Commissioner of Income Tax vs Visnagar Taluka Mazdoor Sahakari Mandali Limited

Ahmadi, J.—The assessee, a co-operative society was engaged at all material times in undertaking contract works for construction of roads

and dams as well as digging of tube-wells, etc. It maintained different sets of accounts for different works undertaken from time to time according

to the mercantile system of accounting. We are concerned with the assessment year 1970-71, previous year having ended on June 30, 1969.

Three questions have been referred u/s 256(1) of the Income Tax Act 1961 (hereinafter called ""the Act"") for our opinion. They are as under

(1) Whether, on the facts and in the circumstances of the case, the decision of the Tribunal that the payment of Rs. 15,000 to the gratuity fund was

allowable u/s 28 of the Income Tax Act, 1961, being loss incidental to the business, or on the ground of commercial expediency was right in law ?

(2) Whether the amount of Rs. 20,059 in respect of the contribution to provident fund is an allowable deduction u/s 28 or 37 of the Income Tax

Act, 1961 ?

(3) Whether, on the facts and in the circumstances of the case, the payment of interest on provident fund account, is allowable deduction u/s 28 or

u/s 37 of the Income Tax Act, 1961 ?

For reasons which we will presently state, all the aforesaid three questions must be answered in the affirmative, i.e., in favour of the assessee and

against the Revenue.

We will take up questions Nos. 2 and 3 first. The assessee made a claim for deduction of Rs. 20,059 in respect of provident fund contribution.

The authorities below disallowed the claim of the assessee on the ground that the said payments were made to an unrecognised provident fund and

as such the assessee''s claim was not sustainable u/s 36(1)(iv) of the Act. The Tribunal in appeal disagreed with the view of the authorities below

holding that even though the assessee''s claim did not fall within the purview of section 36(1)(iv) of the Act, it could be entertained either u/s 28 or

u/s 37 of the Act. According to the Tribunal, the assessee created the said fund under a scheme framed on July 1, 1961, and approved at its

meeting of August 16, 1961, which was duly recognised by the Registrar of Co-operative Societies. The payment in question was made under the

bye-laws of the society for the purposes of its business. For the same reasons, it also held that the payment of interest was allowable u/s 28 or u/s

37 of the Act as a natural corollary. The Revenue feeling aggrieved by the view taken by the Tribunal sought a reference as formulated in questions

Nos. (2) and (3) above.

In the case of Commissioner of Income Tax, Gujarat-I Vs. Chhotabhai Jethabhai Patel Tobacco Products Co. Ltd., , the facts disclosed that

the assessee was carrying on business as sole distributors of a firm''s products from July 1, 1962. For the assessment year 1966-67, the assessee

claimed a deduction of Rs. 32,245 out of the contribution of Rs. 58,871 made to the provident fund relating to the period prior to July 1, 1965,

which was the date of recognition of the provident fund. The Tribunal upheld that claim for deduction of the provident fund contribution u/s 37 of

the Act. The assessee-company also made gratuity payments during the assessment year 1966-67 to the widows and other dependants of the

deceased employees and claimed deduction thereof u/s 37 of the Act. The Tribunal held that since there was no co-relation between the payment

made and the months of service or the last pay drawn by the employee concerned prior to his death, only the payment of an amount equivalent to

12 months'' salary on the basis of the salary drawn before death would be a reasonable amount to be allowed as deduction u/s 37 of the Act. This

court held that the contribution to the provident fund made by the assessee for a period prior to its recognition would be justifiable on the ground of

commercial expediency so as to keep the workmen satisfied and to see to it that the workmen got the benefit of the provident fund. The payment

was made for the purpose of earning the profits of business or in the course of earning profits of the business by the assessee. Hence, all the

requirements of section 37 of the Act were satisfied and the Tribunal was right in allowing the deduction. As regards the payment by way of

gratuity, this court held that as long as a reasonable amount was paid, the reasonableness to be judged by the quantum of salary last drawn or by

the length of service or the period of service for which the gratuity was calculated, the amount would be deductible u/s 37 of the Act, presumably

on the ground of commercial expediency. This decision, therefore, clearly supports the view taken by the Tribunal on the last two questions. As a

natural corollary, the interest amount must also be deductible.

In the case of Nagri Mills Co. Ltd. Vs. Commissioner of Income Tax, Gujarat, , the assessee-company carried on business of textile

manufacturing and maintained its books of account on the mercantile system of accounting. It was a party to an industrial dispute which resulted in

an award made by the Industrial Court in 1957, which became effective from September, 1957. Under the award, gratuity was payable to the

employees of the assessee-company according to the scale and subject to the conditions therein laid down. The assessee paid gratuity under the

award to its employees and debited the amount in its books of account and claimed deduction. After filing its returns for the assessment year

1968-69, the assessee obtained an actuarial valuation of its gratuity liability for 1967 and charged the same against the year''s income. Accordingly,

it claimed deduction of a sum of Rs. 29,637. The authorities below rejected the claim. The Tribunal took note of the fact that in the past such

claims were allowed as a deduction, whenever the actual payment of gratuity was made upon the happening of any of the contingencies provided in

the award. Besides, though in the year of assessment, the assessee claimed deduction on the basis of the actuarial valuation of the estimated

liability, no provision therefore was made in the accounts, although the assessee''s books of account were maintained on the mercantile system of

accounting. The Tribunal, therefore, held that the assessee was not entitled to any deduction in respect of such estimated liability. On a reference,

this court held that the assessee was entitled to deduct the cost of making provision for its liability towards gratuity u/s 28 of the Act. It also held

that the existence or absence of entries in the books of account was not decisive or conclusive of the question whether the deduction was

permissible. It, therefore, allowed a deduction in the sum of Rs. 29,637 for the assessment year 1968-69.

It is clear from the aforesaid two decisions of this court that even in cases where the deduction is not permissible u/s 36(1)(iv) or (v) of the Act,

it would be permissible u/s 28 to deduct the same while calculating the profits and gains from business or u/s 37 on the ground of ""commercial

expediency"". In either view, therefore, the assessee was entitled to deduct the amount of provident fund and gratuity paid to the employees from

the total income assessable to tax. As a natural corollary, the assessee would also be entitled to deduct the interest paid on the provident fund

amount either u/s 28 or u/s 27 of the Act.

For the above reasons, we answer all the three questions in the affirmative, that is, in favour of the assessee and against the Revenue. The

reference stands disposed of accordingly with no order as to costs.

Re : Income Tax Application No. 12 of 1977 : While making the reference u/s 256(1) of the Act, the Tribunal refused to refer the following

question for this court''s opinion :

Whether the claim of bad debt of Rs. 21,477 made by the assessee is rightly allowed by the Tribunal u/s 37 or in the alternative u/s 28 of the

Income Tax Act, 1961 ?

The facts reveal that the assessee claimed deduction in respect of the payments made to transport contractors by way of advance against

anticipated carting bills. Against the advances made to the transport contractors, the amount of carting bills for services rendered by the

contractors was expected to be adjusted and the balance carried forward from year to year. The genuineness of the payments made to the

transport contractors is not doubted. The transport contractors to whom the advances were made appeared to have disappeared and hence the

assessee was not able to adjust the amount against their carting bills. Since the whereabouts of the contractors were unknown over a period, the

assessee was constrained to write off the debt due from those transport contractors and it is this amount of Rs. 21,477 so written off that the

assessee claimed by way of bad debt. Once the facts are not in dispute and the genuineness of the transaction is not suspected, the question is

essentially one of fact and, therefore, in our view, the Tribunal was justified in not referring the same for this court''s opinion. We, therefore, reject

this application. Rule discharged with no order as to costs.