COMMISSIONER OF INCOME-TAX VS VELLORE ELECTRIC CORPORATION LTD, 2000 PTD-MADRAS-HIGH-COURT-INDIA 2248 (1997)

(a) Income-tax---

----Business expenditure---Gratuity---Provision for additional gratuity as a result of Payment of Gratuity Act in accounting year relevant to assessment year 1973-74 was deductible---Indian Income Tax Act, 1961, S.36.

The expression "any sum paid" occurring in clause (v) of sub section (1) of section 36 of the Income Tax Act, 1961, has to be construed in the light of the expression4'paid" found in other clauses of subsection (1) of section 36. The expression would include not only cash payment, but also the payment by way of transfer' of valuable securities. Rule 101 of the Income Tax Rules, 1962, deals with the investment by the trustee of the approved gratuity fund and the rule does not in any way prohibit the trustees from receiving certain valuable securities. Only after the introduction of section 43B of the Act, which was inserted by the Finance Act, 1983, with effect from April 1, 1984, the Act contemplates the actual payment of cash in the case of contribution to the gratuity fund:

Held, (i) that the question regarding the amount of gratuity that would become payable during the previous year was a question of fact that had to be determined on investigation of materials and evidence on record. When the Revenue had not raised before the Tribunal such a case, that the amount was not payable during the previous year, it was not permissible for the Revenue to raise such a contention for the first time before the High Court in the reference proceedings.

(ii) That the finding of the Appellate Tribunal was that, the provision was made in the account of the assessee for the purpose of contribution to the existing gratuity fund and the Tribunal had also observed that. the sum of Rs.3,07,607 represented additional gratuity payable as a result of the enactment of the Payment of Gratuity Act. The Tribunal had come to the correct conclusion that the assessee was entitled to deduction for the provisions made in its accounts for the sum of Rs.3,07,607 for the assessment year 1973-74.

(b) Income-tax---

Business expenditure ---Gratuity---Meaning of "Paid" in S.36(1)(v)-- Transfer of approved securities approved by gratuity fund in accounting year relevant to assessment year 1974-75---Transfer of approved securities amounted to payment of gratuity---Amount representing such securities was deductible---Indian Income Tax Act, 1961, S.36---Income Tax Rules, 1962, R.101.

In so far as the assessment year 1974-75 was concerned, it was admitted that the liability was discharged during the accounting year by actual payment. The liability of the assessee was discharged partly by transfer of the approved securities and partly by payment of cash. The transfer of the approved securities was approved and acknowledged in the accounts of the Vellore Electric Corporation Employees' Gratuity Fund. It meant that the recipient had acknowledged the value of the securities given and credit. for the amount was also given in the accounts of the recipient. The study of various provisions of the Electricity (Supply) Act as well as the relevant clause in Part C of the Fourth Schedule to the Income-tax Act clearly showed that the assessee as a licensee, had to make investment in the approved securities and only those securities were transferred to the trustees of the approved gratuity in satisfaction of and in discharge of the assessee's liability to pay the gratuity amount to the approved gratuity fund. Therefore, when the trustees of the approved fund had accepted the securities, it must be taken that the assessee had discharged its obligation, by actual payment. Further, the securities had been purchased earlier by making cash payment and only those securities which were valuable in nature and which were in the prescribed form of the securities under the Indian Trusts Act had been transferred. The Tribunal had come to the correct conclusion in holding that the liability of the assessee was duly discharged during the accounting year itself by transfer of securities partly and by transfer of certain amounts partly in cash.

(c) Income-tax--

---Reference---Point not raised before or considered by Tribunal cannot be considered by High Court---Indian, Income Tax Act, 1961, S.256.

Raja Mohan Raja Bahadur v. CIT (1967) 66 ITR 378 (SC) applied.

CIT v. Colgate Palmolive (India) (Pvt.) Ltd. (1994) 210 ITR 770 (Bom.) and CIT v. Loyal Textile Ltd. (1998) 231 ITR 573 (Mad.) ref.

S. V. Subramaniam for C. V. Rajan for the Commissioner

T. Srinivasamoorthy for the Assessee.

JUDGMENT

N. B. BALASUBRAMANIAN, J.---The Short points that arise in these. tax cases are whether the provision for gratuity liability is an allowable deduction in the computation of. income of the assessee for the assessment year 1973-74 and whether there was a payment when the assessee transferred partly by approved securities- and partly by cash in favour of an approved gratuity fund under section 36(1)(v) of the Income Tax Act, 1961 (hereinafter to be referred to as "the Act").

In pursuance of the direction of this Court, dated April 26, 1982, the Appellate Tribunal has stated a case and referred the following questions of law for two assessment years 1973-74 and 1974-75 in the case of Vellore Electric Corporation Limited, Madras (hereinafter to be referred to as "the assessee"), for our consideration:---

"(1)Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the sum of Rs.3,07,607 and Rs.1,19,655 being the provision for gratuity was an admissible deduction while computing the income of the assessee for the assessment years 1973-74 and 1974-75?

(2) Whether, on the facts and in the circumstances of the case and regard to the provisions of section 40A(7) of the Income Tax Act, 1961, the Appellate Tribunal was right in allowing the n for gratuity as a deduction?

(3) Whether the Appellate Tribunal's view that there was sufficient with the provisions of section 36(1)(v) of the Income-tax Act is sustainable in law when the entire contribution to the approved gratuityfund of the assessee was not made in cash and also during theprevious year relevant for the assessment year relevant for the assessment year 1973-74?

(4) Whether on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee was only discharging a liability for which a prior provision had been made for gratuity by way of a mere provision?

(5) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the transfer of electricity bonds would amount to discharge of the liability towards contribution to an approved gratuity fund as envisaged in section 36(1)(v) of the Income Tax Act, 1961, or would constitute expenditure incurred for the purpose of the business of the assessee?

(6) In the event of question No.5 is answered in favour of the assessee, should the market value of these bonds be handed over or their face value be taken into account for purposes of deduction as business expenditure?

(7) Whether, on the facts and in the circumstances of the case, the payment made on January 5, 1974, constitutes capital expenditure in view of its being made at or in connection with the closure of the business?"

The assessee claimed in its assessment proceedings for the assessment year 1973-74 that the gratuity provision made towards its staff amounting to Rs.3,07,607 should be allowed as a deduction against the income of the assessee company in the said assessment year. The Income-tax Officer rejected the claim of the assessee on the ground that there was a staff gratuity fund already in existence recognised by the Commissioner of Income-tax and the practice adopted by the assessee was to claim the gratuity payable during the year and transfer it to the gratuity fund. The Income-tax Officer was of the view that since the assessee had created only the provision towards gratuity liability and did not comply with the conditions laid down under section 40A(7) of the Act, the provision made was not liable for deduction.

During the course of the assessment proceedings for the next assessment year 1974-75; the assessee made a similar claim for deduction towards a provision of a sum of Rs.1,19,655 which was disallowed on the same ground by the Income-tax Officer. The Income-tax Officer found that during that year as per the agreement reached by the assessee with the Tamil Nadu Electricity Board, the assessee agreed to pay a sum of Rs.1,25,000 to its employees for arrears of work to be carried out by the employees, when the electricity undertaking was taken over by the Government. Therefore, the Income-tax Officer was of the view that the provision made by the assessee was only a provision and there was no liability during the relevant period under consideration and, therefore, the assessee was not eligible for deduction.

The assessee filed separate appeals to the Appellate Assistant Commissioner against the orders of the Income-tax Officer. for both the assessment years. The Appellate Assistant Commissioner found that the assessee had an approved gratuity fund and the assessee had made a provision of Rs.3,07,607 and the payment was actually made to the fund on January 5, 1974. The Appellate Assistant Commissioner also found that the conditions prescribed under section 40A(7) of the Act were satisfied and the assessee was entitled to claim the deduction of Rs.3,07,607 in the assessment proceedings for the year 1973-74. In so far as the next year is concerned, the Appellate Assistant Commissioner, following the reasons given in his order for the assessment year 1973-74, held that the assessee was entitled to claim the deduction for the assessment year 1974-75 as well.

The Revenue filed appeals before the Income-tax Appellate Tribunal. The Tribunal found that in so far as the assessment year 1973-74 is concerned, the sum of Rs.3,07,607 represented additional gratuity payable- as a result of enactment of the payment of Gratuity Act, 1972, and since the gratuity liability was fastened on the assessee-company during the accounting year, the assessee would be entitled to the deduction. The Appellate Tribunal also held that this is a case not falling under the provisions of section 40A(7)(b)(ii) of the Act, but a case which falls under section 40A(7)(b)(i) of the Act. The Tribunal accepted the contention of the Revenue that mere provision towards the gratuity liability in its accounts would not be sufficient for the allowance of the claim, but the claim of the assessee for the deduction was justified as, in has completed with the provisions of section 40A(7)(b)(i) of the Act. The Tribunal further held that the assessee has made provision for contribution to an existing gratuity fund and. therefore, it was allowable. In so far as the assessment year 1974-75 is concerned, its liability was completely`' discharged by the assessee transferring both approved securities and cash and the transfer of approved securities would constitute an effective discharge of its obligation and it has been acknowledged in the accounts of Vellore Electric Corporation Limited, Employees Gratuity Fund. The Appellate Tribunal rejected the contention of the Revenue that the payment made should be regarded as a capital expenditure on the ground that the liability was agreed during the accounting year and the same was discharged. It also held that the payment cannot be considered as compensation that arose as a result of the closure of the business.

The Revenue has challenged the order of the Appellate Tribunal and on the basis of the directions of this Court, the references have been made on the questions of law set out above for our opinion.

Mr. S. V. Subramaniam, learned senior counsel for the Revenue submitted that in so far as the assessment year 1973-74 is concerned, the Appellate Tribunal was not correct in holding that the provisions of sub -clause (i) of subsection (7)(b) of section 40A of the Act were satisfied as the provision made by the assessee was not for the purpose of payment of any contribution towards an approved gratuity in respect of the amount that has become payable during the previous year. According to learned senior counsel the latter part of sub-clause (i) of subsection (7)(b) of section 40A of the Act, viz., that has become payable during the previous year would qualify both the parts of sub-clause (i) of subsection (7)(b) of section 40A of the Act. In support of his submission, learned senior counsel placed reliance on a decision of this Court in the case of CIT v. Loyal Textile Ltd. (1998) 231 ITR 573. In so far as the assessment year 1974-75 is concerned, the contention of learned senior counsel is that though it is not a case of provision, the assessee is not entitled to claim deduction under clause (v) of subsection (1) of section 36 of the Act as the amount was not paid by the assessee by way of contribution towards an approved gratuity fund. According to learned senior counsel, the assessee had transferred to the approved gratuity fund and discharged its liabilities partly by securities and partly by transferring cash and the transfer of securities would not be sufficient and the payment to the gratuity fund should be made only by cash. He submitted that it is not clear as to how the securities were valued and it is also not clear at what value the, bonds were transferred in discharge of the liability and how the liability was discharged for both the years by transfer of the securities.

Mr. T. Srinivasamoorthy, learned counsel for, the assessee, on the other hand, submitted that case of the Revenue before the Appellate Tribunal was that the assessee did not comply with the provisions of sub-clause (i) of subsection (7)(b) of section 40A of the Act only on the basis that the assessee had been claiming deduction all along on the basis of contribution to -the fund year after year and not on accrued basis and the provision made cannot call for deduction. He submitted that the plea now put forward before this Court that the gratuity liability has not become payable during the relevant previous year was not put forward before the Appellate Tribunal and in the absence of such a plea, he submitted, it is not permissible for the Revenue to raise such a contention before this Court. He. further submitted that in view of the finding of the Tribunal that the sum represented additional gratuity payable as a result of the previous year, the assessee has satisfied the conditions prescribed in sub-clause (i) of subsection (7)(b) of section 40A of the Act. In so far as the assessment year 1974-75 is concerned, he referred to the relevant provisions of the Electricity (Supply) Act, 1948, particularly the Sixth Schedule and submitted that the securities are valuable securities and on the basis of the decision of the Supreme Court in the case of Raja Mohan Raja Bahadur v. CIT (1967) 66 ITR 378, the transfer of the approved securities should be taken as actual payment by way of cash. He placed reliance on a decision of the Bombay, High Court in the case of CIT v. Colgate Palmolive (India) (P.) Ltd: (1994) 210 ITR 770 and submitted that it is not open to the Revenue to raise a contention that it was not clear whether the securities were transferred either at the face value or at the market value and what would be their value at the time of their encashment as no such contention was raised before the Appellate Tribunal.

We have carefully considered the submissions of learned senior counsel for the Revenue and learned counsel for the assessee. In so far as the first assessment year, viz., 1973-74, is concerned, we are not able to accept the contention of learned senior counsel for the Revenue that the provisions of sub-clause (i) of subsection (7)(b) of section 40A of the Act were not satisfied. The Income-tax Officer when he completed the assessment under section 143(3) of the Act has disallowed the payment of the ground that there was. no actual payment by way of contribution and mere provision would not be sufficient. The Appellate Assistant Commissioner allowed the appeal of the assessee for the assessment year 1973-74 on the ground that there was an actual payment to the fund on January 5, 1974. In the appeal by the Revenue against the order of the Appellate Assistant Commissioner before the Appellate Tribunal, the contention that was raised on behalf of the Revenue was that there was a change in the practice and there should be actual contribution to the fund and the amount cannot be claimed on accrued basis in so far as the claim for provision is concerned. It is not the case of the Revenue of any stage of the proceedings that the provision made by the assessee did not represent the amount payable during the relevant previous year. On the other hand, the Appellate Tribunal has observed that a sum of Rs.3,07,607 claimed as deduction by the assessee represented the additional gratuity payable as a result of the Gratuity Act and the Gratuity liability has been fastened on the assessee during the accounting year. The Appellate Tribunal also accepted the plea that mere provision would not be sufficient. But, the Tribunal found that there was an approved gratuity fund and the provision was made for the purpose- of contribution towards an existing fund. A fair reading-of the order of the Appellate Tribunal clearly shows that the Revenue has not raised the plea that the provision was not deductible because the provision made was not towards any gratuity liability that has become payable during the previous year. The question what would be the amount of gratuity that would become payable during the previous year is a question of fact that has to be determined on investigation of materials end evidence on record. When the Revenue has not raised before the Tribunal such a case that the amount was not payable during the previous year, in our view, it is not permissible for the Revenue to raise such a contention for the first time before us in the reference proceedings. It is true that the decision relied upon by learned counsel for the Revenue in the case of CIT v. Loyal Textile Ltd. (1998) 231 ITR 573 (Mad.) would support the case of the Revenue, but, however, for the decision to apply, there must be necessary factual foundation and in the absence of any factual basis, it is not open for the Revenue to raise the plea that the provision made by the assessee was not towards any amount that has become payable during the previous year. In this view of the matter, we are not entertaining such a plea raised for the first time by learned counsel for the Revenue before us. The finding of the Appellate Tribunal is that the provision was made in the accounts of the assessee for the purpose of contribution to the existing gratuity fund and the Tribunal has also observed that the sum of Rs.3,07,607 represented additional gratuity payable as a result of the enactment of the Payment of Gratuity Act. In view of the finding of the Appellate Tribunal, we find that the Tribunal has come to a correct conclusion that the assessee is entitled to deduction for the provision made in its accounts for the sum of Rs.3,07,607 for the assessment year 1973-74.

In so far as the next assessment year 1974-75 is concerned, it is an admitted case that the liability was discharged during the accounting year by actual payment. The. liability of the assessee was discharged partly by transfer of approved securities and partly by payment of cash. The transfer of the approved securities was approved and acknowledged in the accounts of the Vellore Electric Corporation Employees' Gratuity Fund. It means that the recipient has acknowledged the value of the securities given and credit for the amount was also given in the accounts of the recipient. The contention of learned counsel for the Revenue that there should be an actual payment of cash under the, provisions of clause (v) of subsection (1) of section 36 of the Act to discharge the assessee's liability is not acceptable on the facts of the case.

The expression "any sum paid" occurring in clause (v) of sub section (1) of section 36 of the Act has to be construed in the light of the expression, "paid" found in the other clauses of subsection (1) of section 36 of the Act. It cannot be contemplated and also visualised that the Legislature has intended to give a different meaning when it employed the same expression "paid" in clause (v) of subsection (1) of section 36 of the Act than that is contemplated or provided .for in the other clauses of subsection (1) of section 36 of the Act. The expression "paid" is defined in clause (2) of section 43 of the Act to mean actually paid or incurred according to the method of accounting upon the basis. of which the profits or gains are computed under the head "Profits and gains of business or profession". The definition of the expression, "paid" clearly indicates that the deduction can be on actual payment or it can also be when the liability is incurred during the accounting year on, the basis of the regular method of accounting employed by the assessee. Further, the expression, "paid" occurs in other clauses of the same subsection (1) of section 36 of the Act. If the expression "paid" is given the meaning as actual cash payment in clause (v) of subsection (1) of section 36 of the Act, it would create anomalous and unintended result in working out the deductions provided under the other clauses of subsection(1) of section 36 of the Act as well.

That apart, the expression, "any sum paid" in clause (v). of subsection (1) of section 36 of the Act, in our opinion, would include not only cash payment; but also the payment by way of transfer of valuable securities. When the recipient received the securities, acknowledged the value and gave quittance of the lability to be discharged by the payer, we are of the view that it is not for the Income-tax Officer to sit in judgment over the acts of the payee in accepting the securities and in its determination of the value of the securities. No doubt, Mr. S. V. Subramaniam, learned senior counsel referred to rule 101 of the Income Tax Rules and submitted that the money contributed to the fund should be invested in approved securities as provided in the said rule. This rule deals with the investment by the trustee. of the approved gratuity fund and the rule does not in any way prohibit the trustees from receiving certain valuable securities. He also referred to the provisions of Part C of Schedule IV to the Income-tax Act and submitted that the contribution should only be in the nature of cash. He submitted that if the contribution is by way of securities, it is not possible for the trustees to invest the securities received by the trustees in the mode contemplated under rule 101 of the Income Tax Rules. As already seen the rule imposes certain duties upon trustees to invest the money contributed to the fund in certain deposits. Therefore, it is not permissible or possible to construe the expression, "paid" in clause (v) of subsection (1) of section 36 of the Act with reference to the duties of the trustees required to be performed under rule 101 of the Income Tax Rules or to give a restricted meaning to the expression "paid" in the light of the trustees' duties in making proper investments of the trust money. That apart, we are of the view that only after the introduction of section 43B of the Act, which was inserted by the Finance Act, 1983, with effect from April 1, 1984, the Act contemplates the actual payment of cash in the case of contribution to the gratuity, fund. Therefore,, the expression, "paid" in clause (v) of subsection (1) of section 36 of the Act cannot be construed or confined only to the payment of cash alone during the relevant assessment year in question.

The Supreme Court in the case of Raja Mohan Raja Bahadur v. CIT (1967) 66 ITR 378, held that if commercial assets are received by a trader maintaining accounts on cash basis in satisfaction of an obligation, income which is embedded in the value of the assets is deemed to be received and the receipt. of income is not deferred till the asset is realised in terms of cash or money. The Supreme Court also held that it makes no difference whether the receipt of assets is in pursuance of an agreement or by law and once the trader receives the assets; by consensual arrangement or by operation of law, he received the income embedded in the value of the asset. Applying the principle laid down by the Supreme Court to the instant case, when the trustees of the Vellore Electric Corporation Employees' Gratuity Fund received the approved securities in discharge of the assessee's obligation to pay gratuity liability to the said fund, it must be taken that the money value embedded in the value of the security was deemed to have been received by the trustees and the trustees have realised the position and made necessary accounting entries in their books. Therefore, it is futile on the part of the Revenue to content that the value of the securities transferred by the assessee to the fund should not be taken into account at all and such a transfer of securities cannot be regarded as a sum paid within the meaning of clause (v.) of subsection (1) of section 36 of the Act.

It is also necessary to refer to certain provisions of the Electricity (Supply) Act, 1948 (hereinafter referred to as "the Electricity (Supply) Act"). Under the Sixth Schedule to the Electricity (Supply) Act, there are expressions like "reasonable return", "clear profits", "standard rate" and "capital base". Under clause (ii) of the, Sixth Schedule to the. Electricity (Supply) Act, if the clear profit of the electricity undertaking it any year of account is in excess of the amount of reasonable return, one-third of such excess, not exceeding (7-1/2) per cent. of the amount of reasonable return shall be at the disposal of the undertaking. As regards the balance, one-half shall be appropriated to a reserve called tariffs and dividends control reserve and the remaining half shall either be distributed _ in the form of a proportional rebate on the amounts collected from the consumer. Under clause (iv) the licensee shall appropriate to the contingencies reserve the amount mentioned in clause (iv) of the Sixth Schedule to the Electricity Supply Act and the amount appropriated to the contingencies reserve fund shall be invested in approved securities authorised under the Indian Trusts Act. Under rule 9(bb) of Part C of the Fourth Schedule to the Income-tax Act, the Board can make rules regulating the investment or the deposit of the money of an approved gratuity fund. The study of various provisions of the Electricity (Supply) Act as well as the relevant clause in Part C of the Fourth Schedule to the Income-tax Act clearly shows that the assessee as a licensee, had to make investment in approved securities and only those securities were transferred to the trustees of an approved gratuity in satisfaction of and in discharge of the assessee's liability to pay the gratuity amount to the approved gratuity fund. Therefore, when the trustees of the approved fund have accepted the securities, it must be taken that the assessee had discharged its obligation by actual payment. Further, the securities had been purchased earlier by making cash payment and only those securities which are valuable in nature and which are in the prescribed form of the securities under the Indian Trusts Act have been transferred. The assessee could have realised the money value of the securities and, handed over the money to the trustees. If the money had been handed over to the trustees, the trustees should have invested the same in the approved securities as contemplated in the . Electricity (Supply) Act. The assessee, instead of adopting such a circuitous process, transferred the securities themselves and the trustees of the approved gratuity fund also received the same and in this situation, it must be held that the assessee had paid the money by way of contribution to the approved gratuity fund. The questions what was the value of the securities and whether transfer was at the face value at the time of realisation were not raised before the Appellate Tribunal and further those questions are not of much significance in the light of the fact that the trustees of the approved gratuity fund have accepted the value of the securities and acknowledged and given credit for the amount paid. In our opinion, it is not permissible for the Revenue to raise the question of propriety on the part of the trustees in receiving the securities in discharge of the liability of the assessee. Since it is not a case of provisions, the question has to be considered in the light of the provisions of clause (v) of subsection (1) of section 36 of the Act. In CIT v Colgate Palmolive (India) (P.) Ltd, (1994) 210 ITR 770, the Bombay High Court held that if it is not a case of provision, the case has to be considered in the -light of the provisions of clause (v) of subsection (1) of section 36 of the Act. Following the reasoning given by the Bombay High Court, we arc of the view that the Appellate Tribunal bas-come to the correct conclusion in holding that the liability of the assessee was duly discharged during the accounting year itself by transfer of securities partly and by transfer of certain amounts in cash partly. Mr. S. V Subramaniam, learned senior counsel for the Revenue, has not urged any other point. In this view of the matter, we answer the question of law referred to us as under:

(a) First question. ---The first question refers to sums of Rs.3,07,607 and Rs.1,19,655. In so far as the sum of Rs.1,19,655 is concerned, it was not a provision, but it was a case of actual payment. Therefore, the first question is not properly framed and we reframe the question as under:

"Whether, on the facts -and in the circumstances of the case, the Appellate Tribunal was right in holding that a sum of Rs.3,07,607 being the provision for gratuity for the assessment year 1973-74 and a sum- of 85.1,19,655 being the actual payment made to the approved gratuity fund were admissible deductions while computing the income of the assessee for the assessment years 1973-74 and 1974-75?

The first question, as refrained, is answered in the affirmative and against the Revenue.

(b) Second question---The second question is answered in the affirmative and against the Revenue.

(c) Third question. ---In view of the answer to questions Nos. l and 2. it is unnecessary to answer the third question as it relates to the assessment year 1973-74.

(d) Fourth question.---The fourth question is answered in the affirmative and against the Revenue.

(e) Fifth question.---Though the question refers to electricity bond, it must be taken to refer to the electricity bonds which are the approved securities. The fifth question is also answered in the affirmative and against the Revenue.

(f) Sixth question.---The question does not arise out of the order of the Appellate Tribunal.

(g) Seventh question. ---Since the point was not argued, the question is answered in the negative and against the Revenue.

However, in the circumstances of the cases, there will be no order as to costs.

M.B.A./4103/FCOrder accordingly