English Indian Clays Ltd, Trivandrum V. The ACIT, Trivandrum

ITA 190/COCH/2014

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9940 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-05-2015
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 07-05-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 30-04-2014
• Court: TRIBUNAL
• Department Lawyers: M ANIL KUMAR
• Assessee Lawyers: R KRISHNA IYER
• Keywords: Business expenditure; Retrospective amendment; Difference of opinion; Competent authority
• Section: 37(1); 37; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL THIRD MEMBER COCHIN BENCH, COCHIN BEFORE SHRI D.MANMOHAN, VICE PRESIDENT I.T.A. NO.190/COCH/2014 ASSESSMENT YEAR : 2010 - 11 M/S. ENGLISH INDIAN CLAYS LTD., T.C. 79/4, VELI, TRIVANDRUM - 695 021. [PAN: AAACE 5011 C] VS. THE ASSISTANT COMMISSIONER OF INCOME - TAX, CIRCLE - 2(1), KAWDIAR, TRIVANDRUM. (ASSESSEE - APPELLANT) (REVENUE - RESPONDE NT) ASSESSEE BY SHRI R. KRISHNA IYER, CA REVENUE BY SHRI M. ANIL KUMAR, CIT(DR) DATE OF HEARING 19/03/2015 DATE OF PRONOUNCEMENT O R D E R U/S. 255(4) OF THE INCOME TAX ACT, 19 61 PER D. MANMOHAN, VICE PRESIDENT: ON ACCOUNT OF DIFFERENCE OF OPINION BETWEEN THE MEMBERS CONSTITUTING THE DIVISION BENCH, THE MATTER WAS REFERRED TO HONBLE PRESIDENT FOR NOMINATING THIRD MEMBER TO DECIDE THE POINTS OF DIFFERENCE. 2. IN THIS REGAR D, AS PER THE LD. JUDICIAL MEMBER, THE FOLLOWING POINTS OF DIFFERENCE EMERGED OUT OF THE ORDERS PASSED BY BOTH THE MEMBERS: I.T.A. NO.190/COCH/2014 2 (1) WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WHEN THE ASSESSEE AND APPLIED FOR APPROVAL OF THE GRATUITY TRUST BEFORE THE COMMISSIONER OF INCOME - TAX ON 08 - 03 - 2010 AND APPROVAL WAS IN FACT GRANTED BY AN ORDER DATED 12 - 11 - 2010, WHETHER THE APPROVAL GRANTED BY THE COMMISSIONER OF INCOME - TAX IS DEEMED TO BE GRANTED ON AND FROM 08 - 03 - 2010, THE DATE ON WHICH THE ASSESSEE FILED THE APPLICATION IN VIEW OF THE CALCUTTA HIGH COURT IN CIT VS SHALIMAR WIRE AND INDUSTRIES LTD (1991) 188 ITR 814 (CAL.) AND CIT VS CONTINENTAL COMMERCIAL CO LTD (1991) 192 ITR 66 (CAL)? (2) WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WHEN THE ASSESS EE PAID THE GRATUITY FUND BEFORE THE END OF THE FINANCIAL YEAR TO THE IRREVOCABLE TRUST CREATED AND THE FUND WAS BEYOND THE CONTROL OF THE ASSESSEE WHETHER IT HAS TO BE ALLOWED AS DEDUCTION U/S. 37(1) OF THE ACT IN VIEW OF THE JUDGMENT OF THE APEX COURT IN CIT VS. TEXTOOL CO LTD (2013) 263 CTR (SC) 257? 3. THE LD. ACCOUNTANT MEMBER, ON THE OTHER HAND, WAS OF THE OPINION THAT THE FOLLOWING POINTS OF DIFFERENCE WOULD EMERGE OUT OF THE ORDERS PASSED BY BOTH THE MEMBERS: (1). WHETHER IN THE FACTS AND CIR CUMSTANCES OF THE CASE, THE ASSESSEE COULD CLAIM PROVISION MADE FOR GRATUITY FUND DESPITE THE FACT THAT GRATUITY FUND HAD NOT BEEN APPROVED BY THE CIT AND WHETHER THE APPROVAL GRANTED BY THE CIT ON 12.11.2010 COULD BE DEEMED THAT IT WAS GRANTED W.E.F. 18.3 .2010 IN VIEW OF THE JUDGMENT OF THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS JAMUNA AUTO INDUSTRIES REPORTED 275 ITR 570? (2) WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WHEN THE ASSESSEE MADE CONTRIBUTION TO GRATUITY FUND BEFOR E IT WAS DULY APPROVED BY THE CIT AND WHETHER IT COULD BE CONSTRUED AS DUE COMPLIANCE OF PROVISION U/S. 40A(7) OF THE ACT SO AS TO ALLOW THE SAME AS DEDUCTION U/S. 37(1) OF THE ACT IN VIEW OF THE JUDGMENT OF THE APEX COURT IN THE CASE OF SHREE SAJJAN MILL S LTD. V. COMMISSIONER OF INCOME - TAX REPORTED IN 156 ITR 585 (SC)? I.T.A. NO.190/COCH/2014 3 4. THERE IS NO DISPUTE WITH REGARD TO THE FACTS OF THE CASE. THEREFORE, THE LD. COUNSEL APPEARING FOR THE ASSESSEE AND THE LD. SR. AR, CIT(DR) WERE DIRECTED TO RESOLVE THE CONTROVERSY IN THE FORM OF REFRAMING THE QUESTION. 5. AFTER DISCUSSIONS WITH THE LD. AR AND THE LD. SR. A/R CIT(DR), IN MY CONSIDERED OPINION, THE FOLLOWING ISSUE EMERGES OUT OF THE SEPARATE ORDERS PASSED BY THE DIVISION BENCH. THUS QUESTION IS REFRAMED AS UNDER: (1 ) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE ASSESSEE IS ENTITLED TO DEDUCTION U/S. 37 R.W.S. 40A(7) OF THE I.T. ACT, 1961? 6. THE UNDISPUTED FACTS ARE AS FOLLOWS. THE ASSESSEE COMPANY PAID A SUM OF RS.4,50,00,000/ - TOWARDS GRATUIT Y FUND IN THE EMPLOYEES GRATUITY TRUST FOR THE ASSESSMENT YEAR 2010 - 11, THE ACCOUNTING YEAR ENDED ON 31 - 03 - 2010. THE ASSESSEE APPLIED FOR GRANTING APPROVAL OF GRATUITY BEFORE THE COMMISSIONER OF INCOME - TAX VIDE ITS APPLICATION, CLAIMED TO HAVE BEEN FILED ON 02 - 03 - 2010, AND THE SAME WAS PUT UP BEFORE THE COMMISSIONER OF INCOME - TAX ON 08 - 03 - 2010 WHEREAS THE COMMISSIONER OF INCOME - TAX GRANTED APPROVAL VIDE HIS ORDER DATED 12/11/2010. SOON UPON MAKING THE APPLICATION FOR APPROVAL, THE ASSESSEE CONTRIBUTED TO THE GRATUITY FUND. IN OTHER WORDS, BEFORE THE END OF THE ACCOUNTING YEAR, THE ASSESSEE CONTRIBUTED TO THE GRATUITY FUND, THOUGH BY THAT DATE THE GRATUITY FUND WAS NOT APPROVED BY THE COMMISSIONER OF INCOME - TAX. I.T.A. NO.190/COCH/2014 4 THE CASE OF THE ASSESSEE IS THAT MERELY BEC AUSE THERE IS A DELAY ON THE PART OF THE COMMISSIONER OF INCOME - TAX IN GRANTING APPROVAL, THE ASSESSEE CANNOT BE FOUND FAULT WITH AND AS AND WHEN APPROVAL IS GRANTED, IT HAS TO BE CONSIDERED AS RETROSPECTIVE IN OPERATION AND HENCE, THE DEPOSIT MADE IN THE GRATUITY FUND ACCOUNT BEFORE THE END OF THE ACCOUNTING YEAR SHOULD BE TREATED AS PAYMENT MADE U/S. 40A(7) OF THE ACT IN WHICH EVENT THE ASSESSEE IS ENTITLED FOR DEDUCTION. THE CASE OF THE REVENUE IS THAT THE COMMISSIONER OF INCOME - TAX HAS NO POWER TO GRAN T APPROVAL TO THE TRUST WITH RETROSPECTIVE EFFECT. AT ANY RATE, IT WAS NOT SPECIFIED IN THE APPROVAL THAT IT WAS EFFECTIVE FROM 08 - 03 - 2010 AND IT CANNOT BE SAID TO BE AN APPROVED GRATUITY FUND BY THE END OF THE ACCOUNTING YEAR UNDER CONSIDERATION AND HENC E, THE ASSESSEE CAN BE SAID TO HAVE VIOLATED THE CONDITIONS STIPULATED U/S. 40A(7) OF THE ACT. 7. THE LD. JUDICIAL MEMBER OBSERVED THAT FOR ALL PRACTICAL PURPOSES, THE APPROVAL GRANTED ON 12/11/2010 IS DEEMED TO BE GRANTED ON 08/03/2010, I.E., ON THE D ATE OF FILING OF APPLICATION FOR APPROVAL BEFORE THE COMMISSIONER OF INCOME - TAX, AND MERELY BECAUSE THERE IS A DELAY ON THE PART OF THE COMMISSIONER IN GRANTING THE APPROVAL, THE ASSESSEE CANNOT BE DENIED THE BENEFIT OF DEDUCTION BY INVOKING SECTION 40A(7) (B) OF THE ACT. IN THIS REGARD, THE LD. AR, APPEARING FOR THE ASSESSEE, RELIED UPON THE DECISION OF THE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. CONTINENTAL COMMERCIAL CO. LTD. (1991) 192 ITR 66 (CAL) AND ALSO THE JUDGMENT OF THE SUPREME COURT IN THE CA SE OF CIT VS. TEXTOOL I.T.A. NO.190/COCH/2014 5 CO. LTD. (2013) 263 CTR (SC) 257. IN HIS OPINION, REASONABLE CONSTRUCTION HAS TO BE GIVEN TO THE LANGUAGE OF THE SECTION, BEARING IN MIND THE PURPOSE AND INTENTION OF ENACTING THE SAID PROVISION. THE APEX COURT FURTHER OBSERVED THA T A BARE READING OF SEC. 36(1)(V) OF THE ACT BRINGS OUT THE REAL INTENTION OF THE PROVISION, I.E. THE EMPLOYER SHOULD NOT HAVE ANY CONTROL OVER THE FUNDS OF THE IRREVOCABLE TRUST CREATED EXCLUSIVELY FOR THE BENEFIT OF THE EMPLOYEES AND THE AMOUNT WAS ALSO CONTRIBUTED BEFORE THE END OF THE ACCOUNTING YEAR AFTER APPLYING FOR THE APPROVAL BEFORE THE COMMISSIONER OF INCOME - TAX. APPLYING THE RATIO OF APEX COURT, IT WAS CONTENDED THAT THE VERY FACT THAT THE COMMISSIONER HAD TAKEN NOTE OF THE DATE OF APPLICATION AND HAVING NOT SPECIFICALLY GRANTED APPROVAL FROM A FUTURE DATE, IT HAS TO BE ASSUMED THAT THE APPROVAL WAS GRANTED FROM THE DATE OF MAKING THE APPLICATION ONLY. 8. THE LD. ACCOUNTANT MEMBER, ON THE OTHER HAND, WAS OF THE OPINION THAT THE DATE OF CONTRI BUTION MADE BY THE ASSESSEE AND THE POSITION AS IT STOOD ON THAT DATE IS OF PARAMOUNT IMPORTANCE. IN THIS REGARD HE OBSERVED THAT THE FACTUAL POSITION IS THAT THE AMOUNT IN QUESTION WAS CONTRIBUTED BY THE ASSESSEE BEFORE 31 - 03 - 2010 WHEREAS ON THAT DATE, T HERE WAS NO APPROVAL BY THE COMMISSIONER. THUS, DURING THE ACCOUNTING YEAR IN QUESTION, THERE WAS NO APPROVAL OF GRATUITY FUND IN EXISTENCE. HE REFERRED TO THE FOLLOWING CASE LAW IN SUPPORT OF HIS CONCLUSION THAT MERE PROVISION IS NOT SUFFICIENT FOR COM PLIANCE OF CONDITIONS STIPULATED IN SECTION 40A(7) OF THE ACT AND IT HAS TO BE SHOWN THAT THE I.T.A. NO.190/COCH/2014 6 ASSESSEE FULFILS THE SECOND CONDITION, I.E., THE CONTRIBUTION WAS MADE TO THE APPROVED GRATUITY FUND ON THE DATE WHEN THE CONTRIBUTION WAS MADE. 1) SHREE SAJJAN MILLS LTD. VS. CIT 156 ITR 585 (SC). 2) PREMIER CABLE CO. LTD. VS. CIT 193 ITR 719 (KER.) 3) CIT VS. MUMBAI KHAKA UTPADAK SAHAKARI KENDRA LTD., 211 ITR 836. 4) TUTTAPULLUM ESTATES VS. CIT, 191 ITR 131 (MAD.). 5) CIT VS. JAMUNA AUTO INDUSTRIES, 275 ITR 570 (P&H). 6) EASTERN POWER DISTRIBUTION CO. OF AP LTD. VS. ACIT, 132 ITD 568 (ITAT, VISAKHAPATNAM BENCH) 9. THE LD. COUNSEL APPEARING FOR THE ASSESSEE SUBMITTED THAT BOTH THE CONDITIONS STIPULATED UNDER SECTION 40A(7) WERE FULFILLED BY THE ASS ESSEE. THE AMOUNT HAS GONE OUT OF THE COFFERS OF THE ASSESSEE BEFORE THE END OF THE ACCOUNTING YEAR AND THAT TOO AFTER SEEKING APPROVAL FROM THE COMMISSIONER OF INCOME - TAX. ORDINARILY, THE APPROVAL HAS TO BE GRANTED WITHIN A REASONABLE TIME. ONCE THE CL AIM HAS BEEN MADE WITHIN THE TIME PRESCRIBED UNDER THE ACT, IT IS IMMATERIAL WHETHER SUCH APPROVAL WAS GRANTED BEFORE THE END OF THE ACCOUNTING YEAR OR NOT, IN AS MUCH AS THE APPROVAL WOULD RELATE BACK TO THE DATE OF APPLICATION FOR APPROVAL; ONCE APPLICA TION HAS BEEN MADE, THERE WAS NOTHING MORE THAT COULD BE DONE BY THE ASSESSEE. THE COMMISSIONER OF INCOME - TAX, BY WITHHOLDING THE GRANT OF APPROVAL, CANNOT CONTEND THAT THE ASSESSEE DID NOT SATISFY THE CONDITIONS LAID DOWN IN SECTION 40A(7)(B) OF THE ACT. THE APPROVAL OF THE COMMISSIONER OF INCOME - TAX TOWARDS THE GRATUITY FUND IS A MERE I.T.A. NO.190/COCH/2014 7 FORMALITY. HE MAY GRANT APPROVAL OR REFUSE THE SAID APPROVAL. CIRCULAR NO. 14 DATED 23/04/1969, IN ITS CLARIFICATION, OBSERVED THAT ORDINARILY APPROVAL HAS TO BE GRANTED F ROM THE DATE OF INCEPTION OF THE FUND. THE RELEVANT PORTION IS EXTRACTED BELOW: THE COMMITTEE WAS INFORMED THAT INSTRUCTIONS HAD BEEN ISSUED TO THE COMMISSIONERS TO THE EFFECT THAT WHILE ACCORDING APPROVAL TO A GRATUITY FUND, THEY MIGHT, AFTER CONSID ERING ALL THE RELEVANT FACTS OF THE CASE, ACCORD SUCH APPROVAL WITH RETROSPECTIVE EFFECT FROM THE DATE FROM WHICH THE FUND SATISFIED THE REQUIREMENTS OF RULE 3 OF PART C OF THE FOURTH SCHEDULE. THIS WOULD ENSURE THAT, EVEN THOUGH THE FUND HAD TO WAIT FOR AT LEAST THREE YEARS FROM ITS INCEPTION BEFORE APPLYING FOR APPROVAL IN ORDER TO SATISFY THE REQUIREMENT OF RULE 4, THE APPROVAL MAY, IN DESERVING CASES, BE ACCORDED FROM THE DATE OF INCEPTION OF THE FUND. 10. IN THE ABSENCE OF CLEAR M ENTION IN THE APPLICATION THAT IT IS PROSPECTIVELY APPROVED, IT IS RETROSPECTIVE IN OPERATION. IN THIS REGARD, THE ASSESSEE RELIED UPON THE DECISION OF THE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. SHALIMAR WIRE AND INDUSTRIES LTD., 188 ITR 814. THE OBS ERVATIONS OF THE HONBLE COURT AT PAGE 816, WHICH IS RELEVANT IN THIS CONTEXT, ARE EXTRACTED FOR IMMEDIATE REFERENCE: WHERE THE ASSESSEE MAKES AN APPLICATION IN COMPLIANCE WITH THE MANDATE OF SECTION 40A(7)(B)(II) (2), IT IS IMMATERIAL WHETHER THE APPROV AL HAS BEEN ACCORDED BEFORE THE ASSESSMENT IS MADE. IF THE DEPARTMENT DOES NOT ACCORD APPROVAL WITHIN A REASONABLE TIME AND THE APPROVAL COMES AFTER FOUR YEARS, FOR THAT THE ASSESSEE CANNOT BE I.T.A. NO.190/COCH/2014 8 PENALIZED. THE APPROVAL ONCE GRANTED MUST RELATE BACK TO THE ASSESSMENT YEAR IN QUESTION. 11. THE LD. COUNSEL HAS SUBMITTED THAT THE COMMISSIONER OF INCOME - TAX, TRIVANDRUM HAS REFERRED THE DATE OF APPLICATION AS 08/03/2010. THERE IS NO SPECIFIC INDICATION THAT THE APPROVAL WAS GRANTED WITH PROSPECTIVE EFFECT. ON A CONJOINT READING OF THE CBDT CIRCULAR (CITED SUPRA) AND THE JUDGMENT OF THE CALCUTTA HIGH COURT (CITED SUPRA), IT HAS TO BE ASSUMED THAT THE DELAY ON THE PART OF THE COMMISSIONER IN GRANTING APPROVAL WOULD NOT BE LOOKED UPON ADVERSELY AND, FOR THE D ELAY ON THE PART OF THE COMMISSIONER, THE ASSESSEE SHOULD NOT BE DENIED THE BENEFIT OF CLAIM OF DEDUCTION U/S. 37 R.W.S. 40A(7) OF THE ACT AND HENCE, IT HAS TO BE ASSUMED THAT IT WAS EFFECTIVE FROM THE DATE OF APPLICATION. THE VIEW TAKEN BY THE HONBLE CA LCUTTA HIGH COURT, IN THE CASE OF SHALIMAR WIRE INDUSTRIES (CITED SUPRA) WAS REAFFIRMED BY THE SAME HIGH COURT IN THE CASE OF CONTINENTAL COMMERCIAL CO. LTD. 192 ITR 66 AND IN THIS REGARD, THE HONBLE HIGH COURT AT PG. 69 OBSERVED AS UNDER: ONCE AN APPLI CATION HAS BEEN MADE WITHIN THE TIME PRESCRIBED BY THE ACT, THERE IS NOTHING MORE THAT COULD BE DONE BY THE ASSESSEE UNDER THE LAW. THE COMMISSIONER OF INCOME - TAX, BY WITHHOLDING THE GRANT OF APPROVAL ON THE ONE HAND, CANNOT CONTEND ON THE OTHER THAT THE A SSESSEE DID NOT SATISFY THE CONDITIONS LAID DOWN UNDER SECTION 40A(7)(B)(II) OF THE ACT. WE DO NOT, HOWEVER, AGREE WITH THE TRIBUNAL THAT THE APPROVAL OF THE COMMISSIONER OF INCOME - TAX TOWARDS THE GRATUITY FUND IS A MERE FORMALITY. THE COMMISSIONER MAY R EFUSE TO ACCORD APPROVAL IF HE FINDS THAT THE ASSESSEE HAS NOT SATISFIED ALL THE CONDITIONS REQUIRED FOR SUCH APPROVAL TO THE GRATUITY FUND. IT IS NOT THE I.T.A. NO.190/COCH/2014 9 CASE HERE THAT THE GRATUITY FUND CREATED BY THE ASSESSEE IS NOT LIABLE TO BE APPROVED. ONCE THE APP LICATION HAS BEEN MADE WITHIN THE TIME PRESCRIBED BY THE ACT TO THE COMMISSIONER FOR APPROVAL, IT IS IMMATERIAL WHEN SUCH APPROVAL IS ACCORDED, IN AS MUCH AS THE APPROVAL WOULD RELATE BACK TO THE DATE OF APPLICATION FOR SUCH APPROVAL. IF, HOWEVER, FOR ANY REASON, THE APPROVAL IS NOT GRANTED, THE DEPARTMENT MAY WITHDRAW THE BENEFIT EXTENDED TO THE ASSESSEE UNDER SECTION 40A(7). HOWEVER, THE ASSESSEE HAS TO SATISFY ALL THE THREE CONDITIONS MENTIONED IN SECTION 40A(7)(B)(II). THE CONDITION OF CREATING AN APP ROVED GRATUITY FUND WOULD BE SATISFIED IF THE ASSESSEE MAKES AN APPLICATION FOR SUCH APPROVAL ON OR BEFORE JANUARY 1, 1976, IRRESPECTIVE OF THE FACT WHETHER SUCH APPROVAL WAS ACCORDED TO THE ASSESSEE BEFORE THE ASSESSMENT WAS COMPLETED. 12. THE LD . COUNSEL HAS ADVERTED OUR ATTENTION TO THE LD. JUDICIAL MEMBERS ORDER TO SUBMIT THAT THE DECISION RENDERED BY THE LD. JUDICIAL MEMBER IS BASED UPON THE RATIO LAID DOWN BY THE APEX COURT IN THE CASE OF TEXTOOL COMPANY 263 CTR 257. RELEVANT OBSERVATIONS O F THE COURT ARE EXTRACTED FOR IMMEDIATE REFERENCE. TRUE THAT A FISCAL STATUTE IS TO BE CONSTRUED STRICTLY AND NOTHING SHOULD BE ADDED OR SUBTRACTED TO THE LANGUAGE EMPLOYED IN THE SECTION, YET A STRICT CONSTRUCTION OF A PROVISION DOES NOT RULE OUT THE A PPLICATION OF THE PRINCIPLES OF REASONABLE CONSTRUCTION TO GIVE EFFECT TO THE PURPOSE AND INTENTION OF ANY PARTICULAR PROVISION OF THE ACT.(SEE : SAJJAN MILLS LTD. VS. COMMISSIONER OF INCOME TAX, M.P. & ANR. (1985) 156 ITR 585). FROM A BARE READING OF SEC TION 36(1)(V) OF THE ACT, IT IS MANIFEST THAT THE REAL INTENTION BEHIND THE PROVISION IS THAT THE EMPLOYER SHOULD NOT HAVE ANY CONTROL OVER THE FUNDS OF THE IRREVOCABLE TRUST CREATED EXCLUSIVELY FOR THE BENEFIT OF THE EMPLOYEES. IN THE INSTANT CASE, IT IS EVIDENT FROM THE FINDINGS RECORDED BY THE COMMISSIONER AND AFFIRMED BY THE TRIBUNAL THAT THE ASSESSEE HAD ABSOLUTELY NO CONTROL OVER THE FUND CREATED BY THE LIC FOR THE BENEFIT OF THE EMPLOYEES OF THE ASSESSEE AND FURTHER ALL THE CONTRIBUTION MADE BY THE A SSESSEE IN THE SAID FUND ULTIMATELY CAME BACK TO THE TEXTOOL EMPLOYEES GRATUITY FUND, APPROVED BY THE COMMISSIONER WITH EFFECT FROM THE FOLLOWING PREVIOUS YEAR. THUS, THE CONDITIONS STIPULATED IN SECTION 36(1)(V) OF THE ACT WERE SATISFIED. HAVING REGARD TO THE FACTS FOUND BY THE I.T.A. NO.190/COCH/2014 10 COMMISSIONER AND AFFIRMED BY THE TRIBUNAL, NO FAULT CAN BE FOUND WITH THE OPINION EXPRESSED BY THE HIGH COURT, WARRANTING OUR INTERFERENCE. 13. IT DESERVES TO BE NOTICED THAT THE LD. COUNSEL APPEARING ON BEHALF OF THE ASSES SEE, DESPITE HAVING SUFFICIENT PROFESSIONAL STANDING, DID NOT PREPARE THE CASE IN THE CORRECT PERSPECTIVE AND MERELY RELIED ON THE ORDER PASSED BY THE LD. JUDICIAL MEMBER AND THE BENCH HAD TO MAKE HIM GO THROUGH THE CASE LAW. WITH GREATEST RESPECT, I MAY MENTION THAT THIS IS A CASE WHERE THE BENCH DID NOT GET PROPER ASSISTANCE AND RATHER THE BENCH HAD TO ASSIST HIM AND HAD TO ADVISE HIM TO REFER TO THE CASE LAW RELIED UPON BY THE LD. ACCOUNTANT MEMBER TO POINT OUT AS TO WHICH CASE LAW RELIED UPON BY AM ARE DISTINGUISHABLE. THE LD. COUNSEL FOR THE ASSESSEE FAILED TO EXPLAIN THE CASE LAW, WHICH CAN BE ACHIEVED ONLY WHEN THE CASE LAW RELIED UPON BY THE LD. JUDICIAL MEMBER AND LD. ACCOUNTANT MEMBER ARE PROPERLY GONE INTO TO PROJECT HIS CASE, I.E., WHETHER THEY ARE APPLICABLE TO THE FACTS AND CIRCUMSTANCES OF THIS CASE; THEN IT IS FOR THE REVENUE TO SHOW THAT THE CASE LAW RELIED UPON BY THE LD. ACCOUNTANT MEMBER APTLY APPLIES TO THE FACTS OF THE CASE AND THE CASE LAW RELIED UPON BY THE LD. JUDICIAL MEMBER ARE DIS TINGUISHABLE ON FACTS. AFTER OBTAINING THE CASE LAW FROM THE LIBRARY AND HANDING OVER THE SAME TO THE ASSESSEES COUNSEL, HE WAS PERSUADED TO READ THE CASE LAW SO AS TO ENABLE THE BENCH TO UNDERSTAND AS TO WHICH IS THE ACCOUNTING YEAR/ASSESSMENT YEAR IN DI SPUTE AND WHEN APPLICATION WAS MADE I.T.A. NO.190/COCH/2014 11 AND PAYMENTS MADE IN AFORESAID CASES, SO AS TO APPRECIATE AS TO WHETHER THESE CASE LAW ARE APPLICABLE TO THE INSTANT CASE OR NOT. 14. IT IS NOT DISPUTED BY THE LD. JUDICIAL MEMBER AS WELL AS THE LD. ACCOUNTANT MEMB ER THAT THE GRATUITY FUND WAS DEPOSITED BEFORE THE END OF THE ACCOUNTING YEAR. THE LD. ACCOUNTANT MEMBER RELIED UPON THE DECISION OF THE APEX COURT IN THE CASE OF SHREE SAJJAN MILLS LTD. 156 ITR 585 WHILE OBSERVING THAT IN ORDER TO APPLY THE PROVISIONS OF SEC. 40A(7) OF THE ACT, TWO CONDITIONS HAVE TO BE FULFILLED, I.E., A PROVISION HAS TO BE MADE BY THE ASSESSEE FOR THE PURPOSE OF PAYMENT OF A SUM, BY WAY OF CONTRIBUTION TOWARDS GRATUITY FUND, AND IT SHOULD BE TOWARDS AN APPROVED GRATUITY FUND. THE EXPRE SSION PROVISION MADE BY THE ASSESSEE IS NOT USED IN ANY ARTIFICIAL SENSE, I.E., BY STATING HOW MUCH AMOUNT WAS SET APART BY THE ASSESSEE FOR MEETING THE LIABILITY FOR GRATUITY IN ITS BOOKS OF ACCOUNTS. IT SHOULD BE ADMISSIBLE AS DEDUCTION UNDER SECTIONS 28 TO 37 OF THE ACT AND FOR THAT PURPOSE, PROVISION HAS TO BE MADE STRICTLY ACCORDING TO THE PRINCIPLES LAID DOWN IN SECTION 40A(7) OF THE ACT. THE LD. ACCOUNTANT MEMBER OBSERVED THAT IN THE CASE OF THE ASSESSEE, THE DEPOSIT WAS NOT MADE TO THE APPROVED GRATUITY FUND AND HENCE THE RATIO LAID DOWN BY THE APEX COURT SQUARELY APPLIES TO THE FACTS OF THE CASE. I.T.A. NO.190/COCH/2014 12 15. A CAREFUL PERUSAL OF THE DECISION INDICATE THAT A MERE PROVISION WAS MADE FOR FUTURE USE BY THE ASSESSEE OUT OF THE GROSS PROFITS TOWARDS PAYM ENT OF GRATUITY TO EMPLOYEES ON THEIR RETIREMENT OR TERMINATION OF SERVICE. WHEREAS, IN THE INSTANT CASE, THE ASSESSEE ACTUALLY DEPOSITED THE AMOUNT IN THE ABOVE FUND ACCOUNT BEFORE THE END OF THE ACCOUNTING YEAR IN QUESTION AND FULFILLED THE OBLIGATION ON ITS PART OF SEEKING APPROVAL FROM THE COMMISSIONER OF INCOME - TAX BEFORE THE END OF THE ACCOUNTING YEAR; IN THE INSTANT CASE, FUNDS HAVE GONE OUT OF THE HANDS AND THE SAME WAS DEPOSITED IN THE GRATUITY FUND ACCOUNT SUBJECT TO THE APPROVAL BY THE COMMIS SIONER. THUS, IN THE LIGHT OF THE CLARIFICATORY CIRCULAR ISSUED BY THE CBDT AND IN THE LIGHT OF THE DECISIONS RENDERED BY THE HONBLE CALCUTTA HIGH COURT (CITED SUPRA), THE APPROVAL SHOULD ORDINARILY BE RETROSPECTIVE UNLESS SPECIFICALLY MENTIONED IN THE AP PROVAL; IN THE INSTANT CASE, THE APPROVAL WAS NOT GRANTED PROSPECTIVELY AND HENCE, THE DECISIONS OF THE CALCUTTA HIGH COURT SQUARELY APPLY TO THE FACTS OF THE CASE. 16. THE LD. ACCOUNTANT MEMBER HAS RELIED ON THE DECISION OF THE HONBLE MADRAS HIGH CO URT IN THE CASE OF TUTTAPULLUM ESTATES VS. CIT (1991) 191 ITR 131. THE AFORECITED CASE PERTAINS TO THE ASSESSMENT YEAR 1973 - 74 WHEREIN THE ASSESSEE CREATED THE GRATUITY TRUST ON 1ST AUGUST, 1975 AND THE SUM HAD ALSO BEEN HANDED OVER TO THE TRUST ON 24 TH SE PTEMBER, 1975, AND THE TRUST, IN TURN, HAD HANDED OVER THE ADMINISTRATION OF THE TRUST TO THE LIC ON 1 ST I.T.A. NO.190/COCH/2014 13 MARCH 1976. UNDER THESE FACTS, THE HONBLE COURT OBSERVED THAT THE ASSESSEE HAD NOT COMPLIED WITH THE FIRST OF THE CONDITIONS. ON THE OTHER HAND, IN T HE CASE OF THE ASSESSEE HEREIN, THE TRUST WAS CREATED AND APPROVAL WAS SOUGHT BEFORE THE END OF THE ACCOUNTING YEAR IN QUESTION AND IN FACT, THE DEPOSIT WAS MADE IN THE GRATUITY FUND ACCOUNT BEFORE THE END OF THE ACCOUNTING YEAR AND HENCE, THE AFORECITED C ASE IS DISTINGUISHABLE ON FACTS. 17. THE LD. ACCOUNTANT MEMBER RELIED UPON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. MUMBAI KHAKA UTPADAK SAHAKARI KENDRA LTD. (211 ITR 836). IT MAY BE NOTICED FROM PAGE 837 OF THE SAID JUDGM ENT THAT THE MATTER PERTAINS TO THE ASSESSMENT YEAR 1976 - 77 AND THE CORRESPONDING ACCOUNTING YEAR ENDED ON 30 TH JUNE 1975 WHEREAS THE APPLICATION WAS MADE TO THE COMMISSIONER OF INCOME - TAX FOR HIS APPROVAL ON 26 TH DECEMBER, 1975, I.E., AFTER THE END OF THE ACCOUNTING YEAR. THE ACCOUNTING YEAR HAVING ENDED ON 30 TH JUNE, 1975, THE HONBLE COURT OBSERVED THAT THAT THERE WAS NO APPROVED GRATUITY FUND IN EXISTENCE DURING THE ACCOUNTING YEAR SINCE IT CAME INTO EXISTENCE FOR THE FIRST TIME ON THE FIRST DAY OF THE SUCCEEDING YEAR, I.E., ON 1 ST JULY, 1975 AND HENCE, THE QUESTION OF PROVISION BEING MADE BY THE ASSESSEE DURING THE YEAR IN QUESTION FOR THE PURPOSE OF PAYMENT OF CONTRIBUTION TOWARDS APPROVED GRATUITY FUND CANNOT ARISE. THEREFORE, THE AFORCITED CASE IS DISTINGUISHABLE ON FACTS. I.T.A. NO.190/COCH/2014 14 18. SIMILARLY, THE DECISION OF THE HONBLE KERALA HIGH COURT, IN THE CASE OF PREMIER CABLE CO. LTD. VS. CIT (193 ITR 719) IS ALSO DISTINGUISHABLE ON FACTS IN AS MUCH AS THE SAME WAS CONCERNED WITH THE ASSESSMENT YEAR 1976 - 77 AND OPTED FOR THE PREVIOUS YEAR ENDING ON 30 - 09 - 1975 WHEREAS THE TRUST CAME INTO EXISTENCE ON 01/01/1976 AND THE APPLICATION FOR APPROVAL WAS MADE ONLY ON 30/12/1975. UNDER THESE CIRCUMSTANCES, THE COURT OBSERVED THAT AS PER THE PROVISIONS OF SECTION 4 0A(7) OF THE ACT, THE GRATUITY TRUST SHOULD BE IN EXISTENCE DURING THE RELEVANT PREVIOUS YEAR WHEREAS, IN THE INSTANT CASE, THERE IS NO SUCH TRUST IN EXISTENCE; THUS, THE DECISION OF THE HONBLE HIGH COURT IS DISTINGUISHABLE ON FACTS. 19. THE NEXT CA SE LAW RELIED UPON BY THE LD. ACCOUNTANT MEMBER IS BY THE ITAT, VISAKHAPATNAM BENCH IN THE CASE OF EASTERN POWER DISTRIBUTION CO. OF AP LTD. VS. ACIT IN 132 ITD 568. I HAVE CALLED FOR THE ITD AND DIRECTED BOTH THE PARTIES TO GO THROUGH THE SAID DECISION T O SPECIFY AS TO WHETHER THE BENCH REFERRED TO THE INSTRUCTIONS ISSUED BY THE CBDT AND THE DECISIONS OF THE CALCUTTA HIGH COURT OR THE SUPREME COURT. I HAVE DIRECTED BOTH THE PARTIES TO VERIFY AS TO WHETHER THE ASSESSEE MADE AN APPLICATION FOR APPROVAL TO THE GRATUITY FUND BEFORE THE END OF THE ACCOUNTING YEAR AND ALSO MADE THE PAYMENT BEFORE THAT DATE. BOTH THE PARTIES ADMITTED THAT THE FACTS ARE NOT CLEAR AND THE BENCH HAS ALSO NOT REFERRED TO ANY OF THE EARLIER JUDGMENTS ON THIS ISSUE. I.T.A. NO.190/COCH/2014 15 20. THE LD. ACCOUNTANT MEMBER RELIED ON THE DECISION OF THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. JAMUNA AUTO INDUSTRIES REPORTED IN 275 ITR 570 (P&H)WHEREIN THE BENCH OBSERVED THAT A PROVISION MADE TOWARDS GRATUITY IN AN APPROVED GRATUITY FUND CA N BE CLAIMED AS DEDUCTION IN COMPUTATION OF PROFITS AND GAINS. A CAREFUL PERUSAL OF THE SAID ORDER, AND IN PARTICULAR PARA 14, WOULD INDICATE THAT IN THE AFORECITED CASE, THE COMMISSIONER HAD GRANTED APPROVAL ONLY FROM PROSPECTIVE DATE SINCE THE INFORMATI ON SUBMITTED BY THE ASSESSEE WAS NOT SUFFICIENT FOR GRANTING APPROVAL FROM THE DATE OF MAKING APPLICATION FOR APPROVAL AND SUFFICIENT OPPORTUNITIES WERE GIVEN TO THE PARTIES AT THAT STAGE. THE PARTIES ADMITTED THAT THE APPROVAL MAY BE ALLOWED TO THE FUND ONLY WITH EFFECT FROM 26 TH MARCH, 1979, THOUGH THE ASSESSMENT YEAR UNDER CONSIDERATION IS 1978 - 79 AND THE ACCOUNTING YEAR ENDED ON 31/03/1978. THE COURT AFFIRMED THE DECISION OF THE CALCUTTA HIGH COURT BY OBSERVING AS UNDER: 17. THE TWO JUDGMEN TS, ON W HICH RELIANCE HAS BEEN PLACED BY SHRI JAIN, ARE CLEARLY DISTINGUISHABLE. THE FACTS OF THE JUDGMENT OF CALCUTTA HIGH COURT IN CIT VS. SHALIMAR WIRE & INDUSTRIES LTD. (SUPRA) SHOW THAT APPROVAL TO THE GRATUITY FUND, FOR WHICH APPLICATION WAS MADE ON 30 TH DE CEMBER, 1975, WAS GRANTED BY THE COMPETENT AUTHORITY W.E.F. 27 TH MARCH,1976. THE DIVISION BENCH OF THE HIGH COURT TOOK THE VIEW THAT APPROVAL WOULD RELATE BACK TO THE ASSESSMENT YEAR IN QUESTION AND ACCORDINGLY DECLARED THAT THE ASSESSEE WAS ENTITLED TO D EDUCTION OF RS.4,27,781, REPRESENTING PROVISION FOR PAYMENT OF GRATUITY MADE IN THE PREVIOUS YEAR ENDING 30 TH JUNE 1974. I.T.A. NO.190/COCH/2014 16 THUS THE JUDGMENT RELIED UPON BY THE LD. ACCOUNTANT MEMBER IS CLEARLY DISTINGUISHABLE ON FACTS. 21. THE LD. COUNSEL FOR THE ASS ESSEE SUBMITTED THAT IN THE INSTANT CASE, THE CASE LAW RELIED UPON BY THE LD. ACCOUNTANT MEMBER ARE DISTINGUISHABLE ON FACTS WHEREAS THE CASE LAW REFERRED TO BY THE LD. JUDICIAL MEMBER ARE APTLY APPLICABLE TO THE FACTS AND CIRCUMSTANCES OF THE CASE AND HEN CE, THE ORDER PASSED BY THE LD. JUDICIAL MEMBER, WHICH IS BASED ON THE VIEW TAKEN BY HONBLE CALCUTTA HIGH COURT, DESERVES ACCEPTANCE. 22 ON THE OTHER HAND, THE LD. SR. A/R, CIT(DR) SUBMITTED THAT SECTION 40A(7) (B) SPEAKS OF PAYMENT TO AN APPROVED GRA TUITY FUND AND TECHNICALLY SPEAKING, THE PAYMENT SHOULD BE MADE TO GRATUITY FUND WHICH IS APPROVED ON THE DATE OF MAKING THE DEPOSIT. IN THE INSTANT CASE, ON THE DATE OF MAKING PAYMENT, THE APPROVAL WAS NOT GRANTED AND HENCE, ONE OF THE TWO CONDITIONS U/S . 40A(7) CANNOT BE SAID TO HAVE BEEN FULFILLED. HE ALSO SUBMITTED THAT THE PROVISIONS OF THE INCOME TAX ACT HAVE TO BE STRICTLY CONSTRUED. IN THIS REGARD, HE STRONGLY RELIED UPON THE RATIO OF THE APEX COURT IN THE CASE OF CASE OF SHREE SAJJAN MILLS (CITED SUPRA). THUS, HE STRONGLY SUPPORTED THE ORDER PASSED BY THE LD. ACCOUNTANT MEMBER. I.T.A. NO.190/COCH/2014 17 23. I HAVE CAREFULLY GONE THROUGH THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. IT IS NOT IN DISPUTE THAT THE ASSESSEE MADE APPLICATION TO THE COMMISSIONER OF INCOME - TA X FOR APPROVAL OF THE GRATUITY FUND AND THE SAME WAS APPLIED AS ON 08/03/2010, I.E., BEFORE THE END OF THE ACCOUNTING YEAR. IT IS ALSO NOT IN DISPUTE THAT THE ASSESSEE DEPOSITED THE AMOUNT IN THE GRATUITY FUND ACCOUNT BEFORE THE END OF THE ACCOUNTING YEAR . WHILE GRANTING APPROVAL, THE COMMISSIONER OF INCOME - TAX HAS NOT SPECIFICALLY MENTIONED THAT THE APPROVAL WAS GRANTED PROSPECTIVELY, THOUGH, THE DATE OF APPLICATION FOR APPROVAL IS REFERRED TO AS 08/03/2010. IN THE LIGHT OF THE CLARIFICATIONS ISSUED BY C BDT CIRCULAR (CITED SUPRA) AND THE DECISIONS OF THE CALCUTTA HIGH COURT (CITED SUPRA) WHEN THE ASSESSEE MAKES AN APPLICATION FOR APPROVAL OF GRATUITY FUND MERELY BECAUSE THERE IS A DELAY ON THE PART OF THE COMMISSIONER OF INCOME - TAX IN GRANTING APPROVAL, A N ADVERSE VIEW CANNOT BE TAKEN AND THE BENEFIT HAS TO BE GRANTED TO THE ASSESSEE BY ASSUMING THAT THE APPROVAL WAS GRANTED FROM THE DATE OF APPLICATION OF GRATUITY FUND IN WHICH EVENT IT HAS TO BE ASSUMED THAT ON THE DATE OF MAKING CONTRIBUTION TO THE GRAT UITY FUND IT WAS AN APPROVED GRATUITY FUND AND CONSEQUENTLY, THE CONDITIONS PRESCRIBED U/S. 40A(7) (B) CAN BE SAID TO HAVE BEEN FULFILLED. THE CASE LAW RELIED UPON BY THE LD. ACCOUNTANT MEMBER ARE DISTINGUISHABLE ON FACTS AS NARRATED ABOVE. BY RESPECTFUL LY FOLLOWING THE RATIO OF DECISIONS OF THE HONBLE CALCUTTA HIGH COURT ( CITED SUPRA) AS WELL AS THE RATIO OF THE DECISION OF THE APEX COURT IN THE CASE OF TEXTOOL COMPANY ( CITED SUPRA), I AM OF THE CONSIDERED I.T.A. NO.190/COCH/2014 18 OPINION THAT THE VIEW TAKEN BY THE LD. JUD ICIAL MEMBER IS IN ACCORDANCE WITH LAW AND THEREFORE, I ANSWER THE QUESTION IN AFFIRMATIVE AND IN FAVOUR OF THE ASSESSEE. 24. THE MATTER MAY NOW BE PLACED BEFORE THE DIVISION BENCH WHICH HAS TO DECIDE THE MATTER ACCORDING TO THE MAJORITY VIEW. SD/ - (D.MANMOHAN) VICE PRESIDENT PLACE: KOCHI DATE D: 20TH MARCH, 2015 GJ COPY TO: 1. ASSESSEE. 2. REVENUE. 3. CIT 4. CIT(A)THE COMMISSIONER OF INCOME - TAX, 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T., COCHIN I.T.A. NO.190/COCH/2014 19 IN T HE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE SHRI V. DURGARAO J.M AND B.R.BASKARAN, A.M. I.T.A. NO.190/COCH/2014 ASSESSMENT YEAR : 2010 - 11 M/ S. ENGLISH INDIAN CLAYS LTD., T.C. 79/4, VELI, TRIVANDRUM - 695 021. [PAN: AAACE 5011 C] VS. THE ASSISTANT COMMISSIONER OF INCOME - TAX, CIRCLE - 2(1), KAWDIAR, TRIVANDRUM. (ASSESSEE - APPELLANT) (REVENUE - RESPONDENT) ASSESSEE BY NONE REVENUE BY SH RI M. ANIL KUMAR, CIT(DR) DATE OF HEARING 07/05/2015 DATE OF PRONOUNCEMENT 07/05/2015 O R D E R PER B.R. BASKARAN, AM: 1. SINCE THERE WAS A DIFFER ENCE OF OPINION BETWEEN THE TWO MEMBERS CONSTITUTING THE DIVISION BENCH OF ITAT, COCHIN, THE MATTER WAS REFERRED TO THE THIRD MEMBER BY THE HONBLE PRESIDENT U/S. 255(4) OF THE ACT. THE HONBLE VICE PRESIDENT, ACTING AS THIRD MEMBER, REFRAMED THE QUESTION AS UNDER WITH THE CONSENT OF BOTH THE PARTIES TO THE APPEAL: WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE ASSESSEE IS ENTITLED TO DEDUCTION U/S 37 R.W.S. 40A(7) OF THE I.T ACT 1961? I.T.A. NO.190/COCH/2014 20 2. THE HONBLE THIRD MEMBER HAS AGREED WITH THE VIEW T AKEN BY THE HONBLE JUDICIAL MEMBER. ACCORDINGLY, AS PER THE MAJORITY VIEW, THE ABOVE SAID ISSUE IS DECIDED AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE. 3. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. PRONOUNCED IN THE O PEN COURT ON THIS 7 TH DAY OF MAY, 2015. SD/ - SD (V. DURGA RAO) (B.R. BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEM BER PLACE: KOCHI DATED: 7TH MAY, 2015 GJ COPY TO: 1. M/S. ENGLISH CLAYS LTD., T.C. 79/4, VELI, TRIVANDRUM - 695 021. 2. THE ASSISTANT COMMISSIONER OF INCOME - TAX, CIRCLE - 2(1), KAWDIAR, TRIVANDRUM. 3. THE COMMISSIONER OF INCOME - TAX ( APPEALS), TRIVANDRUM. 4. THE COMMISSIONER OF INCOME - TAX, TRIVANDRUM. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) ITAT, COCHIN I.T.A. NO.190/COCH/2014 21 RE: ENGLISH INDIAN CLAYS LTD VS ACIT IN ITA NO.190/COCH/2014 PER CHANDRA POOJARI I HAVE GONE THROUGH THE ORDER AFTER CAREFUL P ERUSAL OF THE SAME, I AM UNABLE TO CONCUR WITH THE REASONING AND CONCLUSION OF THE LD JUDICIAL MEMBER IN RESPECT OF CERTAIN ISSUES PROPOSED IN THE ORDER. HENCE, I PROPOSE TO WRITE MY SEPARATE ORDER FOR REASONS GIVEN HEREUNDER: 2 IN THIS CASE THE ONLY ISSU E RELATES TO THE ALLOWABILITY OF CONTRIBUTION TOWARDS GRATUITY FUND OF RS 4.50 CRORES AS BUSINESS EXPENDITURE. 3 IN THIS CASE THE ASSESSEE MADE AN APPLICATION FOR APPROVAL OF GRATUITY FUND TO THE COMMISSIONER OF INCOME TAX, TRIVANDRUM ON 8 TH MARCH 2010. THE CIT GRANTED THE APPROVAL VIDE ITS ORDER DATED 12.11.2010. ACCORDING TO THE LD AR OF THE ASSESSEE, IN VIEW OF THE JUDGMENT OF CALCUTTA HIGH COURT IN THE CASE OF CIT VS SHALIMAR WIRE AND INDUSTRIES LTD REPORTED IN 188 ITR 814, THE APPROVAL GRANTED BY THE CIT WILL RECON BACK TO THE DATE OF APPLICATION MADE TO CIT AND IT IS IMMATERIAL WHETHER THE APPROVAL HAS BEEN ACCORDED AFTER END OF FINANCIAL YEAR . THE APPROVAL ONCE GRANTED MUST RELATE BACK TO THE ASSESSMENT YEAR IN QUESTION. IF THE DEPARTMENT D OES NOT ACCORD APPROVAL WITHIN A REASONABLE TIME AND THE APPROVAL COMES AFTER THE END OF THE PREVIOUS YEAR , FOR THAT THE ASSESSEE CANNOT BE PENALIZED. THE APPROVAL ONCE GRANTED MUST RELATE BACK TO THE ASSESSMENT YEAR IN QUESTION. 3.1 ON THE OTHER HAND, T HE LD DR SUBMITTED THAT THE APPROVAL IS GRANTED ONLY ON 12.11.2010 WHICH IS BEYOND THE END OF THE FINANCIAL YEAR UNDER CONSIDERATION AND THEREFORE, THE ASSESSEE IS NOT ENTITLE FOR DEDUCTION OF CONTRIBUTION MADE TOWARDS GRATUITY FUND. I.T.A. NO.190/COCH/2014 22 4 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE. THE CONTROVERSY PERTAINS TO THE ASSESSMENT YEAR 2010 - 11 CORRESPONDING TO THE PREVIOUS YEAR ENDED ON 31.3.2010 . THE UNCONTROVERTED FACTUAL POSITION IS THAT THE AMOUNTS IN QUESTION WERE CONTRIBUTED BY THE ASSESSEE BEFORE 3 1.3.2010 TOWARDS PROVISION FOR GRATUITY FUND. THERE IS, HOWEVER, NO CONTROVERSY ABOUT THE FACT THAT NO APPROVED GRATUITY FUND WAS IN EXISTENCE DURING THE ACCOUNTING YEAR IN QUESTION. IN FACT, THE ASSESSEE APPLIED FOR APPROVAL OF THE GRATUITY FUND AS REQ UIRED BY RULE 2(1) OF PART C OF THE FOURTH SCHEDULE TO THE ACT DURING THE ACCOUNTING YEAR ON 8.3.2010 . THE COMMISSIONER ACCORDED APPROVAL TO THE SAID APPLICATION BY IS ORDER DATED 12,11,2010 . THUS, DURING THE ACCOUNTING YEAR IN QUESTION, THERE WAS NO APPR OVED GRATUITY FUND IN EXISTENCE. 4.1 APPROVED GRATUITY FUND' HAS BEEN DEFINED IN CLAUSE (5) OF SECTION 2 OF THE INCOME - TAX ACT, 1961, TO MEAN A GRATUITY FUND 'WHICH HAS BEEN AND CONTINUES TO BE APPROVED BY THE COMMISSIONER IN ACCORDANCE WITH THE RULES CONTAINED IN PART C OF THE FOURTH SCHEDULE'. RULE 2 OF PART C OF THE FOURTH SCHEDULE DEALS WITH THE PROCEDURE OF APPROVAL OF A GRATUITY FUND. SUB - RULE (1) OF RULE 2 EMPOWERS THE COMMISSIONER TO ACCORD APPROVAL TO ANY GRATUITY FUND WHICH, IN HIS OPINION , COMPLIES WITH THE REQUIREMENTS OF RULE 3. SUB - RULE (2) REQUIRES THE COMMISSIONER TO COMMUNICATE, IN WRITING, TO THE TRUSTEES OF THE FUND, THE GRANT OF APPROVAL 'WITH THE DATE ON WHICH THE APPROVAL IS TO TAKE EFFECT'. IN THE INSTANT CASE, THE COMMISSIO NER ACCORDED APPROVAL TO THE GRATUITY FUND BY HIS ORDER DATED 12.11.2010 , AND COMMUNICATED THE GRANT OF THE APPROVAL TO THE ASSESSEE AND INTIMATED THAT THE APPROVAL WAS TO TAKE EFFECT FROM 12.11.2010 . IT IS, THEREFORE, CLEAR THAT AN APPROVED GRATUITY FUND WITHIN THE MEANING OF SECTION 2(5) READ WITH RULE 2 OF PART C OF THE FOURTH SCHEDULE I.T.A. NO.190/COCH/2014 23 TO THE ACT CAME INTO EXISTENCE IN THE ESTABLISHMENT OF THE ASSESSEE ONLY WITH EFFECT FROM 12.11.2010 . 4.2 IN THIS FACTUAL BACKGROUND, IT MAY NOW BE EXPEDIENT TO REFER TO THE PROVISIONS OF SECTION 40A(7) OF THE ACT, WHICH DEAL WITH THE ALLOWANCE OF DEDUCTION IN RESPECT OF ANY PROVISION MADE BY THE ASSESSEE FOR THE PURPOSE OF PAYMENT OF GRATUITY TO HIS EMPLOYEES. CLAUSE (A) OF SUB - SECTION (7) SPECIFICALLY PROVIDES THAT N O DEDUCTION SHALL BE ALLOWED IN RESPECT OF ANY 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. THIS PROHIBITION, HOWEVER, DOES NOT APPLY IN RELATION TO THE PROVISIONS FALLING UNDER CLAUSE (B) OF SUB - SECTION (7). THE RELEVANT PROVISION ON WHICH THE RELIANCE IS PLACED BY THE ASSESSEE IN THE INSTANT CASE IS CLAUSE (B) U/S 40A(7). CLAUSES (A) AND (B) OF SUB - SECTION (7) OF SECTION 40A, SO FAR AS MATERIAL, READ AS UNDER : ' (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 RETIRE MENT OR ON TERMINATION OF THEIR EMPLOYMENT FOR ANY REASON. (B) NOTHING IN CLAUSE (A) SHALL APPLY IN RELATION TO 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 T HE PURPOSE OF PAYMENT OF ANY GRATUITY, THAT HAS BECOME PAYABLE DURING THE PREVIOUS YEAR ; EXPLANATION : FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT WHERE ANY PROVISION MADE BY THE ASSESSEE FOR THE PAYMENT OF GRATUITY TO HIS EMPLOYEES ON THEIR R ETIREMENT OR 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 I.T.A. NO.190/COCH/2014 24 4.3 ON A CONJOINT READING OF CLAUSES (A) AND CLAUSE (B) OF SUB - SECTION (7) OF SECTION 40A OF T HE ACT, WE ARE OF THE CLEAR OPINION THAT BY VIRTUE OF SUB - CLAUSE (B) THE PROHIBITION CONTAINED IN CLAUSE (A) WOULD NOT APPLY IN RELATION TO ANY PROVISION MADE BY THE ASSESSEE FOR PAYMENT OF A SUM BY WAY OF ANY CONTRIBUTION 'TO AN APPROVED GRATUITY FUND '. THIS CONTEMPLATES THE EXISTENCE OF AN APPROVED GRATUITY FUND DURING THE ACCOUNTING YEAR IN QUESTION. IN THE INSTANT CASE, THE ADMITTED POSITION IS THAT THERE WAS NO APPROVED GRATUITY FUND IN EXISTENCE DURING THE ACCOUNTING YEAR. IT CAME INTO EXISTENCE F OR THE FIRST TIME ON THE 12 TH DAY OF NOV 2010 WHICH WOULD BE SUCCEEDING ACCOUNTING YEAR. THAT BEING SO, THE QUESTION OF PROVISION BEING MADE BY THE ASSESSEE DURING THE YEAR IN QUESTION FOR THE PURPOSE OF PAYMENT OF CONTRIBUTION TOWARDS AN APPROVED GR ATUITY FUND CANNOT ARISE. THE INCOME - TAX OFFICER WAS, THEREFORE, JUSTIFIED IN DISALLOWING THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF THE SUM IN VIEW OF THE PROVISIONS OF SECTION 40A(7)(A) OF THE ACT. THE COMMISSIONER OF INCOME - TAX (APPEALS) IS ALSO JUST IFIED IN THE DECISION OF DISALLOWING DISALLOWANCE OF RS. 4.50 CRORES UNDER THE PROVISIONS OF SECTION 40A(7) OF THE INCOME - TAX ACT, 1961. 4.4 FURTHER, I N THE CASE OF SHREE SAJJAN MILLS LTD. V. CIT [1985] 156 ITR 585, THEIR LORDSHIPS OF THE SUPREME CO URT HAD OCCASION TO CONSIDER AN IDENTICAL PROBLEM INVOLVING THE INTERPRETATION AND SCOPE OF SECTION 40A(7) AND ITS TWO CLAUSES (A) AND (B). ON A CONSTRUCTION OF THESE PROVISIONS, THEIR LORDSHIPS RULED THAT UNLESS THE CONDITIONS SPECIFIED IN CLAUSE (B) OF SECTION 40A(7) WERE FULFILLED, PROVISION MADE BY THE ASSESSEE FOR FUTURE USE FOR PAYMENT OF GRATUITY TO EMPLOYEES COULD NOT BE ALLOWED AS A DEDUCTION IN VIEW OF THE EMBARGO PLACED UNDER CLAUSE (A) ON DEDUCTION OF AMOUNTS PROVIDED FOR FUTURE USE IN T HE YEAR OF ACCOUNT FOR MEETING THE ULTIMATE LIABILITY FOR PAYMENT OF GRATUITY. THEIR LORDSHIPS FURTHER OBSERVED THAT THE EXPRESSION PROVISION MADE BY THE ASSESSEE ' HAS NOT I.T.A. NO.190/COCH/2014 25 BEEN USED IN ANY ARTIFICIAL SENSE, I.E., OF SETTING APART SPECIFICALLY BY THE ASS ESSEE FOR MEETING THE LIABILITY FOR GRATUITY IN HIS ACCOUNT BOOKS BUT IN ITS ORDINARY SENSE. STRESSING THE USE OF THE NON - OBSTANTE CLAUSE IN SECTION 40A, THEIR LORDSHIPS OBSERVED THAT THE LEGISLATIVE INTENT WAS OBVIOUS, NAMELY, THAT EVEN IF CERTAIN PAYM ENTS OR PROVISION MADE BY THE ASSESSEE WERE OTHERWISE DEDUCTIBLE UNDER SECTION 28 OR SECTION 37 OF THE ACT, THE SAME WOULD NOT BE DEDUCTIBLE IN VIEW OF SECTION 40A EXCEPT IN THE CIRCUMSTANCES INDICATED THEREIN. A SOMEWHAT SIMILAR VIEW HAS BEEN EXPRESSED RECENTLY BY THEIR LORDSHIPS OF THE MADRAS HIGH COURT IN THE CASE OF TUTTAPULLUM ESTATES V. CIT [1991] 191 ITR 131. IT WAS HELD THAT THE PROVISION FOR PAYMENT OF GRATUITY BE ADMISSIBLE AS A DEDUCTION, IT MUST BE SHOWN THAT THE PROVISION WAS MADE STRICTLY IN THE MANNER LAID DOWN IN CLAUSE (B) OF SECTION 40A(7). AS ALREADY OBSERVED, IN THE PRESENT CASE, THE DEPOSIT WAS NOT MADE IN APPROVED GRATUITY SCHEME , AS FOUND BY THE TRIBUNAL. 4.5 IN SUPPORT OF THIS FINDINGS, I RELIED THE DECISION OF THE HONBLE BO MBAY HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME - TAX V. MUMBAI KHOKA UTPADAK SAHAKARI KENDRA LTD. REPORTED IN 211 ITR 836 WHEREIN IT WAS HELD T HAT THE ADMITTED POSITION WAS THAT THERE WAS NO APPROVED GRATUITY FUND IN EXISTENCE DURING THE ACCOUNTING YEAR ENDING JUNE 30, 1975. IT CAME INTO EXISTENCE FOR THE FIRST TIME ON THE 1ST DAY OF THE SUCCEEDING ACCOUNTING YEAR, I.E., ON JULY 1, 1975. THE INCOME - TAX OFFICER WAS, THEREFORE, JUSTIFIED IN DISALLOWING THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF THE SU M IN VIEW OF THE PROVISIONS OF SECTION 40A(7)(A) OF THE ACT. 4.6 FURTHER, THE HONBLE KERALA HIGH COURT IN THE CASE OF PREMIER CABLE CO. LTD. V. COMMISSIONER OF INCOME - TAX REPORTED IN 193 ITR 719 HAS HELD THAT ; THE CLAIM FOR DEDUCTION OF THE PROVIS ION FOR GRATUITY. THE ASSESSEE HAD MADE A PROVISION FOR PAYMENT OF GRATUITY IN THE SUM I.T.A. NO.190/COCH/2014 26 OF RS. 2,54,452. THE FUND ITSELF WAS CREATED ONLY ON DECEMBER 30, 1975. THE APPLICATION WAS MADE TO THE COMMISSIONER ON THE SAME DAY, DECEMBER 30, 1975. WE ARE CONCE RNED WITH THE PREVIOUS YEAR ENDING ON SEPTEMBER 30, 1975. ADMITTEDLY, THERE WAS NO APPROVED GRATUITY FUND IN EXISTENCE DURING THE RELEVANT PREVIOUS YEAR. EVEN ACCORDING TO THE ASSESSEE, THE TRUST CAME INTO EXISTENCE ONLY ON JANUARY 1, 1976 (SEE ORDER OF THE COMMISSIONER OF INCOME - TAX, PARAGRAPH 5). FOR THE ASSESSMENT YEAR 1976 - 77, SECTION 40A(7)(B)(I) ALONE IS APPLICABLE. UNDER THE SAID PROVISION, THE GRATUITY TRUST SHOULD BE IN EXISTENCE DURING THE RELEVANT PREVIOUS YEAR. IT IS NOT SO IN THIS CASE. SO , THE ASSESSEE IS NOT ENTITLED TO THE CLAIM FOR DEDUCTION. WE SHOULD STATE THAT SECTION 40A(7)(B)(II) WILL BE RELEVANT ONLY FOR THE ASSESSMENT YEARS 1973 - 74 TO 1975 - 76. THIS IS NOT RELEVANT IN THIS CASE. THE TRIBUNAL WAS JUSTIFIED IN HOLDING THAT THE AS SESSEE IS NOT ENTITLED TO THE CLAIM FOR DEDUCTION OF THE PROVISION MADE FOR GRATUITY. WE ANSWER QUESTION NO. 5 IN INCOME - TAX REFERENCE NO. 417 OF 1982 IN THE AFFIRMATIVE, AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE. BY THE SAME TOKEN, SINCE THE C LAIM FOR DEDUCTION OF GRATUITY FOR THE ASSESSMENT YEAR 1976 - 77 COULD BE CONSIDERED ONLY UNDER SECTION 40A(7)(B)(I) OF THE ACT, THE SUBSEQUENT TRANSFER TO THE TRUST FUND IS OF NO CONSEQUENCE. WE ANSWER QUESTION NO. 4 IN INCOME - TAX REFERENCE NO. 375 OF 198 5 AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE. ALL THE QUESTIONS REFERRED TO THIS COURT IN INCOME - TAX REFERENCE NO. 417 OF 1982 AND INCOME - TAX REFERENCE NO. 375 OF 1985 ARE ANSWERED AGAINST THE ASSESSEE AND IN FAVOUR OF THE REVENUE. 4.7 FURTH ER, THE VISAKHAPATNAM BENCH OF THIS TRIBUNAL IN THE CASE OF EASTERN POWER DISTRIBUTION CO OF AP LTD VS ACIT IN 132 ITD 568 HAS HELD IN PARA 5.1 AS UNDER: 5.1 THE NEXT ISSUE IN THE COMPUTATION UNDER NORMAL PROVISIONS OF THE ACT RELATES TO THE DISALLOWANCE OF RS. 9,08,06,966 PERTAINING TO THE PROVISION MADE TOWARDS TERMINAL BENEFITS OF EMPLOYEES. THE ASSESSING OFFICER NOTICED THAT THE 'GRATUITY FUND' OF THE ASSESSEE WAS APPROVED BY LEARNED CIT - I, VISAKHAPATNAM ONLY ON 11.9.2002. SINCE THE APPROVAL WAS NOT A VAILABLE DURING THE YEAR UNDER CONSIDERATION, THE ASSESSING OFFICER DISALLOWED THE SAID CLAIM BY INVOKING THE PROVISIONS OF SECTION 40A(7) OF THE ACT. THE ASSESSING OFFICER ALSO DREW SUPPORT FROM THE CIRCULAR NO. 146 DATED 26.9.1974 ISSUED BY CBDT IN THAT REGARD. THE LEARNED CIT(A) ALSO CONFIRMED THE SAID DISALLOWED WITH THE FOLLOWING OBSERVATIONS: I.T.A. NO.190/COCH/2014 27 '4.6 THE NEXT ISSUE PERTAINS TO THE CLAIM OF DEDUCTION OF RS. 9,08,06,966 TOWARDS PENSION AND GRATUITY PAYABLE TO THE EMPLOYEES ON THEIR RETIREMENT. DURING THE RELEVANT PREVIOUS YEAR ADMITTEDLY THE APPELLANT DIDN'T HAVE ANY APPROVED GRATUITY/PENSION FUNDS. THE APPROVAL FOR SUCH FUNDS WAS GIVEN BY THE COMMISSIONER OF INCOME - TAX - 1, VISAKHAPATNAM W.E.F. 11/09/2002 ONLY. A PERUSAL OF SECTION 40A(7) SHOWS THAT ACCORDI NG TO CLAUSE (A) NO DEDUCTION IN RESPECT OF ANY PROVISION FOR PAYMENT OF GRATUITY IS ADMISSIBLE. CLAUSE (B) HOWEVER, PROVIDES FOR TWO EXCEPTIONS TO THE GENERAL RULE CONTAINED IN CLAUSE (A). ACCORDING TO CLAUSE (B), THE PROVISION FOR GRATUITY CAN BE ALLOWED (I) IF IT HAS BEEN MADE FOR PAYMENT BY WAY OF CONTRIBUTION TOWARDS AN APPROVED GRATUITY FUND OR (II) IF THE PROVISION IS FOR THE PURPOSE OF PAYMENT OF ANY GRATUITY THAT HAS BECOME PAYABLE DURING THE PREVIOUS YEAR. IN THE INSTANT CASE SINCE THE GRATUITY FU ND IS NOT APPROVED ANY CONTRIBUTION MADE TOWARDS SUCH FUND IS NOT ADMISSIBLE. INSOFAR AS ACTUAL PAYMENTS ARE CONCERNED AS CLEARLY BROUGHT OUT BY THE ASSESSING OFFICER IN PARA 5.3.4 OF THE ASSESSMENT ORDER THERE WAS NO LIABILITY ON THE APPELLANT COMPANY REG ARDING PAYMENT OF ANY GRATUITY. WHATEVER GRATUITY WAS ACTUALLY PAID WAS RECEIVED FROM TRANSCO AND DISBURSED TO THE RETIRING EMPLOYEES. THEREFORE, BOTH THE EXCEPTIONS PROVIDED IN CLAUSE (B ) OF SECTION 40A(7) ARE NOT APPLICABLE IN THE CASE OF THE APPELLANT. HENCE, THE DISALLOWANCE OF RS. 9,08,06,966 MADE BY THE ASSESSING OFFICER IN THIS REGARD IS HEREBY 'CONFIRMED'.' 5 FURTHER IT WAS ALSO BE NOTED THAT THE JUDGMENT OF THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF SHALIMAR WIRE AND INDUSTRIES LTD (SUPRA) RE LIED UPON BY THE LD COUNSEL FOR THE ASSESSEE WAS DISTINGUISHED BY THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME - TAX V. JAMUNA AUTO INDUSTRIES REPORTED IN 275 ITR 570 (P&H) WHEREIN IT WAS HELD THAT PROVISION FOR GRATUITY MAD E ONLY IN A APPROVED GRATUITY FUND ENTITLE THE ASSESSEE TO CLAIM DEDUCTION IN COMPUTATION OF PROFIT & GAIN. THE ASSESSEES GRATUITY FUND WAS APPROVED BY THE CIT W.E.F 26.3.1979 AND IT WAS NOT ENTITLED FOR DEDUCTION ON ACCOUNT OF PROVISION FOR GRATUIT Y IN THE YEAR 1978 - 79. I.T.A. NO.190/COCH/2014 28 6 IN VIEW OF THE ABOVE DISCUSSION I HOLD THAT THE CONTRIBUTION TOWARDS GRATUITY FUND CANNOT BE ALLOWED AS DEDUCTION FOR THE AY UNDER CONSIDERATION AND ACCORDINGLY, THE CLAIM OF THE ASSESSEE IS REJECTED. 7 IN THE RESULT THE APPEAL O F THE ASSESSEE IS DISMISSED. SD/ - CHANDRA POOJARI ACCOUNTANT MEMBER PLACE: KOCHI DATED: 11 TH DEC 2014 I.T.A. NO.190/COCH/2014 29 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE SHRI N.R.S. GANESAN (JM) AND SHRI CHANDRA POOJARI (AM) I.T.A NO. 190/COCH/2014 (ASSESSMENT YEAR 2010 - 11 ) ENGLISH INDIAN CLAYS LTD VS ACIT, CIR.2(1) TC 79/4, VELI KAWDIAR, TRIVANDRUM TRIVANDRUM 695 021 PAN : AAACE5011C (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI R KRISHNA IYER RESPONDENT BY : SHRI M ANIL KUMAR, CIT DATE OF HEARING : 14 - 10 - 2014 DATE OF PRONOUNCEMENT : - 1 1 - 201 4 O R D E R PER N.R.S. GANESAN (JM) THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF CIT(A), TRIVANDRUM, DATED 28 - 03 - 2014 AND PERTAINS TO ASSESSMENT YEAR 2010 - 11. 2. THE ONLY ISSUE ARISES FOR CONSIDERATION IS DISALLOWANCE OF RS.4,50,00 ,00 0 SAID TO BE PAID BY THE ASSESSEE TOWARDS GRATUITY FUND. I.T.A. NO.190/COCH/2014 30 3. SHRI R KRISHNA IYER, THE LD.REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS PAID RS.4 . 50 CRORES TOWARDS GRATUITY FUND. ACCORDING TO THE LD.REPRESENTATIVE, THE AMOUNT WAS PAID TO ENGLISH INDIAN CLAY LTD EMPLOYEES GRATUITY TRUST. THE LD.REPRESENTATIVE FURTHER SUBMITTED THAT THE ASSESSEE APPLIED F OR APPROVAL OF THE FUND BEFORE THE COMMISSIONER OF INCOME - TAX. THE COMMISSIONER OF INCOME - TAX BY AN ORDER DATED 12 - 11 - 2010 GRANTED APPRO VAL ON THE APPLICATION OF THE ASSESSEE DATED 08 - 03 - 2010. THEREFORE, ACCORDING TO THE LD.REPRESENTATIVE, FOR ALL PRACTICAL PURPOSE, THE APPROVAL OF THE GRATUITY FUND IS DEEMED TO BE GRANTED WITH EFFECT FROM 08 - 03 - 2010 . THEREFORE, THE ASSESSING OFFICER IS NOT CORRECT IN SAYING THAT THE FUND WAS NOT APPROVED. THE LD.REPRESENTATIVE FURTHER SUBMITTED THAT THE COMMISSIONER HAS POWER TO GRANT APPROVAL WITH RETROSPECTIVE EFFECT ALSO. IN THIS CASE, ACCORDING TO THE LD.REPRESENTATIVE, SINCE THE APPLICATION OF THE ASSESSEE WAS DATED 08 - 03 - 2010 THE APPROVAL IS DEEMED TO BE GRANTED FROM THE DATE OF APPLICATION. THEREFORE, ACCORDING TO THE LD.REPRESENTATIVE, THE ASSESSEE IS ENTITLED TO CLAIM THE ENTIRE AMOUNT AS DEDUCTION FOR THE YEAR UNDER CONSIDERATION. 4. REFER RING TO THE ORDER OF CIT(A), THE LD.REPRESENTATIVE SUBMITTED THAT THE CIT(A) DISALLOWED THE CLAIM OF THE ASSESSEE U/S I.T.A. NO.190/COCH/2014 31 40A(7) OF THE ACT. ACCORDING TO THE LD.REPRESENTATIVE SECTION 40A(7) IS ATTRACT ED ONLY IF A PROVISION IS MADE FOR PAYMENT OF GRATUITY IN CASE THE FUND IS NOT APPROVED . IN THE CASE OF THE ASSESSEE, ACCORDING TO THE LD.REPRESENTATIVE, IT IS NOT A PROVISION BUT THE RE IS AN ACTUAL PAYMENT TO THE TRUST . ACCORDING TO LD.REPRESENTATIVE, SINCE THE GRATUITY FUND IS DEEMED TO BE APPROVED FROM 08 - 03 - 2010, EVEN THE PROVISION MADE IS TO BE ALLOWED U/S 40A(7) OF THE ACT. REFERRING TO THE CIRCULAR ISSUED BY THE CBDT IN CIRCULAR NO.14 DATED 23 - 04 - 1969 THE LD.REPRESENTATIVE SUBMITTED THAT THE CBDT CLARIFIED THAT IN DESERVING CASES, THE APPROVAL CAN BE ACCORDED RETROSPECTIVELY FROM THE DATE OF INCEPTION OF THE FUND. REFERRING TO THE DECISION OF THE AHMEDABAD BENCH OF THIS TRIBUNAL COPY OF WHICH IS AVAILABLE AT PAGE 14 OF THE PAPER BOOK IN DCIT, BHARUCH VS BARODA GUJARAT GRAMIN BANK IN ITA NO.1479/AHD/20 10 DT. 06 - 08 - 2010, THE LD.REPRESENTATIVE SUBMITTED THAT MERELY BECAUSE THE FUND WAS NOT APPROVED BY THE COMMISSIONER OF INCOME - TAX , DISALLOWANCE CANNOT BE MADE U/S 40A(7) OF THE ACT WHEN THE AMOUNT WAS ACTUALLY PAID BY THE ASSESSEE. THE LD.REPRESENTATIVE HAS ALSO PLACED HIS RELIANCE ON THE JUDGMENT OF THE GUJARAT HIGH COURT IN CIT VS ALEMBIC CHEMICAL WORKS CO LTD (1993) 200 ITR 126 AND SUBMITTED THAT THE COMMISSIONER OF INCOME - TAX HAS POWER TO GRANT APPROVAL WITH RETROSPECTIVE OPERATION. I.T.A. NO.190/COCH/2014 32 5. THE LD. REPRE SENTATIVE FURTHER SUBMITTED THAT WHEN THE APPROVAL WAS GRANTED BY THE COMMISSIONER ON THE APPLICATION DATED 08 - 03 - 2010 OF THE ASSESSEE, THE ASSESSING OFFICER IS NOT JUSTIFIED IN SAYING THAT THERE IS NO APPROVAL FOR THE YEAR UNDER CONSIDERATION. ACCORDING TO THE LD.REPRESENTATIVE, THE FUND WAS APPROVED WITH EFFECT FROM 08 - 03 - 2010, THEREFORE, THE P AYMENT MADE BY THE ASSESSEE TOWARDS THE FUND BEFORE THE DUE DATE FOR FILING THE RETURN HAS TO BE ALLOWED. THE LD.REPRESENTATIVE HAS ALSO PLACED RELIANCE ON THE JU DGMENT OF THE CALCUTTA HIGH CO U RT IN CIT VS SHALIMAR WIRE AND INDUSTRIES LTD (1991) 188 ITR 814 (CAL) AND SUBMITTED THAT WHEN THE ASSESSEE MAKES AN APPLICATION FOR APPROVAL IT IS FOR THE DEPARTMENT TO GRANT THE APPROVAL AT A REASONABLE TIME. MERELY BECAUSE THERE WAS SOME DELAY IN GRANT OF APPROVAL, ACCORDING TO THE LD.REPRESENTATIVE, THAT CANNOT BE A REA SON TO DISALLOW THE CLAIM OF THE ASSESSEE. THE LD.REPRESENTATIVE HAS ALSO PLACED HIS RELIANCE ON THE JUDGMENT OF THE CALCUTTA HIGH COURT IN CIT VS CONTINENTAL COMMERCIAL CO LTD (1991) 192 ITR 66 (CAL). THE LD.REPRESENTATIVE FURTHER PLACED HIS RELIANCE ON THE JUDGMENT OF THE APEX COURT IN CIT VS TEXTOOL CO LTD (2013) 263 CTR (SC) 257 . I.T.A. NO.190/COCH/2014 33 6 . ON THE CONTRARY, SHRI M ANIL KUMAR, THE LD.DR SUBMITTED THAT THE APPROVAL WAS GRANTED BY THE COMMISSIONER OF INCOME - TAX BY AN ORDER DATED 12 - 11 - 2010 WHICH IS BEYOND THE Y EAR UNDER CONSIDERATION. THEREFORE, ACCORDING TO THE LD.REPRESENTATIVE, FOR THE YEAR UNDER CONSIDERATION THERE WAS NO APPROVAL. HENCE, THE ASSESSING OFFICER HAS RIGHTLY DISALLOWED THE CLAIM OF THE ASSESSEE. THE CIT(A) AFTER CONSIDERING THE FACT OF THE C ASE FOUND THAT ANY LIABILITY TOWARDS UNAPPROVED GRATUITY FUND IS NOT ALLOWABLE U/S 37(1) OF THE ACT ALSO. 7 . WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITHER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ONLY ISSUE ARISES FOR CONSIDERAT ION IS DISALLOWANCE OF RS.4.5 CRORES SAID TO BE PAID BY THE ASSESSEE TOWARDS ENGLISH INDIA CLAYS LTD EMPLOYEES GRATUITY FUND TRUST. FROM THE MATERIAL AVAILABLE ON RECORD IT APPEARS THAT THE ASSESSEE APPLIED FOR APPROVAL OF THE FUND BY AN APPLICATION DATE D 02 - 03 - 2010, COPY OF WHICH IS AVAILABLE AT PAGE 12 OF THE PAPER BOOK. THE APPLICATION DATED 02 - 03 - 2010 WAS PRESENTED BEFORE THE COMMISSIONER OF INCOME - TAX ON 08 - 03 - 2010. THE COMMISSIONER OF INCOME - TAX BY AN ORDER DATED 12 - 11 - 2010 GRANTED APPROVAL. THER EFORE, AS RIGHTLY SUBMITTED BY THE LD.REPRESENTATIVE FOR THE ASSESSEE FOR ALL PRACTICAL PURPOSE THE APPROVAL IS DEEMED TO BE I.T.A. NO.190/COCH/2014 34 GRANTED ON 08 - 03 - 2010, THE DATE ON WHICH THE APPLICATION FOR APPROVAL WAS SUBMITTED BEFORE THE COMMISSIONER OF INCOME - TAX AS HELD B Y THE CALCUTTA HIGH COURT IN CONTINENTAL COMMERCIAL CO LTD (SUPRA) . 8. FROM THE ASSESSMENT ORDER IT APPEARS THAT THE ASSESSING OFFICER DISALLOWED THE CLAIM OF THE ASSESSEE ON TWO GROUNDS, VIZ. (I) THE GRATUITY FUND DO NOT HAVE AN APPROVAL DURING THE YEA R UNDER CONSIDERATION; (II) THE PROVISION MADE FOR PAYMENT OF GRATUITY IS EXPRESSLY TO BE DISALLOWED U/S 40A(7) OF THE ACT. WE HAVE CAREFULLY GONE THROUGH THE PROVISIONS OF SECTION 40A(7) OF THE ACT, WHICH READS S FOLLOWS: 40A(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 FO R ANY REASON. (B) NOTHING IN CLAUSE (A) SHALL APPLY IN RELATION TO ANY PROVISION MADE BY THE ASSESSEE FOR THE PURPOSE OF PAYMENT OF A SUM BY WAY OF ANY CONTRIBUTION WARDS AN APPROVED GRATUITY FUND, OR FOR THE PURPOSE OF PAYMENT OF ANY GRATUITY, THAT HAS BE COME PAYABLE DURING THE PREVIOUS YEAR. EXPLANATION. - FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT WHERE ANY PROVISION MADE BY THE ASSESSEE FOR THE PAYMENT OF GRATUITY TO HIS EMPLOYEES ON THEIR RETIREMENT OR 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 I.T.A. NO.190/COCH/2014 35 WAY OF CONTRIBUTION TOWARDS AN APPROVED GRATUITY FUND OR BY WAY OF GRATUITY TO ANY EMPLOYEE SHALL NOT BE ALLOWED A S DEDUCTION IN COMPUTING THE INCOME OF THE ASSESSEE OF THE PREVIOUS YEAR IN WHICH THE SUM IS SO PAID. THEREFORE, IN VIEW OF SECTION 40A(7)(B) , IT IS OBVIOUS THAT EVEN THE PROVISION MADE FOR PAYMENT OF CONTRIBUTION TOWARDS APPROVED GRATUITY FUND HAS TO B E ALLOWED. IN THIS CASE, THE APPROVAL WAS DEEMED TO BE GRANTED ON 08 - 03 - 2010 FROM THE DATE ON WHICH THE APPLICATION IS PRESENTED FOR APPROVAL. THE ASSESSMENT YEAR UNDER CONSIDERATION IS 2010 - 11 AND THE RELEVANT FINANCIAL YEAR IS 2009 - 10. THEREFORE, THE ASSESSEE GOT THE APPROVAL WITHIN THE FINANCIAL YEAR RELEVANT FOR THE ASSESSMENT YEAR 2010 - 11. HENCE, THE PROVISION MADE BY THE ASSESSEE FOR PAYMENT OF CONTRIBUTION TOWARDS APPROVED GRATUITY FUND IS TO BE ALLOWED. 9 . T HE APEX COURT IN CIT VS TEXTOOL CO LTD (2013) 263 CTR (SC) 257 HAD AN OCCASION TO EXAMINE THE PROVISIONS OF SECTION 36(1)(V) OF THE ACT. IN THE CASE BEFORE THE APEX COURT, T HE ASSESSEE CONTRIBUTED TOWARDS GROUP INSURANCE SCHEME ON BEHALF OF THE EMPLOYEES. THE GRATUITY FUND ESTABLISHED BY THE ASSESSEE WAS APPROVED BY THE COMMISSIONER OF INCOME - TAX WITH EFFECT FROM 25 - 02 - 1983. THE REVENUE CONTENDED BEFORE THE APEX COURT THAT THE CONTRIBUTION WAS MADE TO LIC AND NOT TO THE APPROVED FUND. THE I.T.A. NO.190/COCH/2014 36 APEX COURT FOUND THAT THE PAYMENT WAS MADE BY THE ASSESSEE AND IT IS GONE OUT OF THE CONTROL OF THE ASSESSEE. THE APEX COURT FURTHER FOUND THAT ONCE THE FUND GOES OUT OF THE CONTROL OF THE ASSESSEE AND T HE FUND ALSO SUBSEQUENTLY APPROVED, THE CLAIM OF THE ASSESSEE HAS TO BE ALLOWED. IN FACT, THE APEX C OURT APPROVED AS FOLLOWS: LEARNED COUNSEL APPEARING ON BEHALF OF THE REVENUE HAS SUBMITTED BEFORE US THAT THE PROVISIONS OF SECTION 36(1)(V) OF THE ACT HAVE TO BE CONSTRUED STRICTLY AND FOR CLAIMING DEDUCTION, CONDITIONS LAID DOWN IN SECTION 36(1)(V) O F THE ACT MUST BE FULFILLED. IT IS URGED THAT SINCE DURING THE RELEVANT PREVIOUS YEAR THE CONTRIBUTION BY THE ASSESSEE TOWARDS THE GRATUITY FUND WAS NOT IN AN APPROVED GRATUITY FUND THE HIGH COURT WAS NOT JUSTIFIED IN AFFIRMING THE VIEW TAKEN BY THE COMMI SSIONER AS ALSO BY THE TRIBUNAL WHILE ANSWERING THE REFERENCE IN FAVOUR OF THE ASSESSEE. HOWEVER, ON A QUERY BY US AS TO WHETHER THE CONTRIBUTION MADE BY THE ASSESSEE IN THE APPROVED GRATUITY FUND CREDITED BY THE LIC FOR THE EMPLOYEES OF THE ASSESSEE AND ULTIMATELY THE ENTIRE AMOUNT DEPOSITED WITH THE LIC CAME BACK TO THE FUND CREATED BY THE ASSESSEE FOR THE BENEFIT OF ITS EMPLOYEES AND APPROVED BY THE COMMISSIONER W.E.F. 25 TH FEBRUAY, 1983, OR NOT, LEARNED COUNSEL IS NOT IN A POSITION TO MAKE A CATEGORICA L STATEMENT IN THAT BEHALF. HAVING CONSIDERED THE MATTER IN THE LIGHT OF THE BACKGROUND FACTS, WE ARE OF THE OPINION THAT THERE IS NO MERIT IN THE APPEAL. TRUE THAT A FISCAL STATUTE IS TO BE CONSTRUED STRICTLY AND NOTHING SHOULD BE ADDED OR SUBTRACTED TO THE LANGUAGE EMPLOYED IN THE SECTION , YET A STRICT CONSTRUCTION OF A PROVISION DOES NOT RULE OUT THE APPLICATION OF THE PRINCIPLES OF REASONABLE CONSTRUCTION TO GIVE EFFECT TO THE PURPOSE AND INTENTION OF ANY PARTICULAR PROVISION OF THE ACT. (SEE : SHR I SAJJAN MILLS LTD. VS. COMMISSIONER OF INCOME TAX, M.P. & ANR. I.T.A. NO.190/COCH/2014 37 (1985) 156 ITR 585). FROM A BARE READING OF SECTION 36(1)(V) OF THE ACT, IT IS MANIFEST THAT THE REAL INTENTION BEHIND THE PROVISION IS THAT THE EMPLOYER SHOULD NOT HAVE ANY CONTROL OVER THE FUNDS OF THE IRREVOCABLE TRUST CREATED EXCLUSIVELY FOR THE BENEFIT OF THE EMPLOYEES. IN THE INSTANT CASE, IT IS EVIDENT FROM THE FINDINGS RECORDED BY THE COMMISSIONER AND AFFIRMED BY THE TRIBUNAL THAT THE ASSESSEE HAD ABSOLUTELY NO CONTROL OVER THE FUND C REATED BY THE LIC FOR THE BENEFIT OF THE EMPLOYEES OF THE ASSESSEE AND FURTHER ALL THE CONTRIBUTION MADE BY THE ASSESSEE IN THE SAID FUND ULTIMATELY CAME BACK TO THE TEXTOOL EMPLOYEES GRATUITY FUND, APPROVED BY THE COMMISSIONER WITH EFFECT FROM THE FOLLOWI NG PREVIOUS YEAR. THUS, THE CONDITIONS STIPULATED IN SECTION 36(1)(V) OF THE ACT WERE SATISFIED. HAVING REGARD TO THE FACTS FOUND BY THE COMMISSIONER AND AFFIRMED BY THE TRIBUNAL, NO FAULT CAN BE FOUND WITH THE OPINION EXPRESSED BY THE HIGH COURT, WARRAN TING OUR INTERFERENCE. 10 . IN VIEW OF THE ABOVE, THE CLAIM OF THE ASSESSEE HAS TO BE ALLOWED EVEN IF IT IS PROVISION FOR PAYMENT OF CONTRIBUTION TOWARDS THE GRATUITY FUND. IN THE CASE BEFORE US, REVENUE ADMITTED THAT A PROVISION WAS MADE BY THE ASSESSEE FOR PAYMENT OF GRATUITY FUND APPROVED BY THE COMMISSIONER OF INCOME - TAX. HOWEVER, THE ASSESSEE CLAIMED THAT THE PAYMENT HAS ALREADY BEEN MADE. HENCE, THIS TRIBUNAL IS OF THE CONSIDERED OPINION TH A T THE CLAIM OF THE ASSESSEE THAT EVEN IF IT IS A PROVISIO N MADE FOR PAYMENT OF CONTRIBUTION TOWARDS ENGLISH INDIAN CLAYS LTD EMPLOYEES GRATUITY FUND HAS TO BE ALLOWED. ACCORDINGLY, THE ORDERS OF THE LOWER I.T.A. NO.190/COCH/2014 38 AUTHORITIES ARE SET ASIDE AND THE ASSESSING OFFICER IS DIRECTED TO DELETE THE ADDITION. 8. IN THE RESULT , THE APPEAL OF THE ASSESSEE IS ALLOWED OR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON THIS _____ NOVEMBER , 2014 . UNDER SEPARATE ORDER SD/ - ( CHANDRA POOJARI ) (N.R.S. GANESAN) ACCOUNTANT MEMBER JUDICIAL MEMBER COCHIN, DT : NOVEMBER , 2014 PK/ - COPY TO: 1. ENGLISH INDIAN CLAYS LTD, TC 79/4, VELI, TRIVANDRUM 695 021 2. THE ACIT, CIR.2(1), KAWDIAR, TRIVANDRUM 3. THE COMMISSIONER OF INCOME - TAX , TRIVANDRUM 4. THE COMMISSIONER OF INCOME - TAX(A) , TRIVANDRUM 5. THE DR (TRUE COPY) BY ORDER ASSTT. REGISTRAR, INCOME - TAX APPELLATE TRIBUNAL, COCHIN BENCH I.T.A. NO.190/COCH/2014 39