REFERENCE APPLICATIONS NOS. 122/KB TO 125/KB OF 1993-94 VS REFERENCE APPLICATIONS NOS. 122/KB TO 125/KB OF 1993-94, 1994 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1380 (1994)

(a) Income Tax Ordinance (XXXI of 1979)---

----S. 24(g)---Provision for gratuity created by assessee amounts to "gratuity fund"---Expression "gratuity fund" is not a term of art and has to be given its ordinary meaning as understood in common parlance---Word "fund"-- Connotation---Provision for a gratuity having been earmarked by the assessee for the specific purpose of payment of gratuity to the employees and discharge of such liability in future, had all the attributes of a "gratuity fund"---Such fund, however, not being an approved gratuity fund the claim by assessee was not admissible by virtue of specific bar contained in S.24(g), Income Tax Ordinance, 1979.

Duncan Brothers & Co. Ltd. v. CIT (1978) 111 ITR 885; Duncan Brothers & Co. Ltd. v. CIT (1981) 128 ITR 302; Jowitt's Dictionary of English Law, 2nd Edn., Vol. 1, p.840; Dictionary of Accountants Fourth Edn. by Eric L. Kohler, 4tk Edn. pp. 204--208; Cassell's English Dictionary; Shorter Oxford English Dictionary, 3rd Edn., p.761 and Dictionary of Accounting Terms by Derek French 1st, Edn., p.130 ref.

(b) Income Tax Ordinance (XXXI of 1979)---

----S. 136---Reference application---Every question of law must not be referred to the High Court---Only such questions should be referred which had some substance---Such question, answer to which has patently clear and free from any doubt should not be referred to the High Court.

CIT v. Pakistan Beverage Co., Karachi 1967 PTD 265 and Pakistan Lungla (Sylhet) Tea Co. Ltd., Sylhet v. CIT, Dacca 1970 SCMR 872 ref.

Sirajul Haq Memon for Applicant.

Abdul Hameed Niazi, D.R. for Respondent.

Date of hearing: 29th March, 1994.

ORDER

MUHAMMAD MUJIBULLAH SIDDIQUI (JUDICIAL MEMBER).---By above-reference applications the assessee (hereinafter referred to as the applicant) has required to refer the following common' questions to the Hon'ble High Court under section 136(1) of the Income Tax Ordinance, 1979:

"(1) Whether in the facts and circumstances of the case the learned Income Tax Appellate Tribunal has not misdirected itself in law in confirming the disallowance of the gratuity on the ground that creation of a gratuity fund was mandatory under section 24(g) of the Income Tax Ordinance, 1979?

(2) Whether in the facts and circumstances of the case the learned Income Tax Appellate Tribunal was justified in upholding the disallowance made by the Income Talc Officer when the expenditure of gratuity was incurred in accordance with the method of accounting and the same was an ascertainable liability?"

2. Heard Mr. Sirajul Haq Memon leaned counsel for the applicant and Mr. Abdul Hameed Niazi learned representative for the department. Perused the order, dated 4-9-1993 out of which the questions sought to be referred are said to arise.

3. Briefly stated the relevant facts are that the applicant is a private limited company engaged in the business of dyes and chemicals and also deriving income from indenting commission. In all the four assessment years under consideration the applicant claimed expenses on account of provision for gratuity and the assessing officer disallowed the same for the reason that it was mere provision and was not an actual payment. The applicant preferred first appeal before the learned CIT(A) contending that the claim of provision for gratuity was allowable as applicant's practice was to accrue the liability from year to year and to credit the said amount to the individual member of the staff according to his entitlement, thereafter drew against the credit of the said gratuity. It was further contended that for all practical purposes the gratuity given to the staff tantamounts to credit and, therefore, it should have been allowed. The learned CIT(A) did not accept the plea for the reason that it was a mere provision and the claim was not allowable because of the provision contained in section 24(g) of the Income Tax Ordinance, 1979 as well.

4. The applicant still feeling aggrieved preferred second appeal before this Tribunal and the orders of the two officers below disallowing the claim of the gratuity were confirmed. The finding relating to assessment year 1985-86 is reproduced below:

"The Income Tax Officer disallowed Rs.14,888 out of provision for gratuity. The argument of the A.R. of the assessee is that the gratuity having been paid in accordance with method of accounting should be " allowed. This argument is not acceptable because creation of fund in accordance with provision of section 24(g) is mandatory and if the interpretation of the A.R. is accepted then a mandatory requirement of law will be rendered redundant. It is not possible to read the law in a manner that part of the law should become inoperative which will be the effect of accepting interpretation being conveyed by the A.R. It is, therefore, rejected.

5. Being still dissatisfied the applicant has submitted these reference applications with the prayer to refer the questions produced in earlier part of the order to the Hon'ble High Court, for invoking advisory jurisdiction under section 136(1) of the Income Tax Ordinance, 1979.

6. Mr. Sirajul Haq Memon learned counsel for the applicant has submitted that the applicant is employing mercantile system of accounting and, therefore, the liability on account of payment of gratuity in future for which provision has been made should be deemed to actual. payment and, therefore, the claim ought to have been allowed. He has submitted that the contention canvassed in this behalf by the learned counsel for the applicant has not been considered by this Tribunal, therefore, the questions proposed may be referred to the Hon'ble High Court. He has further submitted that there are several judgments of the Sindh High Court and the Supreme Court of Pakistan whereby an ascertained liability has been held to be admissible expenditure. Mr. Sirajul Haq Memon was pointed out that all the judgments of the Hon'ble Sindh High Court and the Hon'ble Supreme Court of Pakistan to which Mr. Sirajul Haq Memon has referred have been delivered in accordance with the provisions contained in the Income-tax Act, 1922 which stands repealed with enactment Income-tax Ordinance, 1979. Mr. Sirajul Haq Memon has very candidly conceded that the Hon'ble Sindh High Court and the Supreme Court of Pakistan have considered the provision of law as contained in the Income tax Act, 1922 and not in accordance with the new provisions introduced in the Income Tax Ordinance, 1979. Mr. Sirajul Haq Memon was further informed that the issue relating to the admissibility of claim relating to the provision for gratuity has been considered in detail in various other judgments of this Tribunal and in view of the consistent opinion that any claim on account of gratuity hit by the provision contained in section 24(g) of the Income Tax Ordinance, 1979 is not admissible, the point has not been discussed at length in the case of applicant. At this stage we would like to reproduce the provision contained in section 24(g) of the Income Tax Ordinance, 1979 which reads as follows:

"24. Deductions not admissible: -Nothing -contained in section 23 shall be so construed as to authorise the allowance or deduction of---

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(g) any sum paid to any provident fund, superannuation fund or gratuity fund, not being a recognised provident fund, an approved superannuation fund or an approved gratuity fund;"

4. We have asked Mr. Sirajul Haq Memon if there was any provision in the Income-tax Act, 1922 parallel to section 24(g) of the Income Tax Ordinance, 1979 to which Mr. Sirajul Haq Memon has replied in negative. In the Income-tax Act, 1922 there was a provision which is analogous to the provision contained in section 24(h) and the bar contained in section 24(g) has been introduced by the Income Tax Ordinance, 1979 for the first time.

5. Mr. Sirajul Haq Memon when confronted with the above situation contended that the provision contained in section 24(g) is not applicable to the facts and circumstances of the present case because according to Mr. Sirajd Haq Memon the provisions were applicable when provident fund, superannuation fund or gratuity fund was created, and it was not recognised however if no provident fund, superannuation fund or gratuity fund has been created the bar contined in section 24(g) shall not be applicable. Mr. Sirajul Haq Memon was asked if such interpretation would not render section 24(g) of the Income Tax Ordinance, 1979 as redundant and superfluous to which he has replied in negative. He has contended that the provisions contained in section 24(g) shall remain operative and shall be applicable when an assessee has created a fund, but it is not recognised. However if no fund has been created, the provisions contained in section 24(g) shall not be applicable. The point canvassed by Mr. Memon has been considered by us in several other judgments and we have reached to the conclusion that the contention is not tenable. We would like to deal with the issue in some detail in order to shorn that the contention is without substance and the purpose of law is very simple which does not require any interpretation by the Hon'ble High Court. We asked Mr. Sirajul Haq Memon if the provision for gratuity created by the applicant does not amount to creation of gratuity fund to which Mr. Sirajul Haq Memon replied in negative. We asked Mr. Sirajul Haq Memon to define the expression "fund" and Mr. Sirajul Haq Memon stated that in the ordinary common parlance the expression "fund" means accumulation of money for some specific purpose but according to Mr. Sirajul Haq Memon the ordinary meaning of the expression "fund" should not be taken into consideration because the expression "fund" used in section 24(g) is a term of art and is no an ordinary expression. When asked to substantiate his contention that the expression "fund" as used in section 24(g) is a term of art Mr. Sirajul Ha Memon has submitted that it has been defined in Sixth Schedule which has been framed in accordance with the provisions contained in sections 2, 24 and section 40 of the Income Tax Ordinance, 1979. The rules relating to approved gratuity fund are contained in Part Three of the Sixth Schedule to the Income Tax Ordinance, 1979. A perusal of these rules shows that the term gratuity fund has not been defined in these rules. The term approved gratuity fund has, however, been defined in section 2(4) of the Income Tax Ordinance, 1979 to mean a gratuity fund which has been and continues to be, approved by the Commissioner in accordance with the Rules contained in Part Three of the Sixth Schedule. Thus it will be seen that the expression approved gratuity fund has been defined in Income Tax Ordinance, 1979, but the expression gratuity fund has not been defined in the Income Tax Ordinance, 1979 or the Rules framed thereunder. The result is that the expression `gratuity fund' shall not be treated as a term of art and it is to be given its ordinary meaning as understood in common parlance. A similar point has been considered by the Calcutta High Court in the case of Duncan Brothers & Co. Ltd. v. CIT (1978) 111 ITR 885)) and has been followed by the same High Court again in the case of Duncan Brothers & Co. Ltd. v. CIT ((1981) 128 ITR 302). It has been held in the above judgments by the Calcutta High Court that etymologically fund means a sum of money available for the payment or discharge bf liabilities and if the term fund is not defined in a particular statute, it is to be given to its ordinary meaning as understood in the common parlance. It has been held by the Calcutta High Court that considering the meaning of expression "fund" in common parlance the provision for taxaton constitutes fund. The Calcutta High Court accepted the contentions that an amount already earmarked for a particular liability such a provision for tax amounts to fund.

6. Examining the meaning of expression "fund" as defined in various dictionaries we find that in Jowitt's Dictionary of English Law, 2nd Edition, Volume I, page 840 the term "fund" has been defined as follows:

"Fund, a sum of money available for the payment or discharge of liabilities. Thus the assets of a testator form a fund for the payment of his debts."

7. In the dictionary of Accountants, Fourth Edition by Eric L. Kohler, pages 204 to 208 the fund has been defined as follows:

"Fund. 1. An asset or group of assets within any organization, separated physically or in the accounts or both from other assets and limited to specific uses.

Examples: A petty cash or working fund; a replacement and renewal fund; and accident fund; a contigent fund; a pension fund.

2. Cash, securities, or other assets placed in the hands of a trustee, principal or income or both being expended in accordance with the terms of a formal agreement.

Examples: A trust fund created by a will; and endowment fund; a sinking fund.

3. (Government accounting): A self-balancing group of accounts--assets, liability, revenue and expense--relating to specified sources and uses of capital and revenue.

4. Pl.--Current assets less current liabilities (on an accrual basis):working capital; a term used in flow statements.

5. PI.--Cash.

V. t. 1. To convert currently maturing liabilities into a long term loan.

2. To provide for the ultimate payment of a liability by the systematic accumulation of cash or other assets in a separate account or trust.

A special revenue fund is created for taxes and other revenues levied or set aside for specified purposes. For example, if a separate fund is authorised for schools, a special revenue fund is set up to account for its disposition. The accounting principles, procedures, and final statements of a special revenue fund resemble those of the general fund other Funds.

A balance sheet combining a group of related funds should indicate the amount of insets, liabilities, reserves and surplus applicable to each fund within the group. The revenues and expenditures of each fund must likewise be kept independent, and the revenues of one fund should not be used to meet the expenditures of another without legal authority or opinion behind the action."

8. In Cassell's English Dictionary the term fund has been defined as under:--

"Fund (fund) (F. Fond, L. Fundus, the bottom; later assim to L.), n. A sum of money or stock of anything available for use or enjoyment; assets, capital; a sum of money set apart for a specific object permanent or temporary; (pl.)"

9. In Shorter Oxford English Dictionary, (Third Edition), page 761 the expression "fund" has been defined as follows:

"FUNDS.--1761. 2: --FOND Sb. 1: - 1748. 3. Source of supply; a permanent stock that can be drawn upon 1695, 4 a Sing. A stock or sum of money, esp. one set apart for a particular purpose 1694. b.pl. Pecuinary resources 1728. 5. a. A portion of revenue set apart as a security for specified payments--1776. b. The (public) funds; the stock of the national debts, considered as a mode of investment 1713."

10. In the Dictionary of Accounting Terms by Derek French First, Edition at page 130 the term "fund" has been defined as follows:

"fund. (1) Noun. A stock or sum of money, especially one set aside for a particular purpose.

(2) Verb. To provide money for a particular purpose.

(3) Noun. plural form (funds). Financial resources; finances.

(4)Noun. plural form (funds). Another term for `working' capital.

(5) Noun plural form written with capital F(Funds). British Government stocks. (Originally, before the creation of the consolidated fund, the taxes or funds charged with repayment of loans; then the loans themselves.)

(6) Verb. To provide for a financial obligation by borrowing money for a ' fixed period, especially for a long period.

(7) Verb. To provide for a future financial obligation by setting aside money and lending it to earn interest; to create a sinking fund."

11. A perusal of the above definitions leave no room for any doubt that the provision for gratuity created by the assessee amounts to gratuity fund. It was specifically pleaded on behalf of the applicant before the learned CIT(A) and the contention was reiterated before us that the applicant's practice was to accrue the liability of gratuity from year to year and to credit the said amount to the individual members of the staff according to his entitlement, who thereafter drew against the credits of the said gratuity. It means that the provision for a gratuity was earmarked for the specific purpose of payment of gratuity to the employees and discharge of such liability in future. Thus the `provision for gratuity' has all the attributes of a `gratuity fund' but admittedly this gratuity fund is not approved and, therefore, by virtue of specific bar contained in section 24(g) of the Income Tax Ordinance, 1979 the claim was not admissible. The treatment meted out to the application by the learned two officers below was, therefore, confirmed for the above reasons. As already observed the issue has been considered at length by various Benches of this Tribunal in large number of cases and, therefore, in subsequent orders the entire discussion was not made. We have discussed one aspect of the issue in this order for the reason that Mr. Sirajul Haq Memon stated that the previous judgments of this Tribunal are not reported, therefore, he is not aware of the reasons prevailing with this Tribunal for disallowing the claim on account of gratuity in the cases of unapproved gratuity funds. In the earlier judgments various other facts of the issue have been considered which we need not to advert in the present order.

12. The above discussion shows clearly and amply that the provision of law contained in section 24(g) is very simple and there is no ambiguity requiring interpretation by the Hon'ble High Court. We, therefore, by placing reliance on the judgment of the Hon'ble Karachi Bench of Erstwhile West Pakistan High Court, reported as CIT v. Pakistan Beverage Co., Karachi 1967 PTD 265 and the judgment of Hon'ble Supreme Court of Pakistan Lungla (Sylhet) Tea Co. Ltd., Sylhet v. CIT, Dacca 1970 SCMR 872 refuse to refer the proposed questions to the Hon'ble High Court and reject the reference applications. It has been clearly observed by the Hon'ble Supreme Court of Pakistan that every question of law must not be referred to, the Hon'ble High Court. Only such questions should be referred which have some substance. The Hon'ble Judges of West Pakistan High Court Karachi Bench have held that such questions, answers to which are patently clear and free from any doubt should not be referred to the Hon'ble High Court. -

13. The reference applications stand rejected accordingly.

M.BA./58/T.T. Applications rejected.