I have a confusion b/w the above given 2 sections whether deduction for the both section are allowed at the same time and what is the difference b/w the above 2 sections?
18 September 2009
The difference between the two sections may be understood on going through the decided case laws. One is reproduced herein below:
[1997] 227 ITR 866 (MAD.)
HIGH COURT OF MADRAS
Commissioner of Income-tax
v.
Jawahar Mills Ltd.
K.A. THANIKKACHALAM AND N.V. BALASUBRAMANIAN, JJ.
TAX CASE NOS. 103, 104 AND 625 OF 1984
JUNE 13, 1996
JUDGMENT
K.A. Thanikkachalam, J.—At the instance of the Department, the Tribunal referred the following questions for the opinion of this court under section 256(1) of the Income-tax Act, 1961, hereinafter referred to as the "Act":
T.C. Nos. 103 and 104 of 1984:
"Whether, on the facts and in the circumstances of the case and having regard to the provisions of sections 40A(7) and 36(1)(v) of the Income-tax Act, the Appellate Tribunal is correct in law in directing to allow the entire incremental liability towards gratuity claimed by the assessee for the assessment years 1975-76 and 1976-77?"
T.C. No. 625 of 1984:
"Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in directing to allow the sum of Rs. 6,92,175 being the gratuity liability for the assessment year 1978-79?"
The assessee had established a gratuity fund known as Jawahar Mills Ltd. Employees Gratuity Fund, from December 1, 1972. The approval was asked for and obtained for group gratuity-cum-life assurance scheme as can be seen from the copy of the order of the Commissioner in C. No. 207 (44)-73, dated December 3, 1973. The trust deed provides that the intention is to provide for payment of gratuity by taking insurances on the lives of employees. In pursuance of this provision, the group insurance scheme was entered into. The scheme covers the gratuity payable to persons whose services are terminated or on death, resignation or retirement of the employee during the period covered by the policy. The amount of premium is only a fraction of the incremental liability towards gratuity. The policy covers death, resignation, retirement or termination during the year while the incremental liability takes into account the discounted value of the expected future liability of all the employees. The Income-tax Officer allowed in the assessment years 1975-76 and 1976-77 the actual payment of gratuity and payment of premium under section 36(1)(v) of the Act and did not allow the incremental liability since he was of the opinion that the assessee did not have a larger liability than the premia paid by it. He, therefore, allowed the premium. He also allowed actual gratuity payments which were neither covered by the policy nor had been allowed on provision basis in the past. Aggrieved, the assessee filed an appeal before the first appellate authority. The assessee pointed out that the incremental liability had been determined on an actuarial basis. The incremental amount as certified by an actuary (L.I.C.) was claimed by the assessee in a separate letter for both the years. Such a claim of incremental liability was at Rs. 20,71,900 for the assessment year 1975-76 in the place of the premia already allowed and Rs. 27,22,633 for the assessment year 197677. The Income-tax Officer has confined the allowance to actual payment of premia for both the years at Rs. 2,27,915 for the assessment year 197576 and Rs. 2,83,883 for the assessment year 1976-77. Actual payment of gratuity made to employees to the extent of Rs. 50,528 was allowed by him in the assessment for the assessment year 1976-77, while a similar claim of Rs. 43,693 for the assessment year 1975-76 was rather inconsistently disallowed.
In first appeal, the Commissioner of Income-tax (Appeals) found that there was a pre-existing approved gratuity fund. A provision for payment to such fund would be qualified for deduction under section 40A(7)(b)(i) of the Act. Even if no provisions were made, it would be allowable according to the first appellate authority under section 36(1)(v) of the Act, which authorises the allowance of "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. He was of the opinion that under the mercantile system of accounting "paid" includes payable sum. He also relied on section 43(2) in order to take this view. He pointed out that it is a statutory liability. Accordingly, he directed allowance of the excess of incremental liability over the premia paid as further deduction for both the years.
Aggrieved, the Department preferred second appeals before the Tribunal and contended that only the actual gratuity payment and premia would qualify for deduction under section 36(1)(v), that it could not be allowed under section 40A(7)(b)(i), since no provision had been made. The Tribunal held that since the gratuity liability is both statutory and contractual in the assessee’s case and since the assessee is maintaining its accounts on the mercantile basis, there was no doubt that the incremental liability was a charge on the assessee’s profits, whether provision as such is made or not. The Tribunal further held that such a charge would constitute a provision within the meaning of section 40A(7)(b)(i). The Tribunal concluded that the assessee’s claim was admissible under section 40A(7). In this view of the matter, the Tribunal did not go into the further point whether the claims were admissible even under section 36(1)(v) of the Act. Accordingly, the Tribunal agreed with the Commissioner of Income-tax (Appeals) that the difference between the incremental liability and premia paid (should be allowed) as further deduction. The Tribunal thus dismissed the Departmental appeals.
In the assessment year 1978-79, the assessee had paid a sum of Rs. 1,90,735 towards renewal premium in respect of the group gratuity cum-life insurance scheme for its employees. It was debited to the profit and loss account and was allowed by the Inspecting Assistant Commissioner under section 36(1)(v). In addition, the assessee claimed a sum of Rs. 8,82,960 as incremental liability based on the actuarial valuation of the gratuity liability as on December 21, 1976 (Rs. 70,16,307), and on December 31, 1977 (Rs. 78,99,223). The Inspecting Assistant Commissioner held that this claim was not admissible having regard to the provisions of section 36(1)(v), section 40A(7)(b)(i). On appeal, the Commissioner of Income-tax (Appeals) upheld the disallowance, since according to him, section 40A(7)(a) expressly bars the deduction of any provision made by the assessee for payment of gratuity to its employees. Aggrieved, the assessee filed a second appeal before the Tribunal. The Tribunal, following its earlier order, held that apart from the insurance premium, the difference between incremental liability and the premia paid would be allowed as a further deduction. Ultimately, it was held that the assessee is entitled to further deduction of the difference between the incremental liability, Rs. 8,86,910 and Rs. 6,92,175. Accordingly, the appeal filed by the assessee was allowed.
Before us, learned senior standing counsel appearing for the Department submitted that after the coming into force of section 40A(7) of the Act, introduced by the Finance Act, 1975, with effect from April 1, 1973, unless the assessee makes a provision in its books of account for its incremental gratuity liability on the basis of actuarial valuation, the assessee is not entitled to claim any deduction under this head. Learned senior standing counsel further submitted that in the present case the assessee has not made any provision in its books of account for payment of the incremental gratuity liability made on the basis of actuarial valuation. It was further submitted that after section 40A(7) was introduced with effect from April 1, 1973, it is not possible for the assessee to claim any deduction with regard to the gratuity payment made to an approved gratuity fund created under a deed of irrevocable trust. Learned senior standing counsel also pointed out that section 40A(7) of the Act will have overriding effect in the matter of allowing gratuity liability with regard to any further provisions in the Act. In order to support his contention, learned senior standing counsel relied upon the decision of the Supreme Court in Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585, and yet another decision of this court in ITO v. Palani Andavar Mills Ltd. [1996] 218 ITR 364.
On the other hand, learned counsel appearing for the assessee submitted that it is no doubt true that the assessee has not made any provision in the books of account for payment of the incremental gratuity liability based on actuarial valuation. According to learned counsel, the incremental liability is allowable as deduction under section 36(1)(v) of the Act. It was further submitted that even if no provisions were made, it would be allowable under section 36(1)(v) which authorises the allowance of 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 its employees, under an irrevocable trust. Learned counsel further submitted that the assessee was following the mercantile system of accounting under which "paid" includes "payable". To support this view he relied upon section 43(2) of the Act. According to learned counsel the gratuity liability is both statutory and contractual in the assessee’s case and since the assessee is maintaining its accounts on the mercantile basis, there was no doubt that the incremental liability was a charge on the assessee’s profits, whether provision as such is made or not. According to learned counsel such a charge would constitute a provision made within the meaning of section 40A(7)(b)(i) of the Act. Therefore, according to learned counsel for the assessee, the incremental liability is allowable as a deduction both under section 40A(7) as well as under section 36(1)(v) of the Act.
We have heard both learned senior standing counsel appearing for the Department as well as learned counsel appearing for the assessee. We have already set out the facts in detail. The point for consideration is whether the incremental liability of gratuity is allowable in the case of the assessee for the above said three assessment years either under section 40A(7) of the Act or under section 36(1)(v) of the Act. It remains to be seen that the Finance Act, 1975, introduced a new provision, viz., section 40A(7), with effect from April 1, 1973. If the assessee requires that the incremental liability of gratuity should be allowed as a deduction, the assessee should comply with the conditions prescribed under section 40A(7) of the Act; as otherwise, the assessee would not be entitled to deduction with regard to incremental liability towards gratuity. It is also significant to note that section 40A(7) would override all other provisions in the Act in the matter of allowing gratuity payment as a deduction. Therefore, after the introduction of section 40A(7), it is not possible for the assessee to contend that the assessee is entitled to deduction with regard to the incremental liability towards gratuity under section 36(1)(v) of the Act. The answers to the questions raised by learned counsel appearing for the assessee were found in a decision of the Supreme Court in Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585. In the above said decision, the Supreme Court while considering the provisions of section 40A(7) of the Act held as under (page 601):
"On a plain construction of clause (a) of sub-section (7) of section 40A of the Act, what it means is that 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 deduction in the computation of profits and gains of the year of account. The provision of clause (a) was made subject to clause (b). The embargo is on deduction of amounts provided for future use in the year of account for meeting the ultimate liability to payment of gratuity. Clause (b)(i) excludes from the operation of clause (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 and provides that such provision would be excluded from the operation of clause (a) provided the three conditions laid down by the sub-clauses are satisfied.
The submission of the assessee that if no provision is made by the assessee for gratuity, still the same will be deductible and section 40A(7) will have no application, would defeat the very purpose and object of section 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. This interpretation, if accepted, will lead to a curious result, and if one may venture to say so, an absurd result, and even where the assessee has not chosen to adopt the spread-over method and has 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 a deduction from the gross profits of the year the said estimated liability which he could have provided for but he has not chosen to do so.
Where the intention of the Legislature in enacting the provision in question was to put an embargo on the deduction, the interpretation suggested by the assessee defeats that purpose."
It was further held as under (page 602):
"It was pointed out that payment of gratuity was a statutory liability created under the Payment of Gratuity Act, 1972. It could normally be said to have arisen for the carrying on of the business. However, for gratuity to be deductible under the Act, it must fulfil the conditions laid down in section 40A(7). The deduction could not be allowed on general principles under any other section of the Act because sub-section (1) of section 40A makes it clear that the provisions of the section shall have 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’, or, in other words, it means that section 40A would have effect notwithstanding anything contained in sections 30 to 39 of the Act."
On similar facts in the case of ITO v. Palani Andavar Mills Ltd. [1996] 218 ITR 364 (Mad), a similar conclusion was arrived at by this court by following the decision of the Supreme Court in Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585.
A similar view was also taken by this court in the decision in Coimbatore Cotton Mills Ltd. v. CIT [1985] 154 ITR 240.
Recently, this court again took the same view on similar facts in T.C. No. 555 of 1983, order dated March 4, 1996 (Kothari Sugars and Chemicals Ltd. v. CIT [1997] 227 ITR 864).
Thus, on a careful consideration of the facts arising in this case, in the light of the judicial pronouncements cited supra, we hold that the assessee is not entitled to claim incremental liability of gratuity either under section 40A(7) of the Act, or under section 36(1)(v) of the Act, since the assessee has neither created any provision in his account books nor would section 36(1)(v) operate in view of the introduction of section 40A(7) of the Act with effect from April 1, 1973. Accordingly, we hold that the Tribunal is not correct in allowing the incremental liability of gratuity for the assessment years under consideration as deduction. In that view of the matter, we answer the question referred to us in the negative and in favour of the Department. No costs.
Section 36(1)(v)is - AN ALLOWING SECTION SUM PAID by the assessee as an employer as a CONTRIBUTION towards an Apd G Fund is treated as an expense of the business and hence it is deductible on payment basis.
Whereas S. 40A is-A RESTRICTIVE SECTION or You may say a disallowing section. It states that if any provision for gratuity (for direct payment to employees) is made, it will be disallowed. But if provision is made for CONTRIBUTION towards or via an Apd G Fund it will not be disallowed. The difference is "contribution and payment" situation 36(1)v) and only "provision" situation 40(A)(7).
29 May 2015
Yes, Both the deduction can be allowed on the same time. suppose as assessee paid contribution towards approved gratuity fund, then these payments would be allowed u/s 36(1)(v) and if assessee creates provision for contribution towards approved gratuity fund at year end, then same shall be allowed u/s 40A(7)(b).
However, as per provisions of section 43B it can be inferred that deduction for approved as well as for unapproved gratuity fund can be allowed only on actual payment basis. That means section 36(1)(v) should be read with section 43B to get the correct interpretation. However, provision for unapproved gratuity fund is not allowed or can be said that is disallowed as per provisions of section 40A(7)(a), therefore it can be inferred that payment towards unapproved gratuity fund is allowed only on actual payment basis, which is allowed as per section 43B.
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