COMMISSIONER OF Income Tax vs RAYALASEEMA PASSENGER AND GOODS TRANSPORTS PVT. LTD.

K. A. THANIKKACHALAM J. - Pursuant to the direction given by this court dated November 30, 1981, in T.C. No. 183 of 1981, the Tribunal

referred the following question, for the opinion of this court, u/s 256(2) of the Income Tax Act, 1961 (hereinafter referred to as the ""Act"") :

Whether, on the fact and in the circumstances of the case and having regard to rule 104 of the Income Tax Rules, 1962, read with section 36(1)

(v) of the Income Tax Act, 1961, the Appellate 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 assessment year 1973-74 ?

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

relating to the assessment year 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 Income Tax Officer disallowed that 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 Appellate Assistant Commissioner and the Appellate Assistant Commissioner confirmed the disallowance.

The assessee took the matter further on appeal to the Appellate Tribunal. The Tribunal, by its order in I.T.A. No. 2417/Mad. of 1974-75, dated

February 18, 1976, set aside the order passed by the Appellate Assistant Commissioner and remitted back the matter to the Income Tax Officer

with a direction specifically to consider the allowability of the provision for payment of gratuity as laid down u/s 40A(7) of the Act.

When the matter went back to the Income Tax Officer, he still felt that the sum of Rs. 65,499 was not allowable u/s 40A(7) of the Act. The

assessee once again went on appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) held that

the provisions of the section 40A(7) of the Act would have no application to the assessees case, that the claim of the assessee in one which could

be allowed u/s 36(1)(v) of the Act and rule 104 of the Income Tax 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 rule 104 while allowing the same u/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 section 40A(7) of

the Act was wrong, It further held that the initial contribution made by the assessee was found by the Commissioner of Income Tax (Appeals) to

be within the limits prescribed under rule 104 of the Income Tax Rules and if the assessee bona fide set apart by way of initial contribution to

approved gratuity fund, then the claim could be made u/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 Commissioner of Income Tax (Appeals) are sound. It accordingly dismissed the Departments appeal.

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

provisions contained in section 40A(7) of the Act; according to learned senior standing counsel if the provisions of section 40A(7) of the Act are

applied, then the provisions u/s 36(1)(v) of the Act cannot be made applicable. It was, therefore, pleaded that the Commissioner be Income Tax

(Appeals) was not correct in allowing the sum of Rs. 65,499. On the other hand, learned counsel appearing for the assessee supported the order

passed by the Tribunal.

The point for consideration is, whether having regard to rule 104 of the Income Tax Rules, 1962, read with section 36(1)(v) of the Income Tax

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 u/s 37 of the Act. Even after the

introduction of the provision of section 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 u/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 Commissioner of Income Tax (Appeals). Accordingly, we answer the

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