D.b. Income Tax Reference v. Maharaja Shree Umaid Mills Ltd., Jaipur

DB ITR-24/1986 DB ITR-8/2003 DB ITR 1/2005 1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHANBENCH AT JAIPUR *** (1)D.B. Income Tax Reference No.24/1986The Commissioner of Income-tax, Jaipur Vs. Maharaja Shree Umaid Mills Ltd., Jaipur. (2)D.B. Income Tax Reference No.8/2003The Commissioner of Income-tax, JaipurVs. M/s. Maharaja Shree Umaid Mills Ltd., Pali Marwar(3)D.B. Income Tax Reference No.1/2005The Commissioner of Income-tax, Jaipur Vs.M/s. Maharaja Shree Umaid Mills Ltd., Pali (Marwar) Judgment reserved on 05/03/2014 Judgment pronounced on 9th April, 2014. PRESENTHON'BLE MR. JUSTICE AJAY RASTOGI HON'BLE MR. JUSTICE J. K. RANKA *** Mr. Anuroop Singhi, Advocate withMr. Saurabh Jain, for the petitioner/s. Mr. Sanjay Jhanwar, Advocate, for the respondent (Per Hon'ble Ranka, J.). 1.These three Income Tax References, in between thesame parties, being interconnected and arising out of the one single assessment year 1973-74, are being decided by thiscommon order for the sake of convenience. 2.The questions in all the three references No.24/1986,8/2003 & 1/2005 are reproduced here as under:- -Questions in DB ITR No.24/1986: “(1)Whether the Tribunal was justified in holdingthat the AAC was competent to decide the appealof the assessee against the original order ofassessment dated 11.3.74 even after that orderhad been set-aside for being made afresh by theCIT's order u/s 263 dated 19.2.1975 ? (2)Whether the Tribunal was justified in holdingthat the assessee was entitled to deduction u/s40A(7) of the I.T.Act in respect of provision forgratuity pertained to earlier years but wasprovided in the accounts in the year relevant toassessment year 1973-74.” - Questions in DB ITR No.8/2003: “(1)Whether on the facts and circumstances ofthe case the Tribunal was justified in holding thatthe AAC was competent to decide the appeal ofthe assessee against the original order ofassessment dated 11.3.1974, even though thesame has been set aside under Sec. 263 of theI.T. Act, 1961 for making the fresh assessment ?(2)Whether on the facts and the circumstances ofthe case the Tribunal was justified in holding thatthe assessee was entitled to deduction undersection 40A(7) of the Act in respect of theprovisions for granting liability amounting toRs.35,40,328/- which pertains to earlier yearswas provided in the accounts in the relevantyears ? (3)Whether on the facts and the circumstances ofthe case the Tribunal was justified in holding thatthe assessee was entitled to deduction underSection 40A(7) of the I.T. Act 1961 in respect ofthe full amount of provision for gratuity liabilityamounting to Rs.51,18,074/- standing in theaccounts of the assessee as on the last day ofthe relevant accounting year out of which anamount of Rs.48,17,760/- only had beenprovided during the relevant accounting year andhad been claimed in the return of income, thebalance having been provided in the precedingaccounting year. ? (4)Whether on the facts and the circumstances ofthe case the Tribunal was justified in holding thatthe AAC was right in allowing the deduction ofRs.38,844/- representing the accrued gratuityliability in respect of temporary workers whichhad neither been provided in the accounts byway of provision nor claimed before the ITO ?(5)Whether on the facts and the circumstances ofthe case the Tribunal was justified in holding thatthe AAC was right in allowing the deduction forRs.`12,843/- representing the gratuity actuallypaid during the year, which had not beendisallowed by the ITO in the assessment year atall. ” -Questions in DB ITR No.1/2005: “Whether on facts and in the circumstances of DB ITR-24/1986DB ITR-8/2003 DB ITR 1/2005 4 the case, the Tribunal was justified in upholding -Questions in DB ITR No.1/2005: “Whether on facts and in the circumstances of DB ITR-24/1986DB ITR-8/2003 DB ITR 1/2005 4 the case, the Tribunal was justified in upholding the order of the AAC allowing extra claim ofRs.1,28,622/- on account of gratuity liability in the year under consideration?” 3.Though by three references, the matter has been referred to this Court for answering the questions as aforesaidbut in our view, the question revolves as to claim made by theassessee about an amount of Rs.48,19,425/- which was theliability for gratuity as the assessee maintains books of accounton mercantile basis. It made provision in view of the “Paymentof Gratuity Act, 1972” which came into force w.e.f. 15/09/1972and during the course of disposal of the appeals, Section 40A(7) was brought in by the Finance Act, 1975 with retrospectiveeffect from 01/04/1973. Out of Rs.48,19,425/- it was claimedby the assessee that Rs.12,77,432/- pertained to gratuityliability of the previous year relevant to the assessment year1973-74 while the claim of liability to the extent ofRs.35,41,993/- was a provision made of the past liability as perPayment of Gratuity Act, 1972 and later on as per Section 40A(7) effective from 01/04/1973. The Assessing Officer (for short,'AO') vide order dt. 11/03/1974 allowed an amount ofRs.12,77,432/- but disallowed and added back the amount ofRs.35,41,993/- by holding that since it was a provision only, relatable to earlier years and thus not allowable. 4.Aggrieved by the said dis-allowance, an appeal came to be preferred before the Appellate Assistant Commissionerwhere the assessee challenged the order whereby the saidamount of Rs.35,41,993/- was disallowed. The AppellateAssistant Commissioner passed order on 26/04/1978 which willbe adverted a little later. 5.The Commissioner of Income Tax-2, Jaipur, in themeanwhile, by invoking provisions of Sec. 263 at his commandvide order dt. 19/02/1975, after analyzing the facts andcircumstances, set aside the order of the AO passed on11/03/1974 after holding the same to be erroneous insofar asit was prejudicial to the interest of the revenue and directed formaking a fresh assessment. 6.The assessee aggrieved by the said order filed an appeal before the Tribunal challenging the order u/s 263 of the Act.The Tribunal vide order dt. 16/10/1976 in ITA No.73/JP/75-76sustained the order passed by the Commissioner u/s 263 of theAct. 7.The AO initiated proceedings again u/s 143(3) in the lightof the order of the Commissioner u/s 263 dt. 19/02/1975wherein he allowed a deduction of Rs.11,48,810/- only u/s 40A(7) by coming to a conclusion that as per actuarial valuation made by the actuary, the liability of the assessee for thefinancial year relevant to the assessment year 1973-74 amounted to Rs.11,48,810/- and the assessee havingdeposited the said amount before 31/03/1977 in the gratuityfund, was entitled to the claim and thus allowed Rs.11,48,810/-but disallowed the amount of Rs.1,28,622/-. 8.The Appellate Assistant Commissioner before whom an appeal was filed assailing the order passed by the Income taxOfficer on 11/03/1974 wherein gratuity was disallowed to theextent of Rs.35,41,993/- was challenged and by then theamended provision of Sec. 40A(7) having been introduced bythe Finance Act, 1975, decided the appeal on 26/04/1978 inthe light of the newly inserted Sec. 40A(7) and observed thatthe claim could be allowed if the following conditions weresatisfied:- “(a)The liability has accrued during this year. (b)The liability is ascertained through actuarial valuation. (c)A provision is being made, and (d)An irrevocable trust fund has been made for the purpose of payment of gratuity and the same is recognized by theCommissioner of Income-tax, and payment has been made tothe said fund as stipulated in the Section.” 9.He held that all the aforesaid conditions had been fulfilled “(a)The liability has accrued during this year. (b)The liability is ascertained through actuarial valuation. (c)A provision is being made, and (d)An irrevocable trust fund has been made for the purpose of payment of gratuity and the same is recognized by theCommissioner of Income-tax, and payment has been made tothe said fund as stipulated in the Section.” 9.He held that all the aforesaid conditions had been fulfilled DB ITR-24/1986DB ITR-8/2003DB ITR 1/2005 by the assessee and accordingly directed to allow the entireamount of gratuity of Rs.48,17,760/-. 10.Both the revenue as well as the assessee, beingaggrieved by the aforesaid order, challenged the matter inappeal before the Tribunal. While the revenue challenged thededuction/allowance of Rs.48,17,760/-, the assesseechallenged on some points where the Appellate AssistantCommissioner had not decided the issues on merits. 11.The Tribunal, in the order dt. 29/09/1979 in ITANo.325/JP/78-79 and ITA 466/JP/78-79 came to a categoricalfinding that (1) trust fund has been set up by the assessee; (2)the said trust fund has been recognized by the Commissionerof Income Tax and (3) even the payment as stipulated underthe provisions of Sec. 40A(7) has been made of the said fundand the assessee having complied with all the requirements asprovided u/s 40A(7) of the Act read with Gratuity Act, 1972came to the conclusion that liability being statutory, the wholeamount towards payment of gratuity which fell due becamepayable and therefore, it was proper on the part of theassessee to have made a provision and accordingly upheld theorder passed by the Appellate Assistant Commissioner wherehe allowed the claim of Rs.Rs.48,17,760/-. 12.An order came to be passed by the Commissioner of Income Tax (Appeals) dt. 28/03/1980 for this very assessmentyear 1973-74 where the assessee challenged the disallowance of Rs.1,28,622/- and according to the assessee, while he wasentitled to a claim of Rs.12,77,432/- but the AO allowed onlyan amount of Rs.11,48,810/-. By this order, the Commissioner(Appeals) further allowed the balance amount of Rs.1,28,622/-.The revenue carried the matter in further appeal before theTribunal with reference to the aforesaid amount ofRs.1,28,622/-, however, the Tribunal vide order dt.21/05/1981dismissed the appeal of the revenue and upheld the order ofthe Commissioner (Appeals). 13.Thus, on an application moved by the revenue, theTribunal has referred different questions of law to be answeredby this Court and the controversy as aforesaid revolves solelyon the amount of Rs.48,17,760/-. 14.Counsel for the revenue contended that in the appealpreferred by the assessee u/s 263 of the Act before theTribunal, the Tribunal passed an order dt. 16/10/1976 observing as under:- “We have carefully examined the rival submissions.The grievance of the assessee that Commissioner of Income-tax was wrong in initiating theproceedings under section 263 against it is, in ouropinion, not justified in view of the amendment to 13.Thus, on an application moved by the revenue, theTribunal has referred different questions of law to be answeredby this Court and the controversy as aforesaid revolves solelyon the amount of Rs.48,17,760/-. 14.Counsel for the revenue contended that in the appealpreferred by the assessee u/s 263 of the Act before theTribunal, the Tribunal passed an order dt. 16/10/1976 observing as under:- “We have carefully examined the rival submissions.The grievance of the assessee that Commissioner of Income-tax was wrong in initiating theproceedings under section 263 against it is, in ouropinion, not justified in view of the amendment to the Income-tax Act, 1961 brought about by theFinance Act, 1975, which introduced sub-section(7) of section 40A of the Income-tax Act, 1961 withretrospective effect from 01.04.1973. Due to theaforesaid retrospectivity of the Act, we will have toproceed on the assumption that the law has allalong since 01.04.1973 what is been in accordancewith the provisions of sub-section (7) of Section40A. It prohibits any allowance for gratuity unless itis by way of contribution to approved gratuity fund,and in as much as, such approved gratuity fund didnot exist during the accounting periodcorresponding to assessment year 1973-74, theallowance of Rs.12,77,432/- made by the Income-tax Officer on account of provision for gratuity waspatently wrong and prejudicial to the interest ofrevenue. Commissioner's order, therefore, directingthe Income-tax Officer to reconsider this matterdenovo in accordance with law is correct and werefuse to interfere with this part of his order.” 15.He contended that when the Tribunal had affirmed theorder of the Commissioner u/s 263, then, in so far as theamount of Rs.12,77,432/-, which was originally allowed by theAO, is concerned, should not have been deleted by theTribunal or by the CIT(A) in the subsequent proceedings andfurther contended that the ld. Commissioner in its order u/s263 dt. 19/02/1975 had set aside the assessment to make a fresh assessment in accordance with law and keeping in view the observations made. Therefore, it was wide open and available with the AO to consider the matter afresh as awhole. He further contended that against the order passed bythe AO, wherein the amount of Rs.35,41,993/- was disallowed,an appeal came to be filed before the Appellate AssessmentCommissioner who, despite of the order of the Tribunal havingbeen passed earlier, by deciding the appeal on 26/04/1978,deleted the entire addition of Rs.48,17,760/- which perse wasillegal as the Appellate Assistant Commissioner was ceased ofthe matter only relating to a disallowance to the extent ofRs.35,41,993/- and not Rs.48,17,760/- which he came toallow. He further contended that in the order dt.29/09/1979,though the Tribunal affirmed the order of the CIT(A) who haddeleted the entire addition of Rs.48,17,760/- without lookinginto the facts that the issue before the Commissioner was onlyto the extent of Rs.35,41,993/- but the Tribunal also went onto consider the entire amount of Rs.48,17,760/-. He furthercontended that the Appellate Assistant Commissioner, whilepassing order on 26/04/1978, had no occasion to sit over theorder of the Commissioner u/s 263 a higher authority as alsothe Tribunal who had passed order by then sustaining orderu/s 263. He further contended that the Appellate Assistant DB ITR-24/1986DB ITR-8/2003DB ITR 1/2005 11 Commissioner, being a subordinate authority to theCommissioner u/s 263 of the Act, ought to have followed the DB ITR-24/1986DB ITR-8/2003DB ITR 1/2005 11 Commissioner, being a subordinate authority to theCommissioner u/s 263 of the Act, ought to have followed the directions of the Commissioner u/s 263. He further contendedthat the Tribunal not only in the order dt. 29/09/1979 allowedthe entire amount of Rs.48,17,760 but also allowed the balanceamount which was not even allowable under the provisions ofthe Gratuity Act, 1972 in order dt. 21/05/1981 so also the laterorder dt.06/01/1986. He further contended that though theGratuity, actually relating/pertaining to a particular assessmentyear, may be allowable but not the provision made by theassessee for Rs.35,41,993/- was not proper and therefore, theAO had rightly disallowed the same. He further contended thatprior to insertion of Sec. 40A(7), the assessees were entitled toclaim deduction of actual gratuity paid/payable u/s 37(1) of theAct and the assessee must have been claiming the same overthe years and by making a provision of Rs.35,41,993/-, itcannot be said that it pertained to the earlier years when theassessee, being a limited company, certainly must have beenclaiming gratuity on year to year basis under the provisions ofSec. 37(1). However, he conceded that the revenue is unableto place any material on record as to whether what amountswere being claimed by the assessee over the years and stoodallowed u/s 37(1) of the Act. DB ITR-24/1986DB ITR-8/2003DB ITR 1/2005 12 16.He further contended that the claim made by theassessee being unjust, questions of law deserve to beanswered in favour of the revenue and against the assessee.Counsel for the revenue relied upon judgment of AllahabadHigh Court, in the case of Ramesh Beekay & Co. Vs. CIT,reported in (1994) 72 Taxman 71 (All). 17.Per-contra, ld. counsel for the assessee submitted that inthe assessment order dt. 11/03/1974, which was passed by theAO initially, had specifically disallowed an amount ofRs.35,41,993/- and even the AO was satisfied about the claimof Rs.12,77,432/- which he allowed. He contended that againstdisallowance of Rs.35,41,993/-, the assessee preferred anappeal before the Appellate Assistant Commissioner and thesame came to be disposed of on 26/04/1978 and by that timeSec. 40A(7) came to be inserted w.e.f. 01/04/1973. Hecontended that all the aforesaid conditions stood fulfilled bythe assessee. The Appellate Assistant Commissioner as also theTribunal holding that the aforesaid conditions has beenfulfilled, went on to decide the matter on merits and once theclaim has been allowed on merits, then the submission ofcounsel for the revenue about upholding of order under Sec.263 and other legal submissions, looses its significance. 18.It has been further contended that even the AO, in an 13 order passed on 29/08/1977 in pursuance to the order of theCommissioner of Income Tax u/s 263, even allowed gratuity tothe extent of Rs.11,48,810/- and when the AO was satisfieddespite of the order u/s 263, then the order was fair andreasonable. Counsel for the assessee further contended thatthe Tribunal, in all the three orders, has repeatedly held infavour of the assessee after recording finding of fact on merits.He also relied upon judgments rendered in the case of MetalBox Company of India Ltd. Vs. Their Workmen; (1969) 73 ITR53 (SC); Shree Sajjan Mills Ltd. Vs. CIT & Anr. (1985) 156 ITR585 (SC); CIT Vs. Kelvinator of India Ltd. (1994) 210 ITR 933(Del); CIT Vs. Sri Krishna Tiles and Poteries Madras (P) Ltd.;(2000) 243 ITR 870 (Mad.). 19.Counsel for the assessee further submitted that a circularhas been issued by the Central Board of Direct Taxes dt.21/09/1970, bearing Circular No.47, reported in (1978) ITR (ST) 13 which clarified certain doubts. 20.We have considered the arguments advanced by ld.counsel for the parties and perused the impugned orders asalso the judgments cited at the bar. 19.Counsel for the assessee further submitted that a circularhas been issued by the Central Board of Direct Taxes dt.21/09/1970, bearing Circular No.47, reported in (1978) ITR (ST) 13 which clarified certain doubts. 20.We have considered the arguments advanced by ld.counsel for the parties and perused the impugned orders asalso the judgments cited at the bar. 21.As has been stated herein above, the assessee is alimited company. By virtue of the Gratuity Act of 1972, gratuitywas deductible in three cases (i) where it is paid or has DB ITR-24/1986DB ITR-8/2003DB ITR 1/2005 14 become payable during the accounting year; (ii) where acontribution is made towards an approved gratuity fund orprovision is made for such contribution and (iii) where acontribution is made towards an unapproved gratuity fund andunder a trust. At the time of furnishing of the return of incomeby the assessee herein i.e. 16/08/1973, the assessee madeprovision of the Gratuity in accordance with the Gratuity Act,1972 and a claim was made to the tune of Rs.48,19,425/-.However, the AO allowed claim to the assessee only to theextent of Rs.12,77,432/- which was actually paid /payable bythe assessee relating to year under consideration. 22.As pointed out herein above, the Commissioner, whileinvoking Section 263, was of the opinion that the claim allowedby the AO to the extent of Rs.12,77,432/- was not proper, byholding that admittedly by that time the assessee did not havethe gratuity fund nor did it apply to the Commissioner ofIncome Tax for approval in terms of Section 36(1)(v) of the ITAct and accordingly set aside the order of the AO framed on11/08/1974 and directed to make a fresh assessment. It maybe pointed out that when the CIT passed order u/s 263 on19/02/1975 provisions of Section 40A(7) had not beenintroduced.This was challenged by the assessee beforethe Tribunal which also upheld the order u/s 263 passed by the DB ITR-24/1986DB ITR-8/2003 DB ITR 1/2005 15 Commissioner by order dt. 16/10/1976 by observing asreferred to supra. 23.The AO while passing order in pursuance to the order of CIT was of the view that the assessee is entitled to a deductionof Rs.11,48,810/- u/s 40A(7) the AO allowed accordingly. Inthe meanwhile, the Appellate Assistant Commissioner beforewhom an appeal was preferred by the assessee against thedisallowance of Gratuity to the extent of Rs.35,41,993/-, cameup for consideration and the Appellate Assistant Commissionercame to the conclusion that the assessee is entitled todeduction of entire amount of Rs.48,17,760/- which was theclaim originally made and he decided the issue in view of thenewly inserted Sec. 40A(7) of the IT Act. The relevant portionof the order is reproduced here under:- “Having regarding to the facts mentioned by thelearned counsel, I am inclined to agree with him.In my opinion, all the terms and conditions mentioned for allowing the provision of gratuityas per provisions of Sec. 40A(7) are fulfilled inthe case of the appellant company. Accordingly,the appellant company is entitled to deduction offull amount of Rs.48,17,760/-. The Income-taxOfficer is hereby directed to allow the relief tothe appellant accordingly.” The Tribunal by order dt. 29/09/1979 dismissed the departmental appeal by observing that the assessee wasperfectly justified in claiming the deduction to the extent of Rs.48,17,760/- The Tribunal was satisfied that the assesseehas complied with all the terms and conditions laid down u/s40A(7) of the IT Act. 25.In the light of the above factual backdrop, the issue boilsdown to the claim of the assessee to the extent ofRs.48,17,760/- 26.We will advert to the question No.2 in DB Income TaxReference No.24/1986. 27.While introducing Section 40A(7) by the Finance Act,1975, an explanatory provision came to be issued which readsas under:- The Tribunal by order dt. 29/09/1979 dismissed the departmental appeal by observing that the assessee wasperfectly justified in claiming the deduction to the extent of Rs.48,17,760/- The Tribunal was satisfied that the assesseehas complied with all the terms and conditions laid down u/s40A(7) of the IT Act. 25.In the light of the above factual backdrop, the issue boilsdown to the claim of the assessee to the extent ofRs.48,17,760/- 26.We will advert to the question No.2 in DB Income TaxReference No.24/1986. 27.While introducing Section 40A(7) by the Finance Act,1975, an explanatory provision came to be issued which readsas under:- “28. With a view to mitigating hardship in caseswhere the provisions have been made by theassessees in their accounts for the previous yearsrelevant to the assessment years 1973-74 to1975-76 on the basis of their understanding ofthe law and the clarification given by the Board in1970, the new section 40A(7) has made asavings provision. Under this provision theprohibition regarding allowance of provisions forgratuity will not apply in relation to such amountof the provision as does not exceed an amountcalculated at the rate of 8 ½ per cent of thesalary as defined in rule 2(h) of Part A of the DB ITR-24/1986DB ITR-8/2003DB ITR 1/2005 Fourth Schedule of each employee entitled to thepayment of gratuity for each year of service inrespect of which the provision is made, if certainconditions are fulfilled. These conditions are asfollows: (i)The provision in the accounts for the relevantprevious year is made in accordance with anactuarial valuation of the ascertainable liability ofthe assessee for payment of gratuity to hisemployees on their retirement or on terminationof their employment for any reason. (ii)The assessee sets up a gratuity fund for theexclusive benefit of his employees under anirrevocable trust before 1 January, 1976 and filesan application to the Commissioner for theapproval thereof before that date. (iii)A sum equal to at least 50 per cent of theadmissible amount (i.e. an amount calculated atthe rate of 8 ½ per cent of the salary of eachemployee entitled to the payment of gratuity foreach year of service in respect of which theprovision is made) is paid by the assessee by wayof contribution to the approved gratuity fundbefore 1[st] April, 1976 and the balance of theadmissible amount is so paid before 1 April,1977. Where any amount has been utilized out ofthe provision made in any previous year for thepurpose of the payment of any gratuity beforethe creation of the approved gratuity fund, theamount to be paid to the approved gratuity fund DB ITR-24/1986DB ITR-8/2003DB ITR 1/2005 will be calculated with reference to the admissibleamount as reduced by the actual payment madebefore the date of creation of the approvedgratuity fund. 29. For the removal of doubts, it has beenspecifcially provided that where any provisionmade by the assessee in his accounts for thepayment of gratuity to his employees has beenallowed as a deduction in any previous year, anysum paid out of such provision by way ofcontribution to an approved gratuity fund or byway of gratuity to any employee will not beallowed as a deduction in computing the incomeof the assessee of the later previous year inwhich the sum is so paid.” 28.By this explanatory note, the circular issued by the Boardon 21/09/1972, bearing No.47, stood withdrawn. will be calculated with reference to the admissibleamount as reduced by the actual payment madebefore the date of creation of the approvedgratuity fund. 29. For the removal of doubts, it has beenspecifcially provided that where any provisionmade by the assessee in his accounts for thepayment of gratuity to his employees has beenallowed as a deduction in any previous year, anysum paid out of such provision by way ofcontribution to an approved gratuity fund or byway of gratuity to any employee will not beallowed as a deduction in computing the incomeof the assessee of the later previous year inwhich the sum is so paid.” 28.By this explanatory note, the circular issued by the Boardon 21/09/1972, bearing No.47, stood withdrawn. 29.In the light of the above facts and the explanatory noteand on perusal of the facts on record, it is a finding of fact thata report came to be issued by Sh. PK Ghosh, M.Sc., Fellow ofthe Institute of the Actuaries, Calcutta dt. 13[th] May, 1972 andsubsequent report dt. 1[st] June, 1973 in which he opined that“the liability for gratuity in respect of the employees of the saidcompany as on 31[st] December, 1972 was Rs.51,18,074/-” andfurther observed that “the assessee company is entitled torelief of an amount of Rs.48,19,425/-”. Thus, the assessee DB ITR-24/1986DB ITR-8/2003DB ITR 1/2005 19 claimed the said amount on actuarial basis. In terms ofprovisions of Sec. 40A(7) a trust deed came to be executed on24[th] December, 1975 which was duly registered with theDistrict Registration Officer, Pali. The assessee also moved anapplication before the Commissioner of Income Tax forgranting approval of the gratuity fund and the Commissionergranted approval on 30[th] March, 1976 but made it effectivefrom 29/12/1975. It is also an admitted fact by the AppellateAssistant Commissioner/Commissioner of Income Tax(Appeals) so also the Tribunal that the assessee deposited theentire amount based on actuarial valuation in the trust fund onor before 31[st] March, 1977, the extended period. 30.The Hon'ble Apex Court, in the case of Shree Sajjan MillsLtd. vs. CIT & Anr., reported in (1985) 156 ITR 585 (SC), hadan occasion to consider the newly inserted Sec. 40A(7) of theIT Act and observed as under: On a plain construction of Clause (a) of Sub-section (7) of Section 40A of the Act, what itmeans is that whatever is provided for future useby the assessee out of the gross profits of theyear of account for payment of gratuity toemployees on their retirement or on thetermination of their services would not beallowed as deduction in the computation ofprofits and gains of the year of account. The DB ITR-24/1986DB ITR-8/2003DB ITR 1/2005 provision of Clause (a) was made subject toClause (b). The embargo is on deductions ofamounts provided for future use in the year ofaccount for meeting the ultimate liability topayment of gratuity. Clause (b)(i) excludes fromthe operation of Clause (a) contribution to anapproved gratuity fund and amount provided foror set apart for payment of gratuity which wouldbe payable during the year of account. Clause(b)(ii) deals with a situation that the assesseemight provide by the spread-over method andprovides that such provision would be excludedfrom the operation of Clause (a) provided thethree conditions laid down by the Sub-clausesare satisfied. DB ITR-24/1986DB ITR-8/2003DB ITR 1/2005 provision of Clause (a) was made subject toClause (b). The embargo is on deductions ofamounts provided for future use in the year ofaccount for meeting the ultimate liability topayment of gratuity. Clause (b)(i) excludes fromthe operation of Clause (a) contribution to anapproved gratuity fund and amount provided foror set apart for payment of gratuity which wouldbe payable during the year of account. Clause(b)(ii) deals with a situation that the assesseemight provide by the spread-over method andprovides that such provision would be excludedfrom the operation of Clause (a) provided thethree conditions laid down by the Sub-clausesare satisfied. The submission of the assessee is that if noprovision is made by the assessee for gratuity,still the same will be deductible and Section 40A(7) will have no application, would defeat thevery purpose and object, of Section 40A(7) andrender it nugatory. The interpretation assuggested by the assessee would entitle theassessee who made no provision to claimdeduction whereas an assessee who made aprovision would not get deduction unless therequirements laid down in the Sub-section arefulfilled. This interpretation, if accepted, will leadto a curious result, and if one may venture to sayan absurd result, and even where the assessee DB ITR-24/1986DB ITR-8/2003DB ITR 1/2005 has not chosen to adopt the spread-over methodand has not provided for the present value of thecontingent liability attributable to the year ofaccount by charging it on the profits of the year,the assessee would still be entitled to claim asdeduction from the gross profits of the year thesaid estimated liability which he could haveprovided for but he has not chosen to do so. 31.In the aforesaid case, the said assessee had not created any provision and the conditions were not challenged andtherefore, the Apex Court dismissed the appeal of the assesseeby observing that if the claim is required to be made u/s 40A(7) and the amount is required to be deducted, it must fulfillthe conditions laid down u/s 40A(7) and the deduction couldnot be allowed on general principles under any other section ofthe Act. 32.The Delhi High Court, in the case of CIT Vs. Kelvinator ofIndia Ltd.: (1994) 210 ITR 933 (Del), came to the conclusionthat when a Gratuity Act is introduced for the first time, thegratuity payable to the existing employees, who have alreadyrendered some years of service and are still in service, shallhave to be considered to make a provision because the gratuitypayable depends on the entire length of service of anemployee. DB ITR-24/1986DB ITR-8/2003 DB ITR 1/2005 22 33.The Hon'ble Apex Court, in the case of Metal BoxCompany of India Ltd. vs. Their Workmen (1969) 73 ITR 53 (SC), held that it is legitimate for a company keepingaccounts on the mercantile basis to estimate its liability under agratuity scheme for its employees on an actuarial valuation anddeduct such estimated liability from gross profits in the profitand loss account while working out its net profits. In such asystem of mercantile accounting, a liability already accrued,though to be discharged at a future date, would be a properdeduction while working out the profits and gains of thebusiness; it is not as if such deduction is permissible only in thecase of amount actually spent. Therefore, while working outthe net profits, the trader can provide from the gross receipts,his liability to pay a certain sum for every additional year ofservice of the employees, if such liability is properlyascertainable and it is possible to arrive at a proper discountedpresent value. 34.The Madras High Court, in the case of CIT Vs. Sri KrishnaTiles & Potteries Madras (P) Ltd.: (2000) 243 ITR 870 (Mad),held that Section 40A(7)(b)(ii) of the Act is a special provision.The statutory provision, therefore, enables the assessee tomake the provision in any of the assessment years fallingbetween the 1st day of April, 1973, and the 1st day of April, DB ITR-24/1986DB ITR-8/2003DB ITR 1/2005 23 1976, and the provision made in all these years, if the otherconditions of that provision are satisfied, would be eligible for being claimed as a deduction in the year in which the provisionwas made. 35.The Gujrat High Court, in the case of CIT Vs. Geskets &Radiators Pvt. Ltd.: (1991) 192 ITR 509 (Guj.) also came to theconclusion that once the assessee fulfills all the criteria laiddown, as aforesaid, then the entire amount is allowable. 36.The Allahabad High Court also, in the case of SwadeshiCotton Mills Co. Ltd. Vs. Income Tax Officer: (1978) 112 ITR1038 (All); The Gujrat High Court, in the case of CIT Vs.Shreno Ltd.: (1994) 210 ITR 289 (Guj) & in the case of CIT Vs.Shree Digvijay Cement Co. Ltd.: (1993) 203 ITR 746 andCalcutta High Court, in the case of CIT Vs. Remington Rand ofIndia Ltd. & Ors.: (1986) 159 ITR 922 (Cal) took the sameview. 37.After considering Section 40A(7) when the assessee hascomplied with all the conditions laid down, which have beenreproduced herein above, then, in our view, the assessee wascertainly entitled to the entire deduction of the gratuitypaid/payable or provision made by the assessee. Under theGratuity Act, 1972, the assessee company is liable to paygratuity to its employees who have completed five years of service for the total length of their service as provided underthe said Act. The assessee company would, therefore, become liable to pay gratuity to its employees for their past servicesrendered in accordance with the provisions of the Payment ofGratuity Act. On coming into force of the Gratuity Act, theassessee company became liable to provide an amount ofRs.48,17,760/- by way of gratuity to its employees whichincluded current as well as past liability for which provision wasmade. Therefore, in our view, the liability to pay the saidamount of Rs.48,17,760/- is concerned, it arose in the previousyear, relevant to the assessment year 1973-74 under referenceand since admittedly all the conditions laid down in the sub-clause (ii) of clause (b) of Sec. 40A(7) have been fulfilled, inour view, the Tribunal has rightly upheld the said claim.Therefore, in our view, the question No.2 is to be answered inthe affirmative and against the revenue. 38.In so far as question No.1 is concerned, in our view,when question No.2 has been answered in the affirmative infavour of the assessee and against the revenue on merits, asassessee has fulfilled all the criteria laid down in the GratuityAct, 1972 and Sec. 40A(7) then question No.1 becomesacademic in nature and therefore, we need not answer thesame. 25 39.In so far as the questions in DB ITR No.8/2003 areconcerned, our answer to question No.2 in DB ITR No.24/1986, referred to supra, also covers questions No. 2 and 3 andtherefore, it is answered in affirmative in favour o the assesseeand against the revenue. In this reference also, whenquestions No. 2 & 3 have been answered in affirmative onmerits, then question No.1 remains academic. 40.The question of law in DB ITR No.1/2005 is also covered by question No.2 of DB ITR No.24/1986. We make no order asto costs. [J.K. RANKA], J. , J. Raghu/p.25/24-ITR-1986-FINAL DB.sxw Certificate:All corrections made in the judgment/order havebeen incorporated in the judgment/order being e-mailed. /Raghu, Sr.PA.