Commissioner of Income Tax vs Rayalaseema Passenger and Goods Transports (P) Ltd.

Thanikkachalam, J.—Pursuant to the direction given by this Court dt. 30th November, 1981, in TCP No. 183 of 1981, the Tribunal

referred the following question, for the opinion of this Court, under s. 256(2) of the IT Act, 1961, hereinafter referred to as the ""Act"" :

Whether, on the facts and in the circumstances of the case and having regard to r. 104 of the IT Rules, 1962, r/w s. 36(1)(v) of the IT Act, 1961,

the Tribunal was right in holding that the sum of Rs. 65,499 representing the difference between the actual payment made to the approved gratuity

fund towards initial contribution and the actuarial liability for the same should be allowed as a deduction while computing the income of the

assessee for the asst. yr. 1973-74 ?

The assessee is a company in which public are not substantially interested. At the time of completion of the original assessment of the assessee

relating to the asst. yr. 1973-74, the assessee made a claim of Rs. 1,93,756 being the initial contribution to an approved gratuity fund, calculated at

15 days salary for each year of completed service. Such calculation was on the basis of the salary as on the last day of the preceding accounting

year for each employee. The ITO disallowed the claim of the assessee to the extent of Rs. 65,499 on the ground that it was in excess of the

actuarially valued amount, which alone was considered by him as allowable.

The assessee went on appeal before the AAC and the AAC confirmed the disallowance. The assessee took the matter further on appeal to the

Tribunal. The Tribunal, by its order in ITA No. 2417/Mad/1974-75, dt. 18th February, 1976, set aside the order passed by the AAC and

remitted back the matter to the ITO with a direction specifically to consider the allowability of the provision for payment of gratuity as laid down

under s. 40A(7) of the Act.

When the matter went back to the ITO, he still felt that the sum of Rs. 65,499 was not allowable under s. 40A(7) of the Act. The assessee once

again went on appeal before the CIT(A). The CIT(A) held that the provisions of s. 40A(7) of the Act would have no application to the assessee''s

case, that the claim of the assessee is one which could be allowed under s. 36(1)(v) of the Act and r. 104 of the IT Rules, which restricts the

quantum of the initial contribution to be made to an approved fund would have application only with reference to the approval to be given to the

gratuity fund and that once approval is given to the fund, there is no need to restrict the claim in terms of r. 104 while allowing the same under s.

36(1)(v) of the Act. Thereupon the Department preferred an appeal to the Tribunal.

The Tribunal held that its earlier understanding of the point in dispute, viz., that the claim of the assessee fell within the ambit of s. 40A(7) of the

Act was wrong. It further held that the initial contribution made by the assessee was found by the CIT(A) to be within the limits prescribed under r.

104 of the IT Rules and if the assessee bona fide set apart by way of initial contribution to approved gratuity fund, then the claim could be made

under s. 36(1)(v) of the Act. The Tribunal also went on to hold that in the facts and circumstances of the case, the reasonings of the CIT(A) are

sound. It accordingly dismissed the Departmental appeal.

The learned Senior Standing Counsel appearing for the Department submitted that the assessee is not entitled to deduction of Rs. 65,499 in

view of the provision contained in s. 40A(7) of the Act : According to the learned senior standing counsel if the provisions of s. 40A(7) of the Act

is applied, than the provisions under s. 36(1)(v) of the Act cannot be made applicable. It was, therefore, pleaded that the CIT(A) was not correct

in allowing the sum of Rs. 65,499. On the other hand, the learned counsel appearing for the assessee supported the order passed by the Tribunal.

The point for consideration is, whether having regard to r. 104 of the IT Rules, 1962, r/w s. 36(1)(v) of the IT Act, 1961, the sum of Rs.

65,499 representing the difference between actual payment made to the approved gratuity fund towards initial contribution and the actuarial liability

for the same can be allowed as a deduction while computing the income of the assessee for the year 1973-74.

A similar question came up for consideration before this Court in TRIPLICANE PERMANENT FUND LTD. Vs. COMMISSIONER OF

Income Tax AND ANOTHER., , wherein on similar facts, this Court held that payment of gratuity actually made to the approved gratuity fund

was the expenditure incurred for the purpose of business in the year in which the payment was made and allowable under s. 37 of the Act. Even

after the introduction of the provision of s. 40A(7) in the Act in 1973, there is no change in the legal position so far as the actual payment of

gratuity is concerned. Hence, the actual payment towards gratuity liability is allowable in the year in which it is paid. So also the payment on the

basis of the actuarial valuation towards approved gratuity fund is allowable as a deduction under s. 36(1)(v) of the Act. Accordingly, there is no

infirmity in the order passed by the Tribunal in confirming the deletion of Rs. 65,499 made by the CIT(A). Accordingly, we answer the question

referred to us in the affirmative and against the Department. No costs.