Kalpetta Estates Ltd. vs State of Kerala

V.V. Kamat, J.—These two revision cases relate to two separate assessment years 1984-85 and 1985-86 dealing with the assessee on the rolls of the Inspecting Assistant Commissioner of Agricultural Income Tax and Sales Tax (Special), Ernakulam.

The proceedings arise out of a notice u/s 75 of the Agricultural Income Tax Act, 1991, dated November 4, 1992. The notice records the following undisputed factual position. The final assessments for the assessment years 1984-85 and 1985-86 were completed by two separate orders dated January 31, 1990. At that time for the assessment year 1984-85, the total agricultural income and the net income were fixed at Rs. 28,29,249 and Rs. 18,89,390, respectively. Similarly, for the assessment year 1985-86 it was fixed at Rs. 26,88,130.

For these two assessment years the assessee claimed deduction towards payment to the approved gratuity fund and it was allowed by the assessing authority as it worked out to the employees at 15 days'' wages in accordance with the provisions of the Payment of Gratuity Act, 1972. The assessee remitted the amount in regard to which deduction was claimed for the gratuity fund which was also approved by the Commissioner of Income Tax. Incidentally, u/s 4 of the Payment of Grauity Act, 1972, such gratuity is payable to an employee as a result of the end of his employment, after he has rendered continuous service of not less than five years. The end of the employment gets contemplated, firstly, on his superannuation or, secondly, on his retirement or resignation, and thirdly, on his death or disablement due to accident or disease. u/s 4(2) of the said Act it is the employer''s liability to pay gratuity to an employee at the rate of 15 days'' wages based on the rate of wages last drawn by the employee concerned. There are certain statutory qualifications in regard thereto as provided by the two provisos thereto.

The material further shows that the assessee had preferred an appeal, not with regard to the issue under consideration, but on other issues and the appellate authority decided the appeal on July 18, 1990, by an order of remand for passing fresh orders with regard to the other issues in accordance with the directions. It is thereafter, obviously acting on the directions of the appellate authority, the Inspecting Assistant Commissioner, Alleppey, passed orders separately with regard to the two assessment years on January 29, 1992, and accordingly fixed the net income, for the assessment year 1984-85 at Rs. 3,78,092 and for the assessment year 1985-86 at Rs. 12,13,470. It is thereafter that the Deputy Commissioner, Agricultural Income Tax and Sales Tax, Ernakulam, on November 4, 1992 (annexure A), proceeded u/s 75 of the Agricultural Income Tax Act, 1991. As far as the question under consideration is concerned the notice concentrated on the following defects :

"While completing both the original and revised assessment orders for the above years the claim for provision of gratuity was not supported by actuarial valuation of the liability for each year and in the absence of actuarial valuation of the liability the allowance given was not admissible."

The assessee filed a reply dated November 23, 1992 (annexure B). The assessee specifically contended that the proposal to disallow the claim as it was not supported by actuarial valuation, is not tenable. The assessee specifically contended that the claim is not to be understood as a provision but has to be understood as contribution according to law (Payment of Gratuity Act, 1972), to an approved gratuity trust in regard to the statutory liability in accordance with the provisions of the Payment of Gratuity Act, 1972.

It is also contended that the assessee created an irrevocable gratuity trust in December, 1975, and it was got recognised by the Commissioner of Income Tax, Kerala, Ernakulam, with effect from March 1, 1976, and as a result thereof annual contributions at 15 days'' wages in accordance with the provisions of the Act, the trust rules and the regulations framed in pursuance thereof, as approved by the Commissioner of Income Tax, are being made regularly from time to time. It was specifically made clear by the assessee that the claim could not be understood to be a mere provision for liability arising based on the mercantile system of accounting but the claim is of actual contribution to the trust in accordance with the statutory requirement. The assessee also relied on Rule 8-1 of the Agricultural Income-lax Rules, 1951, made in accordance with the statutory provisions of Section 5(k) of the said Act permitting deductions as may be prescribed generally or in particular cases. It is contended accordingly by the assessee that any sum paid as gratuity under the Payment of Gratuity Act, 1972, would have to be considered as a permissible deduction which was already granted in the completed assessment proceedings. It was contended that either the ascertainment of the amount of payment of gratuity has to be in accordance with liability or in the absence thereof has to be on scientific and actuarial basis.

The Deputy Commissioner, Agricultural Income Tax and Sales Tax, Ernakulam, concentrated on only one aspect as has been emphasised in the notice itself. In this order (annexure C at page 16), it is observed as follows :

"The first contention is that the claim of gratuity is not a provision but a contribution to an approved gratuity trust based on statutory liability and hence the gratuity claimed is an allowable deduction. This contention is not acceptable since it is necessary that the provision of gratuity should be supported by actuarial valuation of the liability for each year."

We have seen the entire order and it is seen that the authorities concentrated only with reference to the actuarial valuation of the liability for the assessment years in question.

The revision attempt of the assessee before the Commissioner of Agricultural Income Tax, Trivandrum, followed the same track, which would be apparent from the following observations therefrom :

"The contentions raised by the petitioner have been examined with reference to the records and it is revealed that the claim for provision of gratuity was not supported by actuarial valuation of the liability for each year and in the absence of actuarial valuation the allowances on this account given in the assessments were irregular."

The above statutory provisions would clearly show that the liability is a statutory liability under the provisions of the Payment of Gratuity Act, 1972. Such payment is understood as a payment in regard to which the claim for deduction can be entertained in view of the provisions of Section 5(k) of the Act. Additionally, reference to Rule 8-I would also reveal that if the payment is made as a gratuity under the Payment of Gratuity Act, the said amount of payment would entitle the assessee to claim deduction in the process of computation of agricultural income of a person. It is also crystal clear that if there is a statutory provision, payment of gratuity has to be paid in accordance with the said statutory provision. The position is that when there is no statutory provision regulating and controlling the payment of gratuity, then and then alone resort to actuarial basis can be perceived. In regard to the situation under consideration, the Payment of Gratuity Act, 1972, answers the situation. We find that this aspect has not been adverted to at all in spite of there being specific contentions in regard thereto.

Therefore, we are left with only one course of remittance of the proceedings to the Deputy Commissioner, Agricultural Income Tax and Sales Tax, Ernakulam, to consider the question in the light of the above observations. The result is that the two orders (annexures C and D) get quashed and set aside resulting in the remittance of the proceedings as observed above. Both tax revision cases get disposed of accordingly.