ORDER
ITRC 617/98
1. Assessee is before us challenging the order of the Income Tax Appellate Tribunal dtd 28-3-1995.
Facts are as under;
1.1 Assessee claimed allowance of the following liabilities for the assessment year 1978-79:
i) Additional liability for gratuity in respect of the year 1977 as a result of actuarial valuation. Rs. 32,66,475/-ii) Provision for gratuity for 1976 based on actuarial valuation made in the accounts for 1976 disallowed in assessment year 1977-78 now claimed (paid over to the MICO gratuity Trust during 1977) Rs. 18,34,913/-iii) Provision for gratuity for Prior years based on actuarialValuation made in the accounts Rs. 14,84,649For 1971 disallowed in the Assessment for assessment year 1972-73 and upheld in appeal now claimed (paid over to MICO Trust during 1977) Rs. 14,84,649/-Besides these claims, certain other claims towards gratuity were also made. Regarding the claim of first item as above, the assessing officer disallowed in the assessment stage a sum relating to the year 1976 of Rs. 31,48,082/-. Out of this amount, a sum of Rs. 13,13,169/- was ultimately allowed by the appellate authorities including the tribunal and hence the balance amount of Rs. 18,34,913/- was claimed afresh in the year under present consideration by way of the second amount as shown above. The assessing officer further observed that, since the creation of the trust, it had been the practice of the assesses to make claims of premium paid to LIC under the Group Gratuity LIC Fund and also of payments made by the assesses through the gratuity trust to its employees who left during the year towards short-fall in settlement by the LIC of India. According to him, there was no warrant for change in the method of accounting adopted by the assessee. On that ground, he disallowed the claim of additional liability to the extent of Rs. 32,66,475/-. An appeal was filed. On appeal, the appellate authority allowed the deduction. Revenue filed an appeal before the tribunal. The tribunal ruled that the amount of Rs. 32,66,475/- represented the additional liability, over and above, the premium paid to the LIC under Group Gratuity Life Insurance Scheme and was nothing but a provision created in the accounts of the assessee in this year in as much as the amount had not been expended in this year. The tribunal preferred to allow the appeal of the revenue.
1.2 The Assessing Officer included the gain in foreign exchange in his assessment order. An appeal was filed. The appellate authority ordered to exclude the gain in foreign exchange.
An appeal was filed to the tribunal. The tribunal reversed the order of the appellate authority on this issued and directed addition of Rs. 19,22,076/- representing the gain in exchange. Thereafter the assessee filed an application seeking a reference and the tribunal has now chosen to refer the following two questions of law in ITRC 617/1958;
a). Whether on the facts and in the circumstances of the case, the appellate tribunal is right holding that in order to fulfil the criterion of 'contribution towards an approved gratuity fund, as finding place in Section 40A(7)(b)(i) of the IT Act, 1961 it is necessary that the entire amount will have to be actually contributed to the. aforesaid approved gratuity fund in the immediately succeeding year or in the year next to that and in directing to allow such amount out of the provision which would be found to satisfy the above condition?
b) Whether, the tribunal was right in holding that the exchange gain earned by the assessee was revenue in nature and in that way in ordering for addition of the same to the income of the assessee?
ITRC 618/98
2. This reference is again at the instance of the revenue. This is for the assessment year 1978-79.
The facts as narrated in the reference are;
The assessee claimed allowance for the following liabilities;
i) Additional liability for gratuity in respect of the year 1977 as a result of actuarial valuation. Rs. 32,66,475/-
ii) Provision for gratuity for 1976 baaed on actuarial valuation made in the accounts for 1976 dis allowed in assessment year 1977-78 now claimed (paid over to the MICO gratuity Trust during 1977) Rs. 18,34,913/-
iii) Provision for gratuity for Prior years based on actuarial Valuation made in the accounts For 1971 disallowed in the Assessment for assessment year 1972-73 and upheld in appeal now claimed (paid over to MICO Trust during 1977) Rs. 14,84,649/-
Besides these certain other claims towards gratuity were also made.
2.1 The assessing authority ruled that the assessee itself had disallowed a sum of Rs. 31,48,082/- relating to the year 1976. Out of this amount a sum of Rs. 13,13,169/- was ultimatelyallowed by the appellate authority including the tribunal and hence the balance of Rs. 18,34,913/- was claimed afresh in the year under present consideration by way of the second amount as shown above. The assessing officer further observed that, since the creation of the trust, it had been the practice of the assessee to make claims of premium paid to LIC under the Group Gratuity LIC Fund and, also of payments made by the assesses through the gratuity trust to its employees who left during the year towards shortfall in settlement by the LIC of India. He, therefore ruled that there was no warrant for change in the method of accounting adopted by the assessee. On that ground, he disallowed the claim of additional liability to the extent of Rs. 32,66,475/-. On appeal, The appellate authority ruled that the said amount has to be allowed as deduction. Thereafter the matter was taken to the tribunal. The tribunal ruled that the amount of Rs. 32,66,475/- represented the additional liability and was nothing but a provision created in the accounts of the assessee in this year in as much as the amount had not been expended in this year. The tribunal allowed the appeal of the revenue. Thereafter the assessee moved a reference application and the tribunal has referred the following two questions of law for our consideration;
a). Whether on the facts and in the circumstancesof this case, the tribunal is right in law in allowing under Section 40A(7) a sum of Rs. 32,66,475/- being additional liability for gratuity in respect of the year 1977 as a result oof actuarial valuation?
b. Whether on the facts and in the circumstances of this case, the tribunal is right in law in allowing under Section 36(1)(v) the provision for gratuity for 1976 and provision for gratuity for prior years based on actuarialvaluation amount to Rs. 18,34,913/- and Rs. 14,84,649/- respectively?
3. Both these appeals are taken up together and a common order is passed.
4. Sri Dastur, learned senior counsel invites our attention to the material facts to say that the tribunal is wrong in the case on hand. He would refer to us Section 40A(7)(b) of the Act to say that no deduction shall be allowed in respect of any provision made by the assessee to its employees. Sub-clause (b) would say that nothing contained in Clause (a) would apply in relation to interalia any provision made by the assessee for the purpose of payment of a sum by way of any gratuity that has become payable during the previous year. He would say that a sum of Rs. 32,66,475/- represents the assessee's liability for making a contribution to the approved gratuity fund in respect of services rendered by the employees in the calendar year 1977 determined on an actuarialbasis. Learned Counsel further says that in the light of Section 40A(7)(b), the assessee's claims ought to have been allowed by the tribunal. He would also say that this very tribunal for the subsequent assessment year has accepted the ease of the assessee.
5. In so far as the second question at the instance of the revenue is concerned, Sri Dastur learned Counsel would argue that the assesaes had provided for a sum of Rs. 18,34,913/- and a sum of Rs. 14,84,649/- in its accounts for the earlier years but the same were not allowed as a deduction. The assessee paid the said amount to the fund in the calendar year 1977 and that therefore deduction is permissible in law. He would further say that the tribunal after referring to the judgment of this Court in 191 ITR 306 has allowed the same as deduction. He therefore would say that the second question has to be answered in favour of the asseasee.
6. Per contra, Sri Seshachala, learned senior counsel would argue that a aum of Rs. Rs. 32,66,475/- is an additional liability in respect of the year 1977. It was not an expenditure for the current assessment year as ruled by the tribunal. He would say that Section 40A(7) would come in the way of the assessee in the case on hand. In 30 far as question No. 1 in ITRC No. 617/1998 is concerned, he would say that deduction is not permissible towards additional liability unless the same is made over during the current assessment year. In so far as question No. 2 is concerned, he would say that allowability of gratuity should be on the basis of actual payment in terms of the judgment in : [1978]115ITR698(KAR) . He would request this Court to answer the second question also in his favour.
7. In so far as the question of gain in exchange, Sri Dastur learned senior counsel would argue that the judgment of the Calcutta High Court in : [1982]136ITR251(Cal) is an answer to the contention of the revenue. As against this revenue would argue that the assessee earned the money in the course of the trade carried on trade carried on by the assessee and that therefore the same qualifies to tax in terms of the tax laws. He would rely on a judgment of the Karnataka High court reported in : [1991]191ITR308(KAR) and : [1979]116ITR1(SC) of the Supreme Court.
8. After hearing, we have carefully perused the material on record.
9. To appreciate the arguments, we have to notice Section 40(A)(7) of the Income Tax Act, 1961. The said section reads as under;
40A(7)(a) Subject to the provisions of Clause (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason.
10. Admitted facts would reveal that in ITRC No. 617/98, the tribunal ruled that a sum of Rs. 32,66,475/- is allowable under Section 40A(7)(a) of the Act. In so far as ITRC 618/98 is concerned, the tribunal ruled that a sum of Rs. 32,66,475/-is in the nature of provision and the same is allowable under Section 40A of the Act. A reading of Section 40A would show that certain payments were not deductible in certain circumstances. A reading of Section 40(A)(1) would show that the provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act, relating to the computation of income under the head (profits and gains of business in profession). Section 40A(7)(a) is subject to Section 40A(7)(b). Section 40A(7)(a) would not apply, in certain circumstances. Those circumstances have been mentioned in the provision itself. It states that Clause (a) of Section 40A(7) shall not apply in relation to any provision made by the assesses for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year.
Therefore from a reading of this provision what is clear to us is that the contention of the revenue of factual payment is not very relevant for the purpose of deduction in the light of Section 40A(7)(b) of the Act; In these circumstances, the first question in ITRC 618/98 has to be answered in the light of payment of gratuity in respect of the year 1977 which is made in the very year itself. In so far as question No. 2 in ITRC 618/98 is concerned, the Act itself provides for allowance in terms of Section 40A(7) of the Act. Section 36(1)(v) is available to the assessee in the light of gratuity for the year 1976. Similarly, the question of law as referred with regard to gratuity in similar circumstances has to be answered in favour of the assessee in ITRC No. 617/1998. The case laws are not wanting in this regard. A Division Bench of this Court after noticing the judgment of the Supreme Court in : 1986ECR276(SC) has chosen to hold that for gratuity to be deductible the conditions laid down in Section 40A(7) had to be fulfilled. The deduction could not be allowed on general principles under any other section of the Act, because Sub-section (1) of Section 40A made it clear that the provisions of the section had effect notwithstanding anything to the contrary contained in any other provision of the Act relating to the computation of income under the head 'profits and gains of business or profession.
10.1 The Madras High court in : [1991]191ITR131(Mad) has ruled that business expenditure of gratuity can be allowed subject to fulfillment of the condition laid down in Section 40A(7) of the Act.
10.2 A Division Bench of this Court in : [1991]191ITR308(KAR) after noticing the judgment of the Supreme Court in the case Sri Sajjan Mills case reported in : 1986ECR276(SC) has held in favour of the assessee. That judgment would be equally applicable to the facts of this case.
10.3 It is unnecessary for us to refer to the various judgments in the case on hand. Admittedly, the deduction of gratuity has to be in consonance with Section 40A(7) of the Act. In the case on hand, we have already ruled that the assessee is entitled for deduction on the facts of this case. In these circumstances, we deem it proper to answer the gratuity question in favour of the assessee.
11. One other question that has been referred to us in ITRC No. 617/1998 is with reference to the exchange gain,, earned by the assessee on the facts of this case. From the material on. record it is seen that a sum of Rs. 19,22,076/- was available to the assessee on account of fluctuation of foreign exchange in the course of export made by the assessee. The assessing officer held against the assesses. On appeal, the commissioner accepted the case of the assessee. The tribunal accepted the findings of the assessing officer by reversing the order of the appellate commissioner.
12. The assessee strongly relies on the judgment of the Calcutta High Court reported in : [1982]136ITR251(Cal) , wherein it is ruled that where a surplus arises due to a fluctuation in the exchange rate, the true test to find out if such surplus is assessable is to find out if it arose out of any trading activity. It must be a result of a trading activity of the assessee or it must arise or result from the trading activity of the assessee. Merely because the holder of a currency gets something more than what it would have got otherwise transform the accretion into a trading profit unless the holding or the dealing in foreign exchange of the particular currency was the trading activity of the assessee concerned. Where the tribunal had made a categorical finding that an amount received by the assessee represented profit on exchange but there was no finding that the profit arose due to fluctuation or escalation of price in respect of export sales and the assessee was not a dealer in foreign exchange. It was further ruled that the profit on exchange was not liable to tax.
12.1 At this stage we must also notice a judgment of this Court reported in : [1963]49ITR471(KAR) . That was a case in which this Court was considering as to whether appreciation in Rupee value owing to devaluation was assessable to Income-tax as a receipt arising from business within the meaning of Section 4(3)(vii) of the Income Tax Act. The facts of that case show that the assessee namely Hindustan Aircraft Ltd., which carried on business in assembling and overhauling, different types of aircraft, held dollars with its bank in America, which were partly received from its clients for repairs and overhaul done to their aircraft and partly remittances made by the assessee. The dollar holdings were utilised in the course of the business either for payment of salaries to American technicians employed in the assessee's factory or for purchasing spare parts. At that time the assessee had with its bank a sum of $ 1,98,202.75 valued at the rate of exchange of Rs. 3.33 per dollar. On 19-9-1949, the Indian Rupee was devalued and exchange rate was fixed at Rs. 4.75 per dollar. On account of devaluation, there was an appreciation in the rupee value of the balance so held with the American bank to the extent of Rs. 2,80,639/-. The Income Tax Officer held that the gain in question is liable to tax. The Appellate Commissioner ruled that the accretion in question was a casual and nonrecurring one and the same was due to a fortuitous circumstance but since at its inception the receipts arose from business and the same was intended to be utilised for the assessee's business, he held that Section 4(3)(vii) is inapplicable to the facts of the case. But he granted a reduction for certain sum. Assessee aggrieved by the same took up the matter before the tribunal. Ultimately, the matter reached this Court. This Court after noticing the various contentions by a detailed judgment came to a conclusion that is not to be construed narrowly. The court ruled that an additional sum of Rs. l,92,136/- was a receipt arising from business and was not exempt from income tax.
12.2 In : [1973]90ITR323(Ker) , Kerala High Court following the judgment of the Karnataka High Court in : [1963]49ITR471(KAR) has ruled that the result of the devaluation was that the assessee became entitled to receive a larger price in terms of rupees for his goods and that was directly in the course of the trade and constituted a trading profit.
13. In the light of these decisions directly available on the subject we are of the view that the contention of the assessee cannot be accepted on the facts of this case. Therefore on the facts of this case and in the light of the binding judgment of this Court, we deem it proper to answer this question in favour of the revenue and against the assessee. In the result, the following order is passed;
In ITRC No. 618/98 both the questions are answered in favour of the assessee.
In ITRC No. 617/98, the first question is answered in favour of the assessee and the second question is answered in favour of the revenue.