N.V. Balasubramanian, J.
1. The Tribunal, at the instance of the Revenue, has referred the following questions of law under s. 256(1) of the IT Act, 1961 for the opinion of this Court :
'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in allowing the assessee's claim for Rs. 21,46,400 credited to profit and loss account as a rebate on excise duty payable for the asst. yr. 1975-76
2. Whether, on the facts and in the circumstances of the case and having regard to provisions of s. 37, the Tribunal was right in law in allowing the sum of Rs. 15,359 described as guest house expenses as an allowable deduction
3. Whether, on the facts and in the circumstances of the case, and having regard to the provisions of ss. 36(1)(v) and 40A(7) of the Act, the Tribunal was right in holding that the assessee is entitled to the deduction of Rs. 3,46,400 representing the provision for gratuity as at the end of the previous year and not Rs. 1,20,738 being the incremental liability for the asst. yr. 1975-76
4. Whether, on the facts and in the circumstances of the case the Tribunal was right in law in holding that the sum of Rs. 34,006 being money kept apart out of sale proceeds of molasses for creation of adequate storage facilities under the Molasses Control (Amendment) Order, 1962 did not form part of the assessee's income and, therefore, should not be included in its total income ?'
2. The assessee is a private limited company and for the asst. yr. 1975-76, it filed its return of income declaring an income of Rs. 57,27,735 and the ITO completed assessment under s. 143(3) r/w s. 144B of the Act making certain additions. The disputed additions, inter alia, which are the subject-matter of the tax case, are as under :
Rs.(i) Rebate on excise duty receivablebut under dispute with the Centralexcise authorities 21,46,400(ii) Guest house expenses treated asentertainment expenditure 15,359(iii) Disallowance under s. 40A(7)(b)(ii) 7,25,662(iv) Amount set apart for molasses storagefund 34,006
3. Insofar as the disputes with reference to the allowance of guest house expenses treated as entertainment expenditure and with reference to the amount kept apart for molasses storage fund are concerned, they are the subject-matter of questions 2 and 4 referred to us and the consideration of question 2 and 4 need not detain us as the said questions are covered by earlier decisions of the Supreme Court as well as this Court.
4. As regards the second question, viz., guest house expenditure treated as entertainment expenditure, as already seen, the assessment year involved is 1975-76 and the claim of the assessee is that it should be treated as business expenditure and no portion of the amount can be treated as entertainment expenditure. The Supreme Court in the case of CIT vs . Patel Bros. & Co. Ltd. : [1995]215ITR165(SC) held as under :
'Generally, 'entertainment expenditure' is an expression of wide import. However, in the context of disallowance of 'entertainment expenditure' as a business expenditure by virtue of sub-s. (2A) of s. 37, the word, 'entertainment' must be construed strictly and not expansively. Ordinarily, 'entertainment' connotes something which may be beneficial for mental or physical well being but is not essential or indispensable for human existence. A bare necessity, like an ordinary meal, is essential or indispensable and, therefore, is not 'entertainment'. If such a bare necessity is offered by another, it is hospitality but not entertainment. Unless the definition of 'entertainment' includes hospitality, the ordinary meaning of 'entertainment' cannot include hospitality. For this reason, the expenditure incurred in extending customary hospitality by offering ordinary meals as a bare necessity, is not 'entertainment expenditure' without the aid of the enlarged meaning given to the words by Explanation 2 inserted w.e.f. 1st April, 1976.'
Applying the principles of law laid down by the Supreme Court, we are of the view that the expenditure in question cannot be treated as entertainment expenditure. Accordingly, we answer the second question referred to us at the instance of the Revenue in the affirmative and against the Revenue.
5. As regards 4th question, viz., money kept apart out of sale proceeds of molasses for creation of adequate storage facilities under the Molasses Control (Amendment) Order, 1962, this Court in the case of CIT vs. Salem Co-op. Sugar Mills Ltd. (1996) 10 MTCR 150 has held that the amount kept apart cannot be included in the total income of the assessee. Following the said decision, we also answer the fourth question referred to us in the affirmative and against the Department.
6. The facts relevant for answering the first question are as under : The assessee received a sum of Rs. 21,46,400 representing the amount of incentive rebate allowed by the Central excise authorities in terms of the notification dt. 4th Oct., 1973. The Central Government, by a notification dt. 20th April, 1974 allowed the 'incentive rebate' to factories engaged in the manufacture of sugar which had produced sugar at a particular period in excess of the production of any corresponding period of earlier years. The notification proceeded on the basis that if the sugar produced in sugar factory commencing from the first day of May, 1974 and ending with 30th June, 1974 is in excess of 180 percentage of the quantity of the sugar produced during the corresponding period in the year 1973, the sugar factory would be entitled to incentive rebate at Rs. 40 per quintal of sugar. The assessee made a claim to the Central excise authorities on the basis of the notification for its production of sugar between the period 1st May, 1974 and 30th June, 1974 during which period it produced 53660 quintals of sugar. The Central excise authorities initially accepted the claim of the assessee and credit for the amount of Rs. 21,46,000 was made in PLA No. 1 (Sugar) towards excise duty. The rebate granted by the Central excise authorities was considered as a deposit to be utilised by the assessee towards the payment of excise duty on future production. The Central excise authorities, however, by a letter dt. 22nd June, 1977 reversed its earlier stand on the ground that the assessee has not produced sugar during the sugar period, 1973, and since no sugar was produced during the base period, the assessee was not entitled to any rebate. In short, the Central excise authorities were of the view that unless some quantity of sugar was produced during the corresponding period of the earlier year, the question of there being any excess would not arise and the assessee was not eligible to the grant of rebate. The assessee, on the basis of the earlier return of the Central Excise authorities credited the amount in the profit and loss account and offered the same as part of his income. However, by that time when the assessment proceedings were taken up, the Central excise authorities has withdrawn the rebate and the assessee contended before the ITO that the sum of Rs. 21,46,400 should be allowed as deduction. The ITO, however, has not accepted the claim on the ground that the assessee was contesting the order of the Central excise authorities withdrawing the rebate and no deduction of the amount withdrawn can be allowed. The assessee preferred an appeal before the CIT(A) and the CIT also upheld the order of the ITO on the ground that the incentive rebate originally allowed had not been finally lost to the assessee. He noticed a decision of the Andhra Pradesh High Court wherein that High Court has taken a view that there need not be a production in the corresponding period of earlier year for the grant of rebate. The CIT(A) also noticed that the order of the Central excise authorities withdrawing the rebate has not become final and therefore, he held that there was no case of deduction of the sum of Rs. 21,46,400 and he gave a further direction that when the matter reaches its finality, it is open to the assessee to claim the deduction of the same. The assessee took the matter in appeal before the Tribunal. The Tribunal held that the rebate was withdrawn by an order of the Central excise authorities and at the time of making assessment, the position was that the assessee was not entitled to the rebate in law. The Tribunal, therefore, held that the mere fact that the assessee has preferred an appeal would not in any way detract from the legal position that the assessee was not entitled for the rebate under the law at the time of assessment. The Tribunal placed reliance on a decision of the Supreme Court in the case of Kedarnath Jute . vs . CIT : [1971]82ITR363(SC) and held that the fact that the right of the assessee to get the refund was disputed in appeal cannot disentitle the assessee from claiming deduction of the amount in the determination of the business income for the relevant assessment year. Therefore, the Tribunal held that the assessee was entitled to have the amount of Rs. 21,46,400 excluded from the computation.
7. Mr. S. V. Subramanian, learned senior counsel appearing for the Department, has contended that the Tribunal was not correct in holding that the sum of Rs. 21,46,400 should be excluded from the computation of the assessee for the assessment year. He submitted that the Tribunal noticed the judgment of this Court in a batch of writ petitions wherein this Court, following a decision of Andhra Pradesh high Court held that the Government was bound by its earlier clarification and the judgment in the writ petitions was taken up in Writ Appeal No. 304 of 1980 and in the writ appeal, the view of the learned Single Judge was upheld. He has also submitted that the judgment rendered by this Court in Writ Appeal No. 304 of 1980 has become final, and hence, in view of the subsequent developments that had taken place, it is clear that the assessee's right to receive the rebate has become final and the subsequent withdrawal by the assessing authority has no force in the eye of law. On the other hand, Mr. Janarathana Raja, learned counsel appearing for the assessee submitted that the amount is not the income of the assessee because of certain developments that took place subsequent to the time of filing its return and the amount received as rebate was no longer its income. He submitted that when the assessee ultimately succeeds in its claim, it can be treated as the income of the year in which the finality is reached in the litigation.
8. We have considered the rival contentions of the parties. The excise authorities, by a letter dt. 31st Dec., 1974 granted rebate and on the basis of the certificate given by the Excise authorities, the assessee became eligible for the sum of Rs. 21,46,400 in respect of its production of sugar. The assessee became entitled to the amount by virtue of the statutory notification issued by the Government of India granting the rebate to the sugar factories producing sugar. No doubt, it is true, the Asstt. Collector, by an order dt. 22nd June, 1977 ordered for withdrawal of the rebate and that order was subject-matter of a batch of writ petitions before this Court and a learned Single Judge of this Court, following a decision of the Andhra Pradesh High Court held that the Government was bound by its earlier clarification and in effect this Court has upheld the claim of the assessee for the rebate under the notification. The writ petitions were carried on appeal by the excise authorities in WA No. 304 of 1980 and it is stated by the learned counsel for the assessee that the judgment of the learned Single Judge was upheld in the writ appeal. It is also stated by the learned counsel for the assessee that the judgment in WA No. 304/60 has become final and to his knowledge, the matter is not pending before the Supreme Court. In view of the subsequent developments that has taken place in the course of litigation in withdrawing the rebate and ultimately restoring the rebate originally granted in favour of the assessee, there is no dispute that the assessee became entitled to the rebate of Rs. 21,46,400. The Tribunal's view that the subsequent order of withdrawing the rebate would wipe out the earlier order is no longer sustainable in law as the subsequent order withdrawing the rebate was set aside by this Court and the only order that remains in force is the order granting rebate as the order withdrawing the rebate is no longer in force in the eye of law. In view of the subsequent development that has taken place, the view of the Tribunal that the sum of Rs. 21,46,400 should be excluded from the computation of total income is not sustainable in law and the amount was rightly shown by the assessee as income of the assessee during the previous year relevant to the asst. yr. 1975-76 and it was rightly assessed to tax by the AO. Hence, we answer the first question referred to us in the negative and in favour of the Department.
9. Insofar as the third question is concerned, it is necessary to clarify that though the question refers to the figures of Rs. 3,46,400 but the correct amount which the assessee claimed as deduction is Rs. 8,46,400. The facts leading to the third question are as under : A sum of Rs. 8,46,400 was claimed by the assessee to be deductible from the computation of income towards the provision of gratuity. The ITO, in the order of assessment, held that the gratuity fund was not approved on the date of passing the order of assessment and, therefore, he held that in the absence of approval by the prescribed authority, the provision for gratuity could not be allowed. He, therefore, held that only the liability relatable to the accounting year relevant for the asst. yr. 1975-76 would be allowable and the balance amount representing the provision under earlier years was not allowable and disallowed the same. The assessee carried the matter by way of an appeal to the CIT(A) and the appellate authority found that the gratuity fund was constituted by a deed dt. 24th Dec., 1975 and the application for approval was made to the CIT on 9th Dec., 1975 and the assessee paid to the gratuity fund a sum of Rs. 7,50,000 on 29th March, 1976 and a sum of Rs. 8,05,292 on 30th March, 1977. The CIT(A) found that all the conditions laid down under s. 40A(7)(b)(ii) of the Act were were satisfied except the approval of the CIT. The CIT(A), therefore, held that since the approval was not granted by the CIT, the entire provisions of Rs. 8,46,400 was not allowable as a deduction. He further held that it is open to the assessee to make a provision of Rs. 8,46,400 on such account in either of three previous years relevant to the asst. yrs., i.e., 1973-74, 1974-75 and 1975-76 as the provisions of s. 40A(7) of the Act were inserted with retrospective effect. The CIT(A) thus held that the entire provision would require to be disallowed. The assessee filed an appeal before the Tribunal and by the time when the Tribunal took up the matter for hearing, the CIT has recognised the trust by an order dt. 12th Sept., 1979 w.e.f. 30th Dec. 1975. The Tribunal found that all the conditions under s. 40A(7)(b)(ii) of the Act were satisfied on the facts of the case and hence, the entire amount of Rs. 8,46,400 was liable to be allowed as deduction. On behalf of the Department two contentions were urged before the Tribunal; (i) when the provision was made, the gratuity fund did not come into existence; and secondly, only incremental liability could be allowed. The Tribunal found that the provisions of s. 40A(7) of the Act were introduced with retrospective effect from 1st April, 1973 and when the provisions permitted for the creation of the fund even after the passage of the Finance Act and so long as the fund was created, the assessee would be entitled to deduction. Insofar as the provision for incremental liability is concerned, the Tribunal rejected the arguments of the Department in view of the recognition accorded by the CIT. The Tribunal, therefore, held that the entire amount of Rs. 8,46,400 is admissible for deduction.
10. Mr. S. V. Subramanian, learned senior counsel for the Department submitted that the provision made should be in accordance with actuarial valuation and the certificate should show that the provisions was made in accordance with the actuarial valuation of ascertainable liability for payment of gratuity. He referred to certain observations of the CIT(A) and contended that the certificates given do not show the liability and hence, he submitted that the provisions made was not in accordance with the certificate given by the assessee. Mr. S. V. Subramaniam, then contended that the question is wide enough for him to contend that the provision made by the assessee was not in accordance with the actuarial valuation as the certificates do not contain the figure, Rs. 8,46,400. In short, the contention of the learned senior counsel is that the provisions of s. 40A(7) were not satisfied.
11. On the other hand, Mr. Janarthana Raja, learned counsel for the assessee brought to the notice that the assessee has produced certificates of gratuity of actuarial valuation and it was specifically found by the CIT(A) as well as the Tribunal that the provision was made in accordance with the actuarial valuation. He referred to the finding given by the Tribunal that all the conditions of s. 40A(7)(b)(ii) of the Act were satisfied except the approval of the CIT. He, therefore, submitted that in view of the finding given by the Tribunal, it is not open to the learned counsel for the Revenue now to contend that the provision made was not in accordance with the actuarial liability.
12. Sec. 40A(7) of the Act was introduced by Finance Act, 1975 w.e.f. 1st April, 1973. Since the Act was introduced with retrospective effect with reference to the deduction for the provisions of gratuity, it is open to the assessee to make a provision for deduction for such amount in either of three previous years relevant to the asst. yrs., i.e., 1973-74, 1974-75 and 1975-76 and to deal with such a contingency, s. 40A(7)(b)(ii) was introduced. The claim would be liable for deduction, provided the following conditions are satisfied :
'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 reasons;
2. The assessee creates an approved gratuity fund for the exclusive benefits of his employees under an irrevocable trust.
3. The application for approval of the fund is made before 1st Jan., 1976.
4. 50% of the provision is paid by the assessee by way of contribution to the approved gratuity fund before 1st April, 1976 and the balance before 1st April, 1977.
5. By the Explanation (1) to that section, the provision also is required to be calculated at eight and one-third per cent of the salary of each employees for each year of service.'
The CIT(A) found that except the approval of the CIT to the fund, all the conditions were satisfied in the assessee's case. The Tribunal, on appeal, has also recorded a finding that all conditions including the approval of the CIT were satisfied, as by the time, when the appeals came up for hearing, the CIT has granted the approval to the fund. The Tribunal further found that the provision was based on actuarial liability. In view of the finding of the Tribunal, it is impermissible for the learned counsel for the Department now to contend that the provision made was not in accordance with the actuarial valuation of the liability of the assessee for the payment of gratuity. The Revenue has not questioned the finding on facts rendered by the Tribunal by the raising a separate question. The only condition that remained to be satisfied at the time of hearing of the appeal before the CIT(A) was the approval of the CIT and as already seen, when the Tribunal took the matter on appeal, the CIT has also granted the approval by an order dt. 12th Sept., 1979. In view of the grant of approval by the CIT, the Tribunal found that all conditions under s. 40A(7) of the Act were satisfied. It is also relevant to notice that the objection raised by and on behalf of the Department before the Tribunal was that at the time when the provision was made, there was no gratuity fund and what was available was only incremental liability. But, it was not argued before the Tribunal that the provision made by the assessee was not in accordance with the actuarial liability. The point now raised by the learned counsel for the Department involves the dispute in question of fact and involves investigation into new materials. Hence, it is not open to the learned counsel for the Revenue now to raise such an objection that the provision made was not in accordance with the actuarial valuation of the gratuity liability. Hence, we are not permitting the learned counsel to raise such a contention. The Tribunal has found that all the conditions of s. 40A(7)(b)(ii) of the Act were satisfied and in view of the positive finding of the Tribunal that the conditions were fully satisfied, we are of the opinion that the Tribunal has come to a correct conclusion that the assessee was entitled to deduction of Rs. 8,46,400 representing the provision for gratuity made at the end of previous year. Accordingly, we answer the third question in the affirmative and against the Department.
13. Consequently, we answer the questions referred to us as under : (1) The first question is answered in the negative and in favour of the Department; (ii) the second question is answered in the affirmative and against the Department; (iii) the third question is answered in the affirmative and against the Department; and (iv) the fourth question is answered in the affirmative and against the Department. No costs.