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. 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. The Appellate 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. 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. 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-tax Appellate 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. 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.
(3.) 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." 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." 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'." ;