1987-VIL-486-KER-DT
Equivalent Citation: [1987] 167 ITR 32, 65 CTR 136, 34 TAXMANN 293
KERALA HIGH COURT
Date: 20.03.1987
COMMISSIONER OF INCOME-TAX
Vs
PERIYA KARAMALAI TEA AND PRODUCE CO. LIMITED
BENCH
Judge(s) : K. P. RADHAKRISHNA MENON., T. KOCHU THOMMEN
JUDGMENT
The judgment of the court was delivered by
T.KOCHU THOMMEN J.-The following question has been, at the instance of the Revenue, referred to us by the Income-tax Appellate Tribunal, Cochin Bench:
"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in finding that the assessee is eligible under section 40A(7)(b)(ii) for the deduction of the provision for gratuity of sum: of Rs. 11,96,413 representing the annual incremental liability to gratuity according to the actuarial valuation for the years ended March 31, 1973, March 31, 1974, and March 31, 1975, in the assessment for the assessment year 1975-76 ? "
For the assessment year 1975-76 relevant to the accounting year ending March 31, 1975, the assessee claimed deduction of Rs. 32,16,950 as provision for gratuity. The assessee admitted before the Income-tax Officer that the provision was made towards the liability which arose prior to March 31, 1974. Since the provision was thus not relevant to the liability which arose in the accounting year relevant to the assessment year 1975-76, the Income-tax Officer disallowed the claim. This is what he has stated at page 3 of the paper book :
" Gratuity Provision.-The assessee has claimed Rs. 32,16,950 as gratuity provision. It was stated at the time of hearing before me that the provision created in this year represents the gratuity Provision as on March 31, 1974. The liability in respect Of the Current year (ending March 31, 1975) has not been debited in the accounts for this year, but was debited to the accounts of the subsequent year. The provision of Rs. 32,96,950 will be disallowed as it does not relate to the accounting year relevant to this assessment year. The assessee is not entitled to any deduction under section 40A(7)(b)(ii) as the conditions prescribed under this section are not satisfied. " (emphasis supplied)
The Inspecting Assistant Commissioner to whom the order of the Income-tax Officer was referred under section 144B also observed as follows :
". ...... Again, as pointed out by me earlier, the provision relates to the period ended March 31, 1974, and as it does not relate to the relevant accounting year, the claim is rightly disallowed. "
This order was confirmed by the Commissioner of Income-tax (Appeals). On further appeal by the assessee, the Tribunal in principle confirmed the finding of the Commissioner (Appeals) that the assessee was not entitled to claim any deduction for the year 1973-74 onwards without making a provision in the accounting years relevant to the respective assessment years. Nevertheless, the Tribunal held that the assessee was entitled to deduction of a sum of Rs. 11,96,413 representing what the Tribunal refers to as " incremental liability to gratuity " for the years ending March 31, 1,973, March 31, 1974, and March 31, 1975. The Tribunal held that the assessee complied with the provisions of section 40A(7) to the extent of the " incremental liability " for the said years in the sum of Rs. 11,96,413. The Tribunal stated:
". ...... The assessee has created the gratuity fund, the fund has been approved by the Commissioner of Income-tax and the provision has been made in the accounts for the year ended March 31, 1975, to the extent of Rs. 32,16,950. The amounts of Rs. 9,60 lakhs and Rs. 2,36,413 have also been paid to the gratuity fund on March 30, 1976, and March 30, 1977 ...... .."
The Tribunal overlooked the fact that the assessee had not made any provision towards the liability for gratuity which arose in the accounting year relevant to the assessment year 1975-76. The assessee did not make any provision for gratuity during any one of the accounting years relevant to the assessment years 1973-74 to 1975-76 towards liability which arose during those accounting years. Furthermore, the Tribunal considered section 40A(7)(b)(ii) of the Income-tax Act, 1961 (the " Act "), without taking into account an important part of that provision contained in Explanation I which speaks of " admissible amounts"
As stated by us in CIT v. G. T. N. Textiles Ltd. [1985] 155 ITR 5 (Ker), in order to allow a claim under section 40A(7)(b)(ii), a provision should have been made in the relevant accounting year in relation to the liability which arose in that year. In the present case, it was not so done. The Tribunal, therefore, wrongly found that the assessee had made a provision in accordance with the requirements of the law. The Tribunal misunderstood the scope of the sub-section when it stated that provision had been made towards an " incremental liability " and that the assessee having paid the said sum into an approved gratuity fund was entitled to claim deduction in respect of that sum.
No provision was made in respect of the " incremental liability " of the relevant accounting year merely because Rs. 11,96,413 was a component of Rs. 32,16,950 for which provision was made in the accounting year ending March 31, 1975, in respect of the liability which arose prior to March 31, 1974. All this apart, what is more fundamental is that the Tribunal wrongly in our view, thought that an " incremental liability" was a concept germane to section 40A(7)(b)(ii) and that an allowance could be claimed under that caption for amounts in excess of the " admissible amounts " defined under Explanation I to section 40A(7)(b)(ii) of the Act. The Tribunal allowed the claim up to Rs. 11,96,413 on the misconception that what was in excess of the 8 1/3 ,per cent. permissible under section 40A(7)(b)(ii) could be allowed de hors the section by calling it an " incremental liability ". This was clearly wrong, for the section does not permit it. No other provision of the Act has been brought to our notice permitting it either. In the circumstances, for the reasons stated above, we are of the view that the Tribunal wrongly allowed the claim for deduction towards gratuity to the extent of Rs. 11,96,413. The question referred is accordingly answered in the negative, that is, in favour of the Revenue and against the assessee.
For the reasons stated above, we dismiss 0. P. No. 5281 of 1983 which is a petition for reference of a question which, in our view, we have already answered in this case.
We direct the parties to bear their respective costs in this tax referred case.
A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.
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