this Court is concerned.
In view of the above discussion, the Tribunal was not justified in law in holding that the amount in question was allowable u/s 37(1) of the Act and that the prohibition contained in Section 40A(7)(a) of the Act is not applicable to the facts of the case.
We, therefore, answer the question referred to us in the negative in favour of the Department and against the assessee by holding that the payment of Rs. 41,790 representing the premium paid to the LIC securing an insurance against the liabilities under the Payment of Gratuity Act, 1972, was hit by the provision of Section 40A(7)(a) of the Act and was not an allowable deduction u/s 37(1) of the Act.