Income‑tax‑‑

‑‑‑‑Business expenditure‑‑‑Gratuity‑‑‑Mercantile system of accounting‑‑ Provision for gratuity‑‑‑Liability worked out on actual valuation is allowable as business expenditure‑‑‑Indian Income Tax Act, 1961, S.40A(7).

For the assessment year 1972‑73, the assessee, a firm, claimed a sum of Rs. 18,472 as deduction under the head "Gratuity to staff". The claim was trade as per actuarial valuation but the Assessing Officer disallowed it on the ground that neither the gratuity fund was approved by the Commissioner nor an irrevocable trust created for the said purpose. The Tribunal held that the same was allowable. On a reference:

Held, that the provision for payment of gratuity had been made under a scheme on an actuarial basis and was allowable as business expenditure.

CIT v. Dalmia Dadri Cement Ltd. (1992) 195 ITR 290 (Delhi); CIT v. Kelviator of India Ltd. (1994) 210 ITR 933 (Delhi); Dalmia Dadri Cement Ltd. v. CIT (1980) 126 ITR 851 (Delhi) and Shree Sajjan Mills Ltd. v. CIT (1985) 156 ITR 585 (SC) ref.

R.C. Pandey with Ms. Prem Lata Bansal for the Commissioner.

S.K. Aggarwal for the Assessee.

JUDGMENT

D.K. JAIN, J.‑‑‑In this reference under section 256(1) of the Income Tax Act, 1961 (for short the Act), at the instance of the Revenue, pertaining to the assessment year 1972‑73, the following question has been referred for the opinion of this Court:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in allowing the provision for gratuity to staff amounting to Rs.18,472 as an admissible deduction in the computation of the assessee's business income for the assessment year 1972‑73?"

The assessee is a firm. In its annual accounts for the previous year ended on June 30, 1971, the assessee, claimed as business expenditure a sum of Rs.18,472 under the head "Gratuity to staff". According to the assessee, the claim was made as per the actuarial valuation. However, during the course of the assessment proceedings, the Assessing Officer disallowed the said claim on the ground that neither the gratuity fund has been approved by the Commissioner of Income‑tax nor an irrevocable trust has been created by the assessee for the exclusive benefit of the employees. The assessee's appeal to the Appellate Assistant Commissioner was unsuccessful.

Aggrieved, the assessee preferred further appeal to the Income‑tax Appellate Tribunal (for short "the Tribunal"). Observing that the method of accounting adopted by the assessee was mercantile; the assessee had introduced a gratuity scheme; the actuarial report had also been filed and similar deduction was allowed to the assessee in the preceding year, the Tribunal held that the expenditure in question was allowable: This order of the Tribunal has given rise to the question set out above.

We have heard Mr. R.C. Pandey, senior standing counsel for the Revenue, and Mr. S.K. Aggarwal for the assessee.

It is submitted by Mr. Pandey that the provision for payment of gratuity could not be allowed .as business expenditure as neither a gratuity fund was maintained by the assessee for the benefit of its employees nor the fund had been approved by the Commissioner. In support, reliance was placed on the decision of the Supreme. Court in Shree Sajjan Mills Ltd. v. CIT (1985) 156 ITR 585, wherein relevant principles on the issue, prior to the insertion of section 40A(7) by the Finance Act, 1975, with retrospective effect from April 1, 1973, have been exhaustively enumerated.

In our view, in so far as this Court is concerned, the issue is no longer res integra. Applying the principle of law laid down in Shree Sajjan Mills Ltd.'s, case (1985) 156 ITR 585 (SC), in CIT v. Kelvinator of India Limited (1994) 210 ITR 933 (Delhi), it was held that prior to the insertion of section 40A(7), banning, except in the, prescribed circumstances, allowance in respect of the provision of gratuity, which admittedly is not applicable in the present case, provision for payment of gratuity, if worked out on an actuarial valuation under a scheme on scientific basis, is a permissible business expenditure in the year concerned for the assessee following the mercantile system of accounting. Again, following an earlier decision by this Court in Dalmia Dadri Cement Ltd. v. CIT (1980) 126 ITR 851 against which special leave petition was also dismissed by the Supreme Court (see (1983) 144 ITR (St.) 11) a similar view was expressed in CIT v. Dalmia Dadri Cement Ltd. (1992) 195 ITR 290 (Delhi).

In the instant case, as noted above, the Tribunal has found as a fact that provision for gratuity had been made under a scheme on actuarial basis, for which a report had also been filed. In the light of the facts found by the Tribunal, which are not under challenge, we are of the view that the Tribunal was correct in law in holding that the liability 'on this account was allowable as business expenditure.

Accordingly, the question is answered in tile affirmative, i.e., in favour of the assessee and against the Revenue. There will, however, be no order as to costs.

M.B.A./648/FCReference answered.