Vildirect: IncomeTax-caselaws-1991-VIL-605-CAL-DT

1991-VIL-605-CAL-DT

Equivalent Citation: [1993] 199 ITR 714

CALCUTTA HIGH COURT

Date: 17.06.1991

COMMISSIONER OF INCOME-TAX

SREE KAMAKHYA TEA CO. PVT. LIMITED

BENCH

Judge(s) : SHYAMAL KUMAR SEN., AJIT KUMAR SENGUPTA

JUDGMENT

AJIT K. SENGUPTA J. -In this reference under section 256(1) of the Income-tax Act, 1961, the following questions of law have been referred to this court for the assessment year 1985-86 :

" 1. Whether, on the facts and in the circumstances of the case, as there was no full allocable surplus during the year as per the provisions of the Payment of Bonus Act, 1965, the Tribunal was correct in law in holding that the bonus payment up to 20% of salaries/wages made in pursuance of an agreement was an allowable deduction under the first proviso to section 36(1)(ii) of the Income-tax Act, 1961 ?

2. Whether the Tribunal was correct in law in holding that the bonus paid in excess of the amount permissible under the provisions of the Payment of Bonus Act was an allowable deduction under the first proviso to section 36(1)(ii) of the Income-tax Act, 1961 ?

3. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the entire contribution of Rs. 9,99,500 to the gratuity fund would be allowable as a deduction under section 43B of the Income-tax Act, 1961 ?

The first and second questions pertain to the same issue as to whether the bonus payment made exceeding 20 per cent. of the salary and wages is an allowable deduction or not under the first proviso to section 36(1)(ii) of the Income-tax Act, 1961. The brief facts relating to the aforesaid questions are stated hereafter.

There was an agreement between the assessee-company and its employees during the relevant accounting year. In accordance with the said agreement, the assessee-company paid bonus amounting to Rs. 7,25,235. It claimed the same as deduction in the computation of its total income. The Income-tax Officer examined the books of account of the assessee-company and found that the allocable surplus during the year was only Rs. 9,80,536 and that surplus was eligible for payment of bonus. In the absence of full allocable surplus, he allowed the payment of bonus as deduction at the rate of 8.33% amounting to Rs. 6,50,000 only. He disallowed the difference between Rs. 7,25,235 and Rs. 6,50,000. The assessee-company, being aggrieved by the order of the Income-tax Officer, took the dispute before the Commissioner of Income-tax (Appeals) who directed the Income-tax Officer to allow the actual payment of bonus of Rs. 7,25,235 as against Rs. 6,50,000. The Department brought the dispute before the Tribunal. The Tribunal held that, Irrespective of whether the allocable surplus was more or less, the bonus paid up to 20 per cent. inpursuance of the agreement was allowable as deduction under the first provision to section 36(1)(ii) of the Income-tax Act, 1961.

This issue came up for consideration in Income-tax Reference No. 35 of 1983 in the case of CIT v. Shaw Wallace and Co. Ltd. [1991] 190 ITR 455 (Cal), where the judgment was delivered on August 22, 1989. A similar question also came up for consideration in Income-tax Reference No. 336 of 1987 in the case of CIT v. Holman Climax Manufacturing Ltd. [1992] 196 ITR 698 (Cal), where the judgment was delivered on February 5, 1991. Following the said decisions, we answer the first and second questions in the affirmative and in favour of the assessee.

We now turn to the third question. The third question relates to allowability of contribution of Rs. 9,99,560 to the gratuity fund.

The payment of Rs. 9,99,560 was made to the gratuity fund as contribution. The said payment includes the initial as well as annual contributions. That is allowable under section 36(1)(v) of the Income-tax Act, 1961, read with rules 103 and 104 of the Income-tax Rules. The assessee-company claimed the said payment as an allowable deduction under section 43B of the Income-tax Act irrespective of the year to which the liability related. It was also contended that the provisions of section 40A(7)of the Act had no application as it was an actual payment and not provision. The Income-tax Officer did not accept the submissions on behalf of the assessee-company. He found that the assessee-company's initial contribution was made in five instalments of Rs. 80,000 on December 9,1978, February 21, 1979, March 5, 1979, March 31, 1979, and October 10,1979. The Income-tax Officer held that there was no question of making payment of initial contribution.

The Income-tax Officer expressed his opinion that section 43B was not a section which dealt with the computation of business income. According to him, the provisions of sections 30 to 43A governed such payment. In his opinion, certain deductions are to be made only on actual payment under section 43B of the Act. In his opinion, the provisions of section 43B of the Act would not permit any relief to the assessee-company regarding the admissibility of deduction from its business income. He also refuted the assessee-company's claim for deduction under section 36(1)(v) of the Act of the entire amount of Rs. 9,99,560. He held that the assessee-company's liability towards the approved gratuity fund for the year under consideration would work out to Rs. 2,58,202 only and he allowed the same as deduction.

The assessee-company, being aggrieved by the order of the Income-tax Officer, took the dispute before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) considered the assessee-company's claim and held that the Income-tax Officer erred in presuming that section 43B had no nexus with the computation of the assessee's business income and the same stood independent of sections 28 and 29 of the Act. He has also held that the Income-tax Officer erred in overlooking the importance and significance of section 43B. According to him, section 43B itself makes a reference to the computation of income under section 26 of the Act. As per that section, any sum payable should be allowed as a deduction only in the year of payment. In his opinion, the Income-tax Officer erred in presuming that the gratuity liability for the year ending March 31, 1985, represented the annual contribution to be made by the assessee-company to the approved gratuity fund for the previous year and also that the Income-tax Officer was not justified in estimating the liability payable for the year ending March 31, 1985. In the opinion of the Commissioner Of Income-tax (Appeals ), section 43B provided for the allowance of deduction of actual payment made in the relevant accounting year irrespective of the previous year in which the liability to pay was incurred. Therefore, the Commissioner of Income-tax (Appeals) directed the Income-tax Officer to allow deduction of Rs. 9,99,560 as against the deduction of Rs. 2,58,202 allowed in the assessment order.

The Revenue, being aggrieved by the order of the Commissioner of Income-tax (Appeals), brought the dispute before the Tribunal. The Tribunal heard both the parties and upheld the order of the Commissioner of Income-tax (Appeals).

Under section 36(1)(v), deduction is allowed in respect of any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund, as defined in section 2(5) of the Act, created by the employer for the exclusive benefit of his employees under an irrevocable trust. After the insertion of section 40A(7), for claiming deduction for gratuity payment, the assessee was required to fulfil the conditions laid down in section 40A(7) and, without fulfilling the conditions laid down therein, no assessee was entitled to deduction under section 36(1)(v). This has undergone a change after the insertion of section 43B for and from the assessment year 1984-85. The provisions of section 43B(b) are relevant and apposite in the context of the provisions of section 36(1)(v). Section 43B has overriding effect over the provisions of section 40A(7). Under the provisions of section 43B, a deduction in respect of any sum payable by the assessee as an employer by way of contribution, inter alia, to a gratuity fund is to be allowed in computing the business income of that previous year in which such sum has been actually paid by him. There is no dispute in this case that the assessee made a payment of a sum of Rs. 9,99,560 on March 27, 1985. It is also admitted that, in respect of this amount, no deduction was claimed or allowed in any past assessment year. Accordingly, this deduction was claimed in this year. In our view, section 43B permits a deduction in respect of any payment by way of contribution to a provident fund or superannuation fund or any other fund for the welfare of employees in the year in which the liability is actually discharged. We may, however, add that clause (va) has been inserted in sub-section (1) of section 36 by the Finance Act, 1987. The effect of the amendment is that no deduction will be allowed in the assessment of the employer unless such contribution is paid to the fund on or before the due date. The due date in the context means the date by which an employer is required to credit the contribution to the employees' account under the provisions of any law or the terms of the contract of service or otherwise. If such contribution is not credited by the employer in the account of the employees in the relevant fund by the due date, it will be assessed as the income of the employer. This amendment, however, has been made effective from the assessment year 1988-89.

For the reasons aforesaid, we answer the third question in the affirmative and in favour of the assessee.

There will be no order as to costs.

SHYAMAL KUMAR SEN J. -I agree.

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