CARBORANDUM UNIVERSAL LTD. VS COMMISSIONER OF INCOME-TAX'
2001 P T D 1661
[241 I T R 402]
[Madras High Court (India)]
Before N. V. Balasubramanian and P. Thangavel, JJ
CARBORANDUM UNIVERSAL LTD.
versus
COMMISSIONER OF INCOME‑TAX
Tax Cases Nos.220 and 221 of 1981 (References Nos.72 and 73 of 1981), decided on 20/10/1997.
(a) Income‑tax‑‑‑
‑‑‑‑Business expenditure‑‑‑Company‑‑‑Surtax‑‑‑Surtax is levied on profits of a company‑‑‑Surtax is not deductible‑‑‑Indian Income Tax Act, 1961, S.31.
(b) Income‑tax‑‑‑
‑‑‑‑Business expenditure‑‑‑Contribution to approved gratuity fund‑‑‑Trust deed executed on 26‑8‑1970‑‑‑Amendment of trust deed on 2‑1‑1975‑‑‑Order of Commissioner granting approval for fund with effect from 26‑8‑1970‑= Amendment of trust deed valid and no fresh deed of trust came into existence‑‑‑Contribution to gratuity fund before 1‑1‑1976, as required by S.40A(7)(b)‑‑‑Tribunal justified in holding that assessee was entitled to deduction of provision for gratuity provided other conditions laid down in S.40A(7) are satisfied‑‑‑Indian Income Tax Act, 1961, S.40A(7)(b).
Held, that the Tribunal was right in law in holding that the assessee was . not entitled‑ to deduction, in computing its total income for the assessment year 1973‑74, of the amount of surtax payable for the year.
Smith Kline and French (India) Ltd. v. CIT (1996) 219 ITR 581 (SC) fol.
For the assessment year 1973‑74, the assessee made a provision in its account for the payment of gratuity amounting to Rs.10,58,521 and claimed the same as deduction in the computation of the business income of the assessee. The Income‑tax Officer disallowed the claim and held that the gratuity fund established by the assessee was not approved by the Commissioner of Income‑tax and the matter would be reviewed by taking appropriate action under section 154 of the Income Tax Act, 1961, as soon as the relevant conditions prescribed, under section 40A(7) were satisfied. On appeal, the Appellate Assistant Commissioner upheld the order of the Income‑tax Officer and also held that as soon as the assesssee complied with the requisite provisions, it should bring the same to the notice of the Income tax Officer who would verify the same and allow the appropriate relief. On further appeal, the Tribunal held that there was an earlier deed of trust, dated August 26, 1970, which was created even before the commencement of the relevant accounting period for the assessment ,year 1973‑74. There was a fund under the Scheme and the fund was also in existence during the accounting period relevant for the said assessment year. Clause 16 of the trust deed provided for the amendment of the trust and accordingly by a trust deed, dated January 2, 1975, the earlier deed, dated August 26; 1970, was validly amended by passing necessary resolution and there were three trustees under ‑the trust deed, dated August 26, 1970 and there was a valid amendment in the original trust deed as well. The Tribunal also noticed that the Commissioner of Income‑tax had granted necessary approval for the fund by his order, dated March 30, 1978, with effect from January 2, 1975. The Tribunal, therefore, held that the condition of the proper approval of the Commissioner of Income‑tax for the accounting of the trust was also satisfied. The Tribunal held that there was a valid amendment and no fresh deed of trust came into existence. The Tribunal noticed that the assessee had made a contribution on February 13, 1973, and there was a payment to the fund. The Tribunal, therefore, held that the requirement of payment to the gratuity fund before January. 1, .1976, as required by section 40A(7)(b) was fully satisfied and the Income‑tax Officer was directed to examine whether any other requirements of section 40A(7) were also satisfied. On a reference:
Held, that the decision of the Madras High Court in Carborandum Universal Ltd: v. CIT (1984) 146 ITR 1 as well as the order of the Chief Commissioner, dated March 15, 1984, clearly showed that the Commissioner had granted approval to the assessee's gratuity fund with effect from August 26, 1970. In view of the decision of the Madras High. Court and the order of the Chief Commissioner, dated March 15, 1984, the Tribunal was correct in holding that no fresh deed came into existence by the latter deed, dated January 2, .1975 and the deed, dated August 26, 1970, had brought into existence the gratuity fund and the ‑order of the Commissioner also established that the fund was in existence from August 26, 1970. The assessee had made the contribution on February 13, 1973, and it had to be regarded that it was a payment made to a recognised gratuity fund as provided under section 40A(7)(b). The Tribunal had come to the correct conclusion and the assessee would be entitled to deduction of provision, of gratuity provided that other conditions of section 40A(7)(b) were satisfied.
Carborandum Universal Ltd. v. CIT (1984) 146 ITR 1 (Mad.) rel.
R. Balasubramanian for the Assessee. C.V. Rajan for the Commissioner.
JUDGMENT
N.V. BALASUBRAMANIAN, J.‑‑‑This is a combined reference both at the instance of the Revenue as well as the assessee and the Tribunal, at the .instance of both. the assessee and the Revenue, had drawn up a consolidated statement .of case and referred the following questions of law under section 256(1) of the Income Tax Act, 1961, for our opinion:
The question of law at the instance of the assessee:
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not entitled to the deduction in computing its total income for the assessment year,, 1973‑74 of the amount of surtax payable for the year? ,
The question of law at the instance of the Revenue:
"Whether, on the facts and in the circumstances of the case and having regard to the provisions of section 40A(7) of the Income Tax Act, 1961, the Tribunal was right ‑in law in holding that the assessee is, entitled to the deduction of the provision for gratuity of Rs.10,58,521 in the assessment for the assessment year 1973‑74?"
In so far as the question referred at the instance of the assessee is concerned, the point that arises is whether the assessee would be entitled to deduction of surtax paid by the assessee in computing the total income for the assessment year. 1973‑74'. A similar question whether the surtax paid by a company is deductible‑in the computation of the company's business income came up for consideration before the Supreme Court in the case. of Smith Kline and French (India) Ltd. v. CIT (1996) 219 ITR 581 and the apex Court in that case held that surtax levied on the company's profit cannot be allowed as a deduction while computing the business income of the assessee as per the provisions of the Income Tax Act, 1961. Following the said decision of the apex Court, we answer the question of law referred to us at the instance of the assessee in the affirmative and against the assessee.
The facts leading to the reference made at the instance of the Revenue are as under: The assessment year with which we are concerned is 1973‑74, the previous year ending on August 31, 1972. The assessee in the course of the assessment proceedings made a provision in its account for the payment of gratuity amounting to Rs.10,58,521 and claimed the same as deduction in the computation of the business income of the assessee. The Income‑tax Officer disallowed the claim by observing that the gratuity fund established by the assessee was not approved by the Commissioner of Income‑tax, and the matter would be reviewed by taking appropriate action under section 154 of the Income‑tax Act as soon as the relevant conditions prescribed under section 40A(7) of the Income‑tax Act were satisfied. The assessee carried the matter by way of appeal to the Appellate Assistant Commissioner against the order of the Income‑tax Officer. The Appellate Assistant Commissioner upheld the disallowance made by the Income‑tax Officer on the ground that the conditions prescribed under section 40A(7) of the Income‑tax Act were not satisfied. He also held that as soon as the assessee complied with the requisite provisions, the assessee was directed to bring the same to the notice of the Income‑tax Officer who would verify the same and allow the appropriate relief.
The assessee filed an appeal before the Income‑tax Appellate Tribunal. The Appellate Tribunal found that there was an earlier deed of trust, dated August 26, 1970, which was created even before the commencement of the relevant accounting period for the assessment year 1973‑74. There was a fund under the Scheme and the fund was also in existence during the accounting period relevant for the said assessment year. One of the terms of the trust deed, clause 16 of the said trust deed provided ‑for the amendment of the trust and according to the Appellate Tribunal, by a trust deed, dated January 2, 1975, the earlier deed, dated August 26, 1970, was validly amended by passing the. necessary resolution and there were , three trustees under the trust deed, dated August, 26, 1970, and there was a valid amendment in the original trust deed as well. The Tribunal also noticed that the Commissioner of Income‑tax has granted necessary approval for the fund by his order, dated March 30, 1978, with effect from January 2, 1975. The Tribunal, therefore, held that the condition of the proper approval of the Commissioner of Income‑tax for the accounting of the trust was also satisfied. The Tribunal further held that there was a valid amendment and no fresh deed of trust came into existence. The Tribunal further noticed a fact that the assessee has made a contribution on February 13, 1973; and there was a payment to the fund. The Tribunal, therefore, came to the conclusion that the requirement of payment to the gratuity fund before January 1, 1976, required by section 40A(7)(b) of the Income‑tax Act was fully satisfied in the instant case and the Income‑tax Officer was directed to examine whether any other requirement of section 40A(7) of the Income‑tax Act was also satisfied. The Revenue has challenged this part of the order by raising the question of law referred to above.
Mr. C.V. Rajan, learned counsel for the Revenue, submitted that there was no valid amendment of trust. Mr. R. Balasubramanian, learned counsel for the assessee, submitted that subsequent to the passing of the order of the Tribunal, there was an appeal to the Central Board of Direct Taxes against the order of the Commissioner granting approval with effect from January 2, 1975, and the Central Board has rejected the appeal. The assessee company, approached this Court and this Court in the case of Carborandum Universal Ltd. v. CIT (1984) 146 ITR 1, allowed the writ petition and issued a mandamus directing the Commissioner of Income‑tax to accord approval for the gratuity fund to the assessee‑company in accordance with its application, dated October 27, 1975. He also brought to our notice the order of the Chief Commissioner of Income‑tax, Tamil‑ Nadu‑I, Madras, in No.207(59) of 1975, dated March 15, 1984, granting approval to the employees gratuity fund with effect from August 26, 1970. Normally, we would not have entertained the additional document that is sought to be produced by learned counsel for the assessee in the reference proceedings as the Tribunal did not have the opportunity of considering those document. However, the decision of this Court in Carborandum Universal Ltd. v. CIT (1984) 146 ITR 1, as well as the order of the Chief Commissioner, dated March 15, 1984, clearly show that the Commissioner has granted approval to the assessee's gratuity fund with effect from August 26, 1970, and if that is the factual position, we are of the 'view that the issue raised whether there was a valid amendment of the deed of trust has become purely academic in nature as the Commissioner has granted approval with effect from August 26, 1970. The question whether a subsequent deed, dated January 2, 1975, is a fresh deed or continuation of the old deed is not of much importance and this Court proceeded on the basis that the subsequent deed is only a continuation of the original deed, dated August 26, 1970. In view of the decision of this Court in Carborandum Universal Ltd. v. CIT (1984) 146 ITR 1 and the order of the Chief Commissioner, dated March 15, 1984, we are of the opinion that the Tribunal was correct in holding that no fresh deed came into existence by the latter deed, dated January 2, 1975, and the deed, dated August 26, 1970, has brought into existence the gratuity fund and the order of the Commissioner also establishes that the fund was in existence from August 26, 1970. The assessee, as. already seen, has made contribution on February 13, 1973, and it has to be regarded that it was a payment made to a recognised gratuity fund as provided under section 40A(7)(b) of the Income‑tax Act. Since the Appellate Tribunal has come to a correct conclusion, that the assessee has complied with the conditions of section 40A(7)(b) of the Income‑tax Act, we are of the view that the Tribunal was correct in holding that the assessee would be entitled to deduction of the provision for gratuity provided the other conditions prescribed under section 40A(7)(b) of the Income‑tax Act are satisfied. In this view of the matter, we answer the question of law referred to us at the instance of the Revenue in the affirmative and against the Revenue. However, there will be no order as to costs.
M.B.A./538/FCReference answered