Coimbatore Cotton Mills Ltd. vs Commissioner of Income Tax

Ramanujam, J.—The assessee company is a textile mill and for the previous year and ended March 31, 1976, relevant to the assessment

year 1976-77, it did not make any provisions for its liability to contribute to an approved gratuity and fund which has been in existence since

October 26, 1973. However, in the printed accounts it had appended a note stating that no provision has been made for the gratuity liability for the

fifteen months'' period ended March 31, 1976, amounting to Rs. 3,77,344. However, the assessee claimed before the ITO that even though no

provision has been made in the accounts for the assessment year 1976-77, it was entitled to a deduction of the said amount as it was an accrued

liability. The ITO took the view that since s. 36(1)(v) of the I.T. Act allowed only a deduction of a sum paid by way of a contribution towards an

approved gratuity fund and since the amount had not been paid in the previous year, the deduction claimed was not to be allowed. The assessee

took the matter in appeal to the Commissioner of Income Tax (Appeals) who held that the word ""paid"" occurring in s. 36(1)(v) of the Act would

also include a liability incurred in accordance with the method of accounting in view of the definition of the word ""paid"" in s. 43(2) of the Act, and,

therefore, the omission to make a book entry, when in fact the liability had accrued, would make no difference to the assessee''s claim for

deduction. In this view, he allowed the appeal filed by the assessee. Aggrieved by the order of the Commissioner of Income Tax (Appeals), the

Revenue took the matter in appeal before the Tribunal contending that the deduction allowed by the Commissioner of Income Tax (Appeals) is

contrary to the provisions of s. 40(A)(7) and that in this case, no provision for payment of any gratuity having been made, the deduction cannot be

allowed. The Tribunal took the view that since the assessee did not part with the fund, it is not entitled to claim deduction of a mere liability to pay

gratuity, and even if a claim deduction of income could be treated as a provision, it could not be regarded as a decision of the assessee to set apart

the amount for payment to the gratuity fund especially when such provision was made only in the accounts of the subsequent year. The Tribunal

also held that since the provision of the contribution relating to the previous year relevant to the assessment year 1976-77 has been made in the

accounts of the subsequent year relevant to the assessment year 1977-78, deduction is allowable only in the assessment for the assessment year

1977-78. Aggrieved by the order of the Tribunal, the assessee sought a reference under s. 256(1) before the Tribunal and the Tribunal having

rejected the application on the ground that the decision of the Tribunal rested on the finding of fact, the present petition has been filed under s.

256(2) of the Act seeking a direction to the Tribunal to refer the following question of law for the opinion of this court :

Whether the Tribunal was right in holding that the provision for gratuity is not allowable in the relevant assessment year, 1976-77 ?

We are, however, of the view that the Tribunal was rightly rejected the assessee''s claim for deduction under s. 36(1)(v) of the Act. In this case,

admittedly, in the accounts of the previous year ended March 31, 1976, relevant to the assessment year 1976-77, the assessee did not make any

provision for its liability to contribute to the approved gratuity fund which has been in existence since October 26, 1973. As a matter of fact, the

assessee has made a provision for this liability only in the succeeding year. But it is not in dispute that no provision was in fact made for the gratuity

liability for the assessment year 1976-77 and that is also clear from the note appended to the printed accounts stating that no provision has in fact

been made for gratuity liability for the fifteen months period ended March 31, 1976, amounting to Rs. 3,77,344. It is also not in dispute that a

provision has been made for the said amount in the previous year relevant to the next assessment year 1977-78, and the amount actually paid into

the fund on January 31, 1979, relevant to the assessment year 1979-80. The assessee, however, claimed before the ITO that even though no

provision was made in the accounts, it was entitled to the deduction of the amount as it was an accrued liability. This was rejected by the ITO on

the ground that deduction can be allowed by way of contribution towards an approved gratuity fund only when the amount is paid and since the

amount has not been ""paid"" in the previous year, the deduction can not be allowed. The Commissioner of Income Tax (Appeals), however, held

that the word ""paid"" in s. 36(1)(v) would also include the liability incurred in accordance with the method of accounting in view of the definition of

the word ""paid"" in s. 43(2) and, therefore, the omission to make the book entry when in fact the liability had accrued, would make no difference to

the claim of the assessee. We are in entire agreement with the Tribunal that the decision of the Commissioner of Income Tax (Appeals) overlooks

the provision in s. 40(A)(7) according to which no provision for payment of any gratuity could be allowed as a deduction except a provision for

contribution to an approved gratuity fund, and since the amount claimed as a deduction was not a provision in the accounts of the assessee, the

claim was not saved from the ban imposed by s. 40(A)(7). According to the Tribunal, s. 40(A)(7) was enacted only to see that no assessee

obtains a deduction of liability to pay gratuity without parting with the funds and, therefore, it was provided that there will be a general ban on the

deduction of any liability to pay gratuity except a provision for contribution to an approved gratuity fund. Admittedly, the assessee has not made

any provision for contribution to the approved gratuity fund in its accounts. Merely because there is a liability to pay contribution to that fund, it

cannot be treated as an accrued liability and the liability should be taken to have accrued only when a provision is made in the accounts. In view of

the admitted position in this case that neither an actual payment has been made nor a provision has been made towards the gratuity liability in the

year in question, the deduction claimed has rightly been disallowed by the Tribunal. In this view of the matter, we are in entire agreement with the

view taken by the Tribunal and, therefore, no reference is called for in this case. The tax case petition is dismissed.