Judgment:
SMT. SUJATA MANOHAR, J. :
The assessee is a company, and the assessment year involved is 1973-74, the previous year being the year ending 3rd December, 1972. During the previous year, the Payment of Gratuity Act, 1972, came into force w.e.f. 16th September, 1972. In view of the previous of this Act, the assessee claimed in the asst. yr. 1973-74 gratuity liability of Rs. 1,13,191 as per actuarial certificate. This amount was by way of provision for gratuity for the current year as well as the earlier years, as per the Payment of Gratuity Act, 1972. Out of the sum of Rs. 1,13,191, a sum of Rs. 90,913 was in respect of liability for the earlier years. The ITO disallowed the deduction in respect of liability for the earlier years amounting to Rs. 90,913.
2. Being aggrieved by the order of the ITO, the assessee carried the matter in appeal before the AAC. The AAC accepted the contention of the assessee that the liability was enforceable not only in respect of the accounting year under consideration, but for earlier years also, and the assessee had to make the provision for this liability, which was done on a scientific basis by discounting the present price. A full provision was made, because the account books were kept on mercantile basis. The AAC, therefore, held that this was an allowable expenditure, as it arose during the period under consideration. The Tribunal has upheld this finding of the AAC. When the matter was considered before the Tribunal, s. 40A(7) was already inserted in the IT Act, 1961, by the Finance Act of 1975 with retrospective effect from 1st April, 1973. The Tribunal felt that s. 40A(7) was not attracted, because the assessee had not made any provision in the accounts for payment of gratuity. The assessee had merely claimed a deduction on the basis of actuarial valuation. From the Order of the Tribunal, the following question has been referred to us under s. 256(1) of the IT Act, 1961 :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee was not hit by the provisions of s. 40A(7) since the assessee had not made any provision in the accounts for the gratuity liability and had simply claimed the same on the basis of actuarial valuation ?'
3. The question posed before us is already covered by a decision of the Supreme Court in the case of Shree Sajjan Mills Ltd. vs . CIT & Anr. reported in : 1986ECR276(SC) . The Supreme Court said that, on a plain construction of cl. (a) of s. 40A(7) of the IT Act, 1961, whatever is provided for future use by the assessee out of the gross profits of the year of account for payment of gratuity to employees on their retirement or on the termination of their services would not be allowed as a deduction in the computation of profits and gains of the year of account, unless the respective conditions specified in cl. (b) of s. 40A(7) were fulfilled. The Supreme Court further said that the expression 'provision made by the assessee' is not used in any artificial sense, e.g., of setting apart an amount specifically by the assessee for meeting the liability for gratuity in his account books, but is in its ordinary sense. Clause (b)(i) excludes from the operation of cl. (a) contribution to an approved gratuity fund and amount provided for or set apart for payment of gratuity which would be payable during the year of account. Clause (b)(ii) deals with a situation where the assessee might provide by the spread-over method for gratuity and such provision would be excluded from cl. (a), provided the three conditions laid down by the sub-clause are satisfied. Expressly dealing with the arguments advanced before the Tribunal, the Supreme Court said 49 CTR 203 : 156 ITR 601 that the submission of the assessee that, if no provision is made by the assessee for gratuity, still the same will be deductible and s. 40A(7) will have no application, would defeat the very purpose and object of s. 40A(7) and render it nugatory. The interpretation as suggested by the assessee would entitle the assessee who made no provision to claim deduction, whereas an assessee who made a provision would not get deduction unless the requirements laid down in the sub-section are fulfilled, and this would lead to an absurd result, viz., that even where the assessee had not chosen to adopt the spread-over method and had not provided for the present value of the contingent liability attributable to the year of account by charging it on the profits of the year, the assessee would still be entitled to claim as deduction it on the profits of the year, the assessee would still be entitled to claim as deduction from the gross profits of the year the said estimated liability which he could have provided for but he had not chosen to do so. In view of this decision of the Supreme Court, the question which is before us must be answered in the negative and in favour of the Revenue, since in present case, the assessee has merely claimed gratuity liability as per actuarial certificate, and has not complied with the conditions laid down in cl. (b) of s. 40A(7) of the IT Act, 1961. The question is answered, accordingly.
No order as to costs.