COMMISSIONER OF INCOME-TAX VS ORIENT PHARMA (P.) LTD.
2001 P T D 1672
[241 I T R 259]
[Madras High Court (India)]
Before R. Jayasimha Babu and Mrs. A. Subbulakshmy, JJ
COMMISSIONER OF INCOME‑TAX
versus
ORIENT PHARMA (P.) LTD.
Tax Case No. 1748 of 1986 (Reference No. 1181 of 1986), decided on 12/02/1999.
Income‑tax‑‑‑
‑‑‑‑Businessexpenditure‑‑‑Disallowance‑‑‑Gratuity‑‑‑Conditionsfor allowance of provision for gratuity‑‑=Scope of S.40A(7)‑‑‑No approved gratuity fund created in relevant previous year‑‑‑No amount paid as gratuity during financial year‑‑‑Deduction claimed not allowable‑‑‑Indian Income Tax Act, 1961, S.40A(7)(b)(ii).
Section 40A(7)(a) of the Income Tax Act, 1961, was inserted by the Finance Act, 1975, with effect from April 1, 1973. Section 40A(1) of the Act provides that the provisions of that 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". Under section 40A(7)(b)(i) of the Act; deduction can be claimed by the, assessee only for the amount for which provision is made in its account for the purposes of payment by way of contribution towards an approved gratuity fund, or for the provision made in the accounts for the purpose of payment of gratuity that is payable during the previous year.
The assessee made a provision of Rs.84,849 during the financial year which ended on May 31, 1975, towards the liability for payment of gratuity to its employees. The amount was not disbursed to the employees towards the gratuity that was payable during that year. The assessee set up a gratuity fund by trust deed, dated December 28, 1975, after the closure of the financial year and secured the approval of the Commissioner of Income tax for the trust on July 25, 1977. The Income‑tax Officer allowed the deduction that was claimed by the assessee with regard to the said sum. The Commissioner of Income‑tax in suo motu revision disallowed the same. The Tribunal held that it was allowable. On a reference:
Held, that admittedly during the financial year 1974‑75, the assessee had not created any approved gratuity fund and the provision made for payment of gratuity was, therefore, not a provision made for the purpose of payment of that sum as contribution to an approved gratuity fund. It was not a sum which had become payable during the previous year. Admittedly, no part of this amount was paid as gratuity during that financial year. The requirements of section 40A(7)(b) were not satisfied in this case and the Commissioner of Income‑tax had rightly directed the Income‑tax Officer to disallow the deduction that had been claimed.
Premier Cable Co. Ltd. v. CIT (1992) 193 ITR 719 (Ker.) ref.
C.V. Rajan for the Commissioner.
P.P.S. Janarthana Raja for the Assessee.
JUDGMENT
R. JAYASIMHA BABU, J.‑‑‑The admitted facts are tat, f the assessee made a provision of Rs.84,849 during the assessee's financial year which ended on May 31, 1975, towards the liability for payment of gratuity to its employees. The amount was not disbursed to the employees towards the gratuity that was payable during that year. The assessee set up a gratuity fund by trust deed, dated December 28, 1975, after the closure of the financial year and secured the approval of the Commissioner of Income‑tax for the trust on July 25, 1977. The Income‑tax Officer allowed the deduction that was claimed by the assessee with regard to the said sum. The Commissioner of Income‑tax on a suo motu revision held that such a deduction was impermissible having regard to section 40A(7)(a) of the Income Tax Act, 1961, which had been inserted by the Finance Act, 1975, with effect from April 1, 1973. The Tribunal while disagreeing with the Commissioner's view has restored the order of the Income‑tax Officer.
Counsel for the Revenue rightly submitted that having regard to the explicit language of section 40A, subsection (1) and section 40(7)(a), the Tribunal was clearly in error in allowing. the deduction claimed by the assessee. Section 40A(1) of the Act provides that the provisions of that 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". Section 40A(7)(a) of the Act, is relevant for the purpose of this case. That provision reads as under:
"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. "
It was contended for the assessee that having regard to section 40A(7)(b)(i) of the Act, the assessee can claim exemption from the rigour of section 40A(7)(a) of the Act. The provision, viz., section 40A(7)(b)(i) of the Act referred to and relied on by the assessee reads thus:
"any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year..."
The assessment year with which we are concerned is 1976‑77, to which the special provision contained in section 40A(7)(b)(ii) of the Act has ‑no application and it is, therefore, unnecessary to consider that provision for the purpose of deciding the assessee's entitlement to deduct the provision made by it in its account for the financial year 1974‑75.
During the financial year 1974‑75, the assessee had not created any approved gratuity fund and the provision made for payment of gratuity was, therefore, not a provision made for the purpose of payment of that sum as contribution to an approved gratuity fund. It was not a sum which had become payable during the previous year. Admittedly, no part of this amount was paid as gratuity during that financial year.
Under section 40A(7)(b)(i) of the Act deduction can be claimed by the assessee only of the amount for which provision is made in its account for the purpose of payment by ‑ way of contribution towards an approved, gratuity fund, or of the provision made in the accounts for the purpose of payment of gratuity that is payable during the previous year. The requirements of this provision are not satisfied in this case and the `Commissioner of Income‑tax had rightly directed the Income‑tax Officer to disallow the deduction that had been claimed.
Learned counsel for the Revenue brought to our notice a decision of a Division Bench of the Kerala High Court in Premier Cable Co. Ltd. v. CIT (1992) 193 ITR 719, wherein a similar view has been taken with regard to the applicability of section 40tk(7)(b)(i) of the Act.
The questions referred to us are, therefore, answered in favour of the Revenue and against the assessee. .
M.B.A./535/FCReference answered