I.E.L. Ltd. vs Commissioner of Income Tax

Ajit K. Sengupta, J.—In this reference u/s 256(2) of the income tax Act, 1961 (''the Act'') for the assessment year 1976-77 the following question of law has been referred to this Court:

Whether, on the facts and in the circumstances of the case, the Tribunal was right in not allowing as a deduction the provision for gratuity of Rs. 12,43,059 made by the assessee for contribution to its approved gratuity fund during the previous year relevant to the assessment year 1976-77?

Shortly stated, the facts are that during the year under reference, the assessee claimed the provision for gratuity of Rs. 12,43,059. The ITO indicated that the provision made by the assessee was not allowable u/s 40A(7) of the Act. The assessee filed a reply vide letter dated 19-5-1978 and stated that if the same is not allowed in 1976-77, the same should be allowed in 1977-78. The ITO indicated that no finding can be given for the assessment year 1977-78 but it was not allowable u/s 40A(7). Consequently, he did not entertain the claim of the assessee. The ITO did not allow the actual payment made by the assessee to the assessment year 1977-78 on the ground that the assessee was following the mercantile system of accounting. The assessee came in appeal before the Commissioner (Appeals) and urged that the application was filed by the appellant on 14-11-1975 before the Commissioner. The accounting year of the assessee ended on 30-9-1975. The approval of the Commissioner was received with effect from 14-11-1975 and, therefore, the provision made by the assessee should be allowed. The Commissioner (Appeals) did not accept the argument of the assessee and, consequently, he confirmed the disallowance.

The assessee in the assessment year 1977-78 claimed that even the amount was allowable u/s 36(1)(v) of the Act to which the Commissioner (Appeals) did not agree. The counsel for the assessee reiterated the arguments made before the Commissioner (Appeals) and relied on a decision of Chandigarh Bench of the Tribunal and urged that as the previous year of the assessee ended on 30-9-1975 and the fund was approved by the Commissioner on 14-11-1975, the claim of the assessee should be allowed in 1976-77. Alternatively, it was urged that the actual payment was made in the subsequent year and the fund was also approved by the Commissioner. Hence, the amount should be allowed in the assessment year 1977-78. The departmental representative relied on Peoples Engineering and Motor Works Ltd. Vs. Commissioner of Income Tax, a decision of the Calcutta High Court and urged that the amount was not allowable in the assessment year 1976-77. The assessee was following mercantile system of accounting and, therefore, rightly it was not allowed in the assessment year 1977-78.

After going through the order and hearing both the sides, the Tribunal concluded the matter as under:

The previous year of the assessee no doubt ended on 30-9-1975. But, however, the fund was approved with effect from 14-11-1975. The concession u/s 40A(7) was available only for the assessment years 1973-74 to 1975-76. The assessee has relied on a decision of Chandigarh Bench (supra). However, this issue has been covered by the decision of the Calcutta High Court in Peoples Engineering and Motor Works Ltd. Vs. Commissioner of Income Tax, Consequently, the claim of the assessee cannot be allowed in the assessment year 1976-77.

On the facts and circumstances of the case we are of the view that the Tribunal came to a correct conclusion. The approval of the Commissioner was communicated on 14-11-1975 which is beyond the previous year ending on 30-9-1975 and, accordingly, the Tribunal was justified in holding that the assessee having not fulfilled the condition prescribed u/s 40A(7) in this year is not entitled to get the deduction as claimed. For the reasons aforesaid, the question is answered in the affirmative and in favour of the revenue and against the assessee.

There will be no order as to costs.

Banerjee, J.

I agree.