V.K. Singhal, J.
1. The Income-tax Appellate Tribunal, Jaipur, has referred the following two questions of law under Section 256(1) of the Income-tax Act, 1961, which have arisen out of its order dated December 30, 1978, in respect of the assessment year 1973-74 :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the claim of the assessee in respect of gratuity payable was allowable under Section 37 or under Section 28(i) of the Income-tax Act, 1961 ?
(2) Whether, on the facts and in the circumstances of the case, the claim of the assessee in respect of gratuity payable was not hit by Section 40A(7)(a) of the Income-tax Act, 1961 ?'
2. The brief facts of the case are that the assessee is a registered partnership concern and derives its income from manufacture and sale of oxygen gas, acetylene gas, etc. In the relevant previous year ending on March 31, 1973, the assessee has actually paid Rs. 4,000 by way of gratuity to certain employees who had retired. A claim of Rs. 21,669 was also made by the assessee as payable for gratuity. This claim was not allowed by the Income-tax Officer on the ground that the conditions laid down in Section 36(1)(v) and Section 40A(7)(a) were not satisfied. Since this amount was not debited in the profit and loss account, no addition was made while disallowing the claim of the assessee.
3. The assessee has preferred an appeal to the learned Appellate Assistant Commissioner of Income-tax, Central Range, Jaipur, where it was contended that the assessee is maintaining its accounts on the basis of the mercantile system of accounting. It was further contended that the Payment of Gratuity Act, 1972, came into effect from September 16, 1972, and the employers were made liable to pay gratuity to their outgoing employees as per the terms and conditions contained in the said Act. It was further submitted that since the assessee-firm is covered by the Payment of Gratuity Act, 1972, the payment of gratuity was a statutory liability and the appellant was bound to make a provision for this accrued liability. It was further submitted that, even if no provision is made in the books of account for deduction for liability, the same has to be allowed if it is a statutory liability in order to work out the income properly and correctly. TheAppellate Assistant Commissioner allowed the claim in respect of the gratuity amount of Rs. 4,000 which was actually paid. Regarding the payment of gratuity of Rs. 21,669, the claim was rejected on the ground that the provisions of Section 37 of the Income-tax Act, 1961, are residuary and since specific provisions have otherwise been made in Section 36(1)(v) and Section 40A(7) of the Act, the claim could not be allowed under Section 37. It was observed that, for the purpose of claiming the deduction under Section 37(1), it has to.be shown that the claim is for an expenditure incurred during the year wholly and exclusively for the purpose of business and, in the present case, since it was only a claim for allowance of the provision for gratuity, the benefit of Section 37(1) cannot be availed of. It was further observed that, in order to get the benefit under Section 40A(7), the conditions laid down therein have to be satisfied and one of the conditions is that the assessee is required to create an approved gratuity fund for the exclusive benefit of its employees under an irrevocable trust and the application for the approval of the fund should have been made before January 1, 1976. The other conditions of Sub-section (7) were also found not satisfied and, therefore, the assessee was held not entitled to the deduction claimed.
4. The matter was carried by the assessee before the Income-tax Appellate Tribunal where the claim of the assessee was allowed on the ground that the assessee is maintaining its accounts on the mercantile basis and the statutory liability for gratuity has accrued in the relevant previous year on the basis of the Payment of Gratuity Act, 1972. The quantum of the liability was determined on the actuarial basis and since the statutory liability has accrued for the first time in the previous year relevant to the assessment year 1973-74, the same is to be allowed. It was held that the liability for gratuity was deductible as business expenditure in the computation of income from business if not under Section 37, then under Section 28(1) itself, since the real profits from the business could not be determined without taking into account the assessee's claim in this regard. It was also held that the deduction is not prohibited by Section 40A(7)(a) since the assessee did not make any provision in its books for this liability. It was further held that the deduction is admissible on ordinary commercial principles and hence it was allowed.
5. The submission of learned counsel for the Revenue is that the Income-tax Appellate Tribunal has erred in considering that the deduction is allowable under Section 37 or under Section 28 of the Income-tax Act, 1961, and that it is not hit by the provisions of Section 40A(7). The Income-taxAppellate Tribunal has ignored the amendment made by Section 6 of the Finance Act, 1975, with retrospective effect from April 1, 1973. It was further submitted that, when there is a specific provision, then the help of the general provisions cannot be taken.
6. In order to examine the submissions of Shri Bapna the provisions of Sections 28(1), 36(1)(v), 37 and 40A(7) have to be analysed.
7. Section 28 of the Act provides :
'The following income shall be chargeable to income-tax under the head 'Profits and gains of business or profession',-- (i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year.'
8. Section 36(1)(v) provides :
'(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28--. . . . (v) any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust.'
9. Section 37(1) of the Act provides :
'Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'.'
10. Section 40A(1) and (7)(a) read as under :
'40A. (1) 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 or profession'. . . .
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.
(b) Nothing in Clause (a) shall apply in relation to-
(i) any provision made by the assessee 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 ;
(ii) any provision made by the assessee for the previous year relevant to any assessment year commencing on or after the 1st day of April, 1973, but before the 1st day of April, 1976, to the extent the amount of such provision does not exceed the admissible amount, if the following conditions are fulfilled, namely :--
(1) the provision is made in accordance with an actuarial valuation of the ascertainable liability of the assessee for payment of gratuity to his employees on their retirement or on termination of their employment for any reason ;
(2) the assessee creates an approved gratuity fund for the exclusive benefit of his employees under an irrevocable trust, the application for the approval of the fund having been made before the 1st day of January, 1976 ; and
(3) a sum equal to at least fifty per cent. of the admissible amount, or where any amount has been utilised out of such provision for the purpose of payment of any gratuity before the creation of the approved gratuity fund, a sum equal to at least fifty per cent. of the admissible amount as reduced by the amount so utilised, is paid by the assessee by way of contribution to the approved gratuity fund before the 1st day of April, 1976, and the balance of the admissible amount or, as the case may be, the balance of the admissible amount as reduced by the amount so utilised, is paid by the assessee by way of such contribution before the 1st day of April, 1977.
Explanation 1.--For the purposes of Sub-clause (ii) of Clause (b) of this sub-section, 'admissible amount' means the amount of the provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason, to the extent such amount does not exceed an amount calculated at the rate of eight and one-third per cent. of the salary (as defined in Clause (h) of Rule 2 of Part A of the Fourth Schedule) of each employee entitled to the payment of such gratuity for each year of his service in respect of which such provision is made.
Explanation 2.--For the removal of doubts, it is hereby declared that, where any provision made by the assessee for the paymentof gratuity to his employees on their retirement or on termination of their employment for any reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity to any employee shall not be allowed as a deduction in computing the income of the assessee of the previous year in which the sum is so paid.'
11. Sub-section (7) of Section 40A was inserted by the Finance Act of 1975 (No. 25 of 1975), with retrospective effect from April 1, 1973, From a bare perusal of Sub-section (1) of Section 40A, it would be evident that the provisions of Section 40A have overriding effect over any other provision of the Act in regard to matters which are contained in Section 40A. Sub-section (7) of Section 40A provides that 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. Clause (a) of Section 40A(7) is only subject to the provisions contained in Clause (b). In Clause (b), two exceptions have been provided, namely, the provision made by the assessee 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 and any provision made by the assessee for the previous year relevant to any assessment year commencing on or after April 1, 1973, but before April 1, 1976, to the extent the amount of such provision does not exceed the admissible amount, if the three conditions mentioned under this sub-clause are satisfied. The matter with regard to the eligibility for deduction under Section 28 and Section 37 was considered by the apex court in Shree Sajjan Mills Ltd. v. CIT : 1986ECR276(SC) . It was held by the apex court that the marginal note or heading is a relevant factor to be taken into consideration in construing the ambit of this section and accordingly the payments mentioned therein are not deductible according to the statute in certain circumstances. It was held that this is abundantly made clear by the non obstante expression used in Sub-section (1) of Section 40A. The provisions of Section 40A shall have effect notwithstanding anything to the contrary contained in any other provision of the Act. The actual payments or provisions for payment could have been eligible for deduction or could have been deducted either under Section 28 or under Section 37 of the Act. But the use of the non obstante expression makes it clear that, if there is any legislative base dealing withthe provisions for gratuity, then the same would be applicable in spite of and notwithstanding any other provision of the Act. It was held that the right to receive the payment accrued to the employees on their retirement or termination of their services and the liability to pay gratuity becomes an accrued liability of the assessee when the employees retire or their services are terminated. Until then, the right to receive gratuity is a contingent right and the liability to pay gratuity continues to be a contingent liability qua the employer. An employer might pay gratuity when the employee retires or his service is terminated and claim the payment made as an expenditure incurred for the purpose of business under Section 37. He might, if he followed the mercantile system, provide for the payment of gratuity which became payable during the previous year and claim it as an expenditure on accrued basis under Section 37 of the said Act. It was further observed that contingent liabilities do not constitute expenditure and cannot be the subject-matter of deduction even under the mercantile system of accounting. Expenditure which was deductible for income-tax purposes is towards a liability actually existing at the time but setting apart money which might become expenditure on the happening of an event is not expenditure. The amounts set apart by way of provision or by way of a reserve or fund to meet the liability of gratuity as and when it becomes payable will not be deductible allowance or expenditure. Where, however, an approved gratuity fund is created for the exclusive benefit of the employees under an irrevocable trust, contribution made to the fund during the year of account will be allowed to be deducted under Section 36(1)(v). The apex court has also held that the claim of deduction for gratuity after the insertion of Section 40A cannot be allowed on general principles under any other provisions of the Act, namely, Section 28 or Section 37, and, therefore, the judgment of the Income-tax Appellate Tribunal is not sustainable in view of the law laid down by the apex court.
12. The Madhya Pradesh High Court in Jiwajirao Sugar Co. Ltd. v. CIT : [1983]144ITR729(MP) , the Kerala High Court in CIT v. N. Radha Bai : [1989]180ITR429(Ker) and the Calcutta High Court in CIT v. New Swadeshi Mills of Ahmedabad Ltd. : [1984]147ITR163(Cal) have also taken the view that, in order to claim the deduction for gratuity payment, the assessee has to fulfil the conditions as laid down in Section 40A. In CIT v. Andhra Prabha P. Ltd. : [1986]158ITR416(SC) , a line of distinction was drawn in respect of the period which related to the assessment year before the insertion of Sub-section (7) in Section 40A and the period thereafter.
13. Clause (iv) of Section 36(1) provided that : 'any sum paid by the assessee as an employer by way of contribution towards a recognised provident fund or an approved superannuation fund, subject to such limits as may be prescribed for the purpose of recognising the provident fund or approving the superannuation fund, as the case may be ; and subject to such conditions as the Board may think fit to specify in cases where the contributions are not in the nature of annual contributions of fixed amounts or annual contributions fixed on some definite basis by reference to the income chargeable under the head 'Salaries' or to the contributions or to the number of members of the fund'. Sub-clause (v) also provides that : 'any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust'. The assessee has neither paid any sum by way of contribution towards a recognised provident fund nor towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust and, therefore, a deduction under Section 36(1)(iv) or 36(1)(v) cannot be allowed. For the purpose of computing the profits and gains for business or profession under Section 28, it has been provided under Section 29 that the income shall be computed in accordance with the provisions contained in Sections 30 to 43. The provisions contained in Section 40A(1), (5) and (6) are specific provisions and Section 40A(1) is an overriding section and, therefore, the Income-tax Appellate Tribunal was not justified in coming to the conclusion that the deduction can be claimed if not under Section 37, then under Section 28(i) itself. The Income-tax Appellate Tribunal was also not correct in coming to the conclusion that the provisions contained in Section 40A will not be applicable since no provision has been made in the books of account. This matter was also considered and the argument was negatived in Shree Sajjan Mills Ltd. v. CIT : 1986ECR276(SC) referred to above and the Supreme Court observed that such an interpretation would lead to an absurd result.
14. We are, therefore, of the view that the Tribunal was not justified in holding that the claim of gratuity was allowable under Section 37 or under Section 28 of the Income-tax Act, 1961. We are also of the view that the Income-tax Appellate Tribunal was not at all justified in coming to the conclusion that the claim of the assessee is not hit by Section 40A(7)(a) of the Income-tax Act, 1961. The reference is, therefore, answered in favour of the Revenue and against the assessee. No order as to costs.