GEORGE WILLIAMSON (ASSAM) LTD. VS COMMISSIONER OF INCOME-TAX
1999 PTD 2810
[228 I T R 343]
[Gauhati High Court (India)]
Before D. N. Baruah and S. B. Roy, JJ
GEORGE WILLIAMSON (ASSAM) LTD.
Versus
COMMISSIONER OF INCOME-TAX
Income-tax Reference No. 10 of 1994, decided on 04/09/1996.
Income-tax---
----Business expenditure---Gratuity---Provision made for payment of gratuity to retiring employees during the previous year---No actual payment made-- Amount allowable deduction---Indian Income Tax Act, 1961, Ss.40-A(7) & 43-B.
In case a provision is made for payment of gratuity to retiring employees in respect of the previous year, it is not necessary that actual payment has to be made. If such amount is earmarked for payment of gratuity, i.e., provision is made for payment of gratuity, the amount has to be allowed for deduction.
R. Gogoi and H. Roy for the Assessee.
G.K. Joshi and U. Bhuyan for the Commissioner.
JUDGMENT
D.N. BARUAH, J.---As directed by this Court vide order, dated April 25, 1994, in Civil Rule No.31(M) of 1992, the Income-tax Appellate Tribunal has referred the following question under section 256(2) of the Income Tax Act, 1961 (for short "the Act"), for the opinion of this Court:
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the order of the Commissioner of Income-tax (Appeals) to the effect that the sum of Rs.2,18,100 representing provision made for gratuity payable to employees who had retired during the relevant previous year not hit by the provisions of section 43-B of the Act, was not sustainable?"
The facts for the purpose of answering the question may be narrated as follows:
The assessee is a company incorporated under the Companies Act, owning tea estates and carrying on the business of tea plantation, manufacture of tea and sale thereof. For the benefit of the employees of the tea garden, the assessee-company made d provision of Rs.2,18,100 in respect of gratuity payable to the employees who retired during the relevant previous year. The question relates to the assessment year 1984-85. The assessee claimed deduction of the aforesaid amount. However, the Assessing Officer disallowed the same under section 43-B of the Act.
Being aggrieved, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals) who disposed of the appeal holding, inter alia, that the provisions of section 43-B(b) are not attracted and directed the Assessing Officer for deletion of the said amount. The Revenue thereafter, took up the matter by way of an appeal before the Income-tax Appellate Tribunal. The Tribunal after considering the matter held that the Commissioner of Income-tax (Appeals) erred in law by giving relief under section 43-B in respect of the aforesaid amount of Rs.?,18,100 on account of gratuity provision. While passing the said order by the Tribunal, it was held that the amount related to the gratuity for employees who were to retire and the amount was made as provision. The Tribunal also held that the assessee- company did not have any gratuity fund. The Tribunal further observed that such liability determined on actuarial basis could be taken into consideration. On hearing the parties, the Tribunal held that the conclusion arrived at by the Commissioner of Income-tax (Appeals) could not be sustained and accordingly allowed the appeal of the Revenue. The assessee thereafter, requested the Tribunal to refer the above question. However, the Tribunal refused to do so. Situated, thus, the assessee-company approached this Court by filing the aforesaid Civil Rule No.31(M) of 1992 before this Court and this Court directed the Tribunal to refer the question. Hence, the present reference.
We have heard Mr. R. Gogoi, learned counsel appearing on behalf of the assessee, and Mr. G.K. Joshi, learned senior standing counsel appearing on behalf of the Revenue.
Mr. Gogoi submits that the finding arrived at by the Tribunal is erroneous. In the facts and circumstances of the case, the Tribunal ought to have held that the assessee was entitled to get deduction of the amount earmarked for gratuity of retiring employees. Mr. Gogoi also submits before us that the assessee-company did not have; a fund but the assessee is entitled to get deduction on the basis of the provisions contained in section 40-A(7). According to Mr. Gogoi, in the present facts and circumstances of the case, section 43-B of the Act does not apply in the instant case and, therefore, the Tribunal committed a manifest error in arriving at the conclusion. Mr. Joshi, on the other hand, submits that the Tribunal was fully justified in coming to the conclusion.
On the rival contentions of the parties it is to be seen whether the assessee is entitled to get the benefit under the provisions of section 40-A(7) or whether the provisions contained in section 43-B would apply. '
In order to appreciate the submissions of the parties, it will be apposite on our part to look into some of the relevant provisions contained in the Act. Section 43-B begins with a non obstante clause. Section 43-B(b) provides as under:
"Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of--...
(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees,
shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him), only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him. "
Mr. Joshi has drawn .our attention that as the section begins with a non obstante clause, if there is no fund no deduction under any circumstances can be allowed even if there are provisions under the Act. Section 43-B has completely taken away the right of the parties in respect of any benefit given in any other provision under the Act. Mr. Joshi further submits that under no circumstances the assessee is entitled to get the benefit of allowance without creating any fund.
Mr. Gogoi, on the other hand, submits that there are three modes of payment of gratuity, namely, (1) having an approved fund, (2) by having a fund though not approved, and (3) when there is no fund but provision is made for payment of gratuity. In the first two cases payment has to be made and in the third case it is not necessary to make payment but a provision has to be made for such payment.
Mr. Joshi's submission, on the other hand, is somewhat different. According to him, when a provision is made for payment of gratuity that itself is a fund and, therefore, in that case also the assessee shall come within the ambit of section 43-B and for that purpose if no payment is made the assessee is not entitled. Mr. Gogoi has also drawn our attention to the provisions contained in section 40-A(7). Section 40-A refers to expenses or payments not deductible in certain circumstances. Section 40-A(1) provides as under.
"(1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in, any other provision of this Act relating to the computation of income under the head 'Profits and gains of business or profession'. "
Subsection (7)(a) of section 40-A provides as under:
"(7)(a) Subject to the provisions of clause (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason."
Therefore, under subsection (7)(a) no deduction shall be allowed in respect of any provision made by the assessee for payment of gratuity to his employees on their retirement or on termination.
The contention of Mr. Gogoi is that he gets the protection of section 40-A(7). Mr. Joshi has drawn our attention to the dictionary meaning of the word "fund" as given in Black's Law Dictionary, Fifth edition, and submits that "fund" does not only mean recognised fund, it means also an amount to capitalise with a view to the production of interest. Also, to put into the form of bonds, stocks, or other securities, bearing regular interest and to provide or appropriate .a fund or permanent revenue for the payment thereof. Under section 43-B, the Legislature has specifically mentioned about fund. Therefore, the meaning as given in section 43-B cannot be said to be the same as given in section 40-A(7)(b)(i).
After considering all these aspects of the matter we are of the opinion. that in case a provision is made for payment to the retiring employees in respect of the previous year, it is not necessary that actual payment has to be made. If such amount is earmarked for such payment it has to be allowed.
In view of the above, we answer the question in favour of the assessee and against the Revenue.
M.B.A./3025/FC Reference answered.