1. These four appeals filed by International Ore & Fertilizer (India) (P.) Ltd., Secunderabad, are against the orders of the Commissioner (Appeals) II, Hyderabad, for the assessment years 1975-76 to 1978-79.
Since they involve a common issue, they are conveniently clubbed together.
2. The assessee is a company doing business as marketing agents for non-resident companies. It has a scheme for gratuity for its employees.
It had also set up a recognised gratuity fund which was common for the assessee and some of its associate companies. At the time when the assessments were made, the claim for recognition was pending.
Meanwhile, the assessee had entered into a contract with the Life Insurance Corporation (LIC) which had agreed to underwrite assessee's obligation to its employees. The same liability which the gratuity fund was obliged to subject itself under this scheme was undertaken by the LIC in consideration of the payment of premium for its Master Policy.
This is the premium amount of Rs. 19,569 for the assessment year 1975-76, Rs. 12,366 for the assessment year 1976-77, Rs. 8,983 for the assessment year 1977-78 and Rs. 6,270 for the assessment year 1978-79, which are now in dispute. The first appellate authority assumed that there was a bar to the deduction of premium amount in Section 40A(7) of the Income-tax Act, 1961 ('the Act') and that it could not, therefore, be considered under Section 37 of the Act. All the same, he observed that the amount would be allowable as a deduction, if and when the gratuity fund receives approval from the Commissioner. The assessee has come up in appeal claiming that the payment is even otherwise allowable as a deduction.
3. Meanwhile, the assessee's request for recognition was turned down by the Commissioner on the ground that there was a common fund and that such a common fund does not satisfy the requirements for recognition.
The assessee's petition to the CBDT against this decision was also turned down for the same reason. The assessee has now sought recognition on the basis that the common gratuity fund may be treated as the fund only for the assessee as a result of the associate companies getting out of the fund. The assessee is not certain whether at least this request would be allowed.
4. The learned counsel for the assessee claimed that the requirement that there should be a separate fund is not a correct one even as pointed out by this Tribunal in Stanmore (Anamallay) Estates Ltd. v.ITO [1982] 1 ITD 519 (Mad.). A copy of the policy was filed to show that the LIC had undertaken the responsibility of paying gratuity to those persons who leave service or die during the year and that it was not a provision for gratuity so as to require the compliance under Section 40A(7). He claimed that the premium paid will have to be allowed whether the fund created by the assessee is recognised or not.
5. The learned departmental representative claimed that Section 40A(7) is a special section and that the requirements thereof will have to be satisfied in case of every payment or provision towards gratuity. In the absence of recognition, he claimed, it was not deductible.
According to him, the insurance policy covered only a provision for payment. In this view recognition of the trust fund was necessary. He relied upon the decisions of the Madras High Court in the cases of CIT v. Andhra Prabha (P.) Ltd. [1980] 123 ITR 760 and CIT v. Carborundum Universal Ltd. [1977] 110 ITR 621. He also relied upon the decision of this Tribunal in. IT Appeal No. 405 (Hyd.) of 1977-78, dated 9-4-1980, where a similar issue was sent back to the first appellate authority for the assessment year 1974-75.
6. We have carefully considered the records as well as the arguments.
The assessee pays premium on what is known as 'Master Policy' issued by the LIC undertaking to honour the obligations undertaken in the trust deed and the rules of the International Ore and Fertilizer (India) (P.) Ltd., Secunderabad, Employees' Group Gratuity Life Assurance Scheme.
Copies of the trust deed and the rules were mentioned in the preamble.
This Master Policy covers only the employees of the assessee-company unlike the trust fund which was a common one. In other words, the payment relates to the obligation of the assessee to its own employees.
The trust deed undertakes obligations which are usual in such cases and it would have also been recognised but for the fact that it was a common fund for a group of companies. In other words, there was nothing wrong with the trust deed so as to warrant disallowance on any other ground. Merely because the trust deed is conveniently adopted as the basis of reckoning the obligations under the scheme, it does not mean that the trust fund created by the trust deed should be recognised before the question of deductibility of insurance premia is gone into.
If the assessee had made only a provision for payment either of premium or of contribution to the trust fund, Section 40A(7) would have squarely applied ; in that event, the assessee would have had no case, because the Commissioner has not recognised the trust fund. We, therefore, find that the recognition of the trust fund need not be tied up with the assessee's claim. If the assessee's claim is allowable on merits in law, it will have to be allowed notwithstanding non-recognition of the trust fund. It is, therefore, not necessary for us to go into the question whether the authorities had taken the right view in rejecting the assessee's claim for recognition. In fact, we wonder, whether we have the jurisdiction to go into this question at all. At any rate, we are of the view that the insurance premium is a charge on the profits of the company. It was a contractual payment made in pursuance of the policy issued on the proposal made by the assessee.
It is wholly and exclusively for purposes of business as it is to safeguard the assessee-company from any unexpected or large liability towards gratuity which it might be called upon to meet. Liability for gratuity, though certain, the quantification is a matter of accident.
Only retirement on superannuation is predictable while death, incapacity, voluntary retirement and resignation are not. It is, therefore, a matter of business expediency that the assessee had taken this policy. In fact, this is a standard policy which a number of employers had availed in order to ensure their ability to meet the obligation. The trust deed becomes part of the policy merely for the purposes of defining the extent of obligation undertaken by the LIC.Such payment is clearly a business deduction under Section 37. As pointed out, what is contemplated under Section 40A(7)(a) is that there should be no deduction allowed 'in respect of any provision (whether called as such or by any other name)'. If such a provision is made, in order that it may still be eligible, it has to satisfy the conditions mentioned under Section 40A(7)(b) which prescribes recognition as one of the primary conditions. A payment due and actually paid under a policy issued by the LIC cannot, by any stretch of imagination, be described to be a provision even if the widest meaning were given to the word 'prevision'. The Supreme Court had occasion to consider the meaning of the word 'provision' in contradistinction to the word 'reserve' in a surtax case in Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559. In the absence of a definition in the statute, it held that the sense of the meaning should be the one that is attributed to it by men of business, trade and commerce. The question of making a provision arises where the payment has not been made. In the assessee's case there is an actual payment and hence, it cannot also be a provision at the same time. The payment, as seen earlier, is towards an obligation to the assessee's employees. It relates to the obligation of the year and, therefore, a rightful charge on the accounts of the year Since, we have held that Section 40A(7) is not applicable to the facts of the assessee's case, it is unnecessary to discuss the two authorities cited by the learned departmental representative in support of the view that every provision has to satisfy the requirements of Section 40A(7) after it was put on the statute book. While we have no difficulty in accepting this proposition on behalf of the revenue, we find that it does not help it as Section 40A(7) is not attracted at all as the assessee had not made any provision and had only made a payment.
Section 40A(7) was introduced with a view to avoid companies from availing the benefit of deduction merely on the basis of provision without any obligation on their part to safeguard their ultimate liability to their employees. Hence, even in the light of the purpose of introduction of Section 40A(7), it cannot be said that the assessee's claim is unreasonable. At any rate, it is a legitimate claim falling under Section 37. Hence, the assessee is entitled to succeed on this point and the relief claimed for all the four years is directed to be allowed. Since this is the only ground for the assessment years 1975-76 and 1978-79, these two appeals are allowed.
7 to 9. [These paras are not reproduced here as they involve minor issues.]