Commissioner Of Income-Tax v. Hindustan Petroleum Corporation Ltd.

T.D Sugla, J.:— In this cross-reference, the Tribunal has referred to this court the following questions of law under section 256(1) of the Income-tax Act, 1961:

At the instance of the Revenue:

(Assessment years 1975-76, 1976-77, 1978-79 and 1979-80)

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that gratuity to the extent up to which it was exempt under section 10(10) of the Income-tax Act, 1961, should not be considered for the purpose of making the disallowance under section 40A(5) of the Income-tax Act, 1961?”

At the instance of the assessee:

(common question for all the assessment years : 1975-76, 1976-77, 1977-78, 1978-79 and 1979-80)

“Whether, on the facts and in the circumstances of the case and on a proper interpretation of the provisions of section 43 of the Income-tax Act, 1961, the Tribunal was justified in holding that the unabsorbed depreciation of Rs. 21,42,815, which was already deducted by Lube India Ltd., in working out the written down value of its assets taken over by the assessee-company on amalgamation, should not be added back for the purpose of working out the written down value of those very assets in the hands of the assessee-company for determining the depreciation admissible on those assets?”

At the instance of the assessee:

(Assessment year 1978-79 only)

“Whether, on the facts and in the circumstances of the case and on a proper interpretation of the provisions of section 40A(5) of the Income-tax Act, 1961, the Appellate Tribunal was justified in holding that, in respect of salary paid to ex-employees, the allowance under that section should be restricted to the maximum of Rs. 60,000?”

At the instance of the assessee:

(Assessment year 1979-80 only)

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the assessee-company was not entitled to value the stock taken over from Caltex Oil Refining India Ltd., on amalgamation in the same manner as was done by Caltex Oil Refining India Ltd., while the closing stock was valued by the assessee-company in a different manner according to its method of valuation of stock followed year after year and, on that account, upholding the addition of Rs. 10,25,480, made by the Income-tax Officer?”

2. For reasons given hereunder, we propose to reframe question No. 3 as under:

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the limit to the allowance of expenditure under section 40a(5)(c)(i) in the case of former employees was Rs. 60,000, and not Rs. 75,000, even though the previous year was of 15 months?”

3. The question pertains to the assessment year 1978-79. The relevant previous year is of 15 months, i.e, from January 1, 1977, to March 31, 1978. section 40a(5) provides that expenditure incurred by an assessee on its employees covered by that provision is not to be allowed beyond the limits prescribed by section 40a(5)(i). The limit in the case of employees (existing/continuing) is Rs. 5,000 per month. In this year, it would be Rs. 75,000. as the previous year is of 15 months. In the case of former employees, however, the limit is stated to be Rs. 60,000. The assessee's claim is that former employees include such employees who ceased to be employees in the previous year or in any earlier year. In the case of the assessee, the former employees ceased to be the employees during the previous year. Some of them might well have worked, say, for 14 months. It will be inequitable if the limit of the expenditure on them is taken as Rs. 60,000. The maximum limit of expenditure in the case of former employees should be Rs. 75,000 for the previous year. This is the real controversy. We propose to first deal with the first question referred to us at the instance of the assessee. This question is involved in all the years under reference. A company known as Lube India Ltd. was amalgamated with the assessee-company in July, 1974, i.e, during the previous year relevant to the assessment year 1975-76. The depreciation allowance to the extent of Rs. 21,42,815 had remained unabsorbed in the case of that company as at the end of the previous year relevant to the assessment year 1974-75. For the assessment year 1975-76, the assessee-company claimed depreciation, inter alia, on the assets it took over from Lube India Ltd. Depreciation was claimed on the written down value of the assets. In view of Explanation 2A, the written down value was claimed to be on the basis of actual cost of those assets to Lube India Ltd., less depreciation actually allowed to it, the expression “actually allowed” meaning the depreciation factually allowed and not merely computed and not given effect to in the assessments. Thus, while computing the written down value, the assessee did not reduce the actual cost further by the aforesaid amount of Rs. 21,42,815 which represented unabsorbed depreciation not given effect to. The Income-tax Officer, however, held that the “written down value” was required to be determined under section 43(6)(b) read with Explanation 2A, and Explanation 3. Explanation 3, it was stated, provided that, for the purpose of arriving at the written down value, depreciation not merely actually allowed but also depreciation carried forward was to be treated as depreciation “actually allowed” for the purpose of clause (b) of sub-section (6) of section 43. Accordingly, he determined the written down value by reducing from the actual cost not only depreciation actually allowed but also depreciation carried forward and allowed depreciation on that basis.

4. The Commissioner (Appeals) accepted the assessee's ???aim. The Tribunal, however, was of the view that, in view of the Supreme Court decision in the case of CIT v. Shahzada Nand and Sons, [1966] 60 ITR 392, the meaning and intention of a statute must be collected from the plain and unambiguous expression used in the provision rather than on the basis of any notions. Accordingly, the Tribunal held that the written down value of the assets taken over by the assessee-company from Lube India Ltd. was the actual cost of the assets to Lube India Ltd. as reduced not only by the depreciation actually allowed but also the depreciation determined but not given effect to. The Tribunal, therefore, set aside the order of the Commissioner of Income-tax (Appeals) and restored that of the Income-tax Officer in this behalf.

5. Depreciation under section 32(1)(ii) of the Income-tax Act, 1961, is admittedly allowable and is allowed at a prescribed rate on the written down value of the assets. The expression “written down value” is defined in section 43(6) as the actual cost to the assessee if acquired during the previous year and the actual cost less all depreciation actually allowed if the assets are acquired in some earlier year. Since the assets herein are taken over from Lube India Ltd., it is common ground that Explanation 2A inserted in section 43(6) by the Finance (No. 2) Act, 1967, is applicable. Explanation 2A, admittedly, provides that, in such a sense, the written down value of the assets shall be taken to be the same as it would have been taken if Lube India Ltd. had continued to hold the assets for its business. Explanation 3, it may be stated, provides that any allowance in respect of any depreciation carried forward under sub-section (2) of section 32 shall be deemed to be depreciation “actually allowed”.

6. In order to appreciate whether and to what extent Explanation 3 is applicable in a case in which written down value is to be computed on account of the application of Explanation 2A, it is desirable to refer to the factual position in brief once again. Lube India Ltd., which was amalgamated with the assessee-company in July, 1974, was assessed to income-tax up to and including the assessment year 1974-75. Depreciation to the extent of Rs. 21,42,815 had not been absorbed in that case for paucity of profits as laid down in section 32(2) of the Income-tax Act, 1961. The legal position about the unabsorbed depreciation is that it is not carried forward as such and is added to the depreciation for the following previous year and deemed to be part of that allowance. However, it is implicit in the scheme of section 32(2) that such a thing would happen only if the assessee continues to carry on its business in the following year or years. Thus, for the assessment year 1975-76, the aforesaid unabsorbed depreciation could not, under section 32(2), be treated and/or allowed as the depreciation of the current year as Lube India Ltd. became non-existent as a result of amalgamation. That is why the depreciation on these assets is claimed by and is allowable in the hands of the assessee only.

7. For this purpose, it is necessary to refer to the provisions of sections 32(1)(ii), 32(2) and of section 43(6) which read as under:

“32. (1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions, shall, subject to the provisions of section 34, be allowed….

(ii) in the case of buildings, machinery, plant or furniture, other than ships covered by clause (i), such percentage on the written down value thereof as may in any case or class of cases be prescribed :….

(2) Where, in the assessment of the assessee (or, if the assessee is a registered firm or an unregistered firm assessed as a registered firm, in the assessment of its partners), full effect cannot be given to any allowance under clause (i) or clause (ii) or clause (iv) or clause (v) or clause (vi) of sub-section (1) or under clause (i) of sub-section (1a) in any previous year owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance; then, subject to the provisions of sub-section (2) of section 72 and sub-section (3) of section 73, the allowance or part of the allowance to which effect has not been given, as the case may be, shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.”

“43. In sections 28 to 41 and in this section unless the context otherwise requires—….

(6) ‘written down value’ means—

(a) in the case of assets acquired in the previous year, the actual cost to the assessee;

(b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886), was in force :….

Explanation 2A.—Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company, and the amalgamated company is an Indian company, the written down value of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamated company had continued to hold the capital asset for the purposes of its business.

Explanation 3.—Any allowance in respect of any depreciation carried forward under sub-section (2) of section 32 shall be deemed to be depreciation ‘actually allowed’.”

8. It is pertinent to mention that Explanation 2A was inserted in section 43(6) by the Finance (No. 2) Act, 1967, whereas Explanations 1, 2 and 3 are there from the inception of the Income-tax Act, 1961. The main purpose of Explanation 3 appears to us to be to avoid an anomaly which would have otherwise resulted. Depreciation computed but not given effect to for paucity of funds is under section 32(2) allowable as deduction in the case of the same assessee as the depreciation of the following year or years, as the case may be. But for Explanation 3, written down value would have been the actual cost of the assets to the assessee less depreciation actually allowed. This would have resulted in certain anomalies. For instance, when depreciation is allowed not on the straight line method but on the basis of the written down value, depreciation of necessity becomes less and less in each successive year. But, if unabsorbed depreciation carried forward under section 32(2) is not taken into account for the purpose of computing the written down value, depreciation in the years in which carried forward depreciation remains unabsorbed for paucity of profits is likely to be the same. Secondly, when a depreciable asset is sold, discarded or destroyed, etc., in a previous year, the extent to which its scrap value falls short of the written down value is allowed under the Income-tax Act as deduction under section 32(1)(iii). But for Explanation 3, an assessee would be entitled to deduction under section 32(1)(iii) on the basis of the written down value without taking into account the unabsorbed depreciation carried forward under section 32(2), even though the assessee will be entitled to the set-off of the unabsorbed depreciation carried forward under section 32(2). Thus, the object of Explanation 3 was to remove such anomalies.

9. However, this by itself does not justify the conclusion that Explanation 3 will not apply to a case of amalgamation covered by Explanation 2A. For that purpose, it would be necessary to examine the provisions of Explanation 3 closely. Explanation 3, no doubt, creates a fiction. But the fiction is not created in vacuum. The fiction operates in a particular situation. That situation is a case in which any allowance in respect of any depreciation is carried forward under section 32(2). Depreciation allowance can be said to be carried forward under section 32(2) when that allowance can be added to the depreciation allowance of the assessee for the following previous year and deemed to be part of that allowance… and so on for the following previous years. In the present case, Lube India Ltd. being no longer in existence by reason of its amalgamation with the ‘assessee-company, the unabsorbed depreciation allowance of Rs. 21,42,815’ is not carried forward under section 32(2). Admittedly, this amount is not allowable as depreciation of the current year under section 32(2) in the hands of the assessee. Thus, the situation necessary for the application of the fiction in this case is not obtaining.

10. July 17, 1990 : Independent of Explanation 3, the written down value under section 43(6)(b) is the actual cost of the asset to an assessee less depreciation actually allowed, the expression “actually allowed” meaning, in view of the Supreme Court decision in the case of CIT v. Dharampur Leather Co. Ltd., [1966] 60 ITR 165, not including notional allowance. Read with Explanation 3, it would mean the actual cost reduced both by depreciation actually allowed and depreciation notionally allowed, i.e, carried forward under section 32(2). As stated earlier, Explanation 3 is not attracted as such in this case.

11. The case is, of course, covered by Explanation 2A. But for this Explanation, the written down value of the assets taken over by the assessee during the previous year from Lube India Ltd. would have been their actual cost to the assessee. In view of Explanation 2A, however, it will be the same as it would have been if Lube India Ltd. had continued to hold the assets for its business. Thus, Explanation 2A creates a fiction whereby though in fact at the end of the previous year the assets are not held by Lube India Ltd., the company having been amalgamated and, thus, ceased to exist, the said company will be deemed to hold the assets for its business. However, there is no further fiction created by Explanation 2A, that unabsorbed depreciation determined to the extent of Rs. 21,42,815, though actually not carried forward under section 32(2), will be treated to be so for the purpose of Explanation 3. Under the circumstances, application of Explanation 2A does not automatically mean application of Explanation 3, the applicability of which depends upon the existence of a particular situation in which alone unabsorbed depreciation becomes depreciation “actually allowed”.

12. In this context; it may not be out of place to mention that section 72A has been inserted in the Income-tax Act, 1961, by the Finance (No. 2) Act, 1977, with effect from April 1, 1978. The section provides for carry forward and set off of accumulated loss and unabsorbed depreciation in certain cases of amalgamation. The result is that in cases falling under section 72A, unabsorbed depreciation in the hands of the amalgamating company will hereafter be carried forward under section 32(2) in the hands of the amalgamated company. In such a case Explanation 3 will undoubtedly apply as the precondition for the application of the fiction will then exist.

13. Arguments were advanced by the parties in support of their rival claims as regards the scope of the legal fiction. It was admitted that Explanations 2A and 3 created legal fictions. In our view, the law in this regard is well-settled. A legal fiction has to be carried to its logical conclusion but only within the parameter of the purpose for which the fiction is created. Moreover, as far as possible, the legal fiction should not be given a meaning so as to cause injustice. It has been held by the Supreme Court in a number of cases that legal fictions are only for a definite purpose and they are limited to the purpose for which they are created and should not be extended beyond that purpose. As stated by us elsewhere, Explanation 3 is there in the Income-tax Act since its inception. Explanation 2A was inserted with effect from April 1, 1967. Thus, the object of Explanation 3 could not have been to cover cases falling within Explanation 2A. The object was to avoid the anomaly pointed out by us in the judgment elsewhere. In the circumstances, it will be in order if Explanation 3 is applied to a case covered by Explanation 2A only if the precondition for its application is found to exist and not otherwise. Even otherwise, applying the provisions of Explanation 3 to a case like the one before us in which allowance in respect of depreciation is not actually carried forward is likely to cause injustice. Accordingly, in our judgment, Explanation 3 is not attracted in the present case. In this view of the matter, it has to be held that the written down value of the assets in this case will be the actual cost of the assets to Lube India Ltd. less depreciation actually allowed to the company. The unabsorbed depreciation which is not to be set off or carried forward should not be taken into account.

14. That our construction of Explanation 3 is in consonance with the legislative intention is evident from clause 36(ii) of the Memo Explaining Provisions in the Finance (No. 2) Bill of 1967 in [1967] 64 ITR (St.) 188. The object of Explanation 2A is stated to be (at page 201):

“As a corollary to the provision at (i) above, the actual cost, as also the written down value of the building, machinery, plant or furniture transferred by the amalgamating company to the amalgamated company will be taken, in the assessment of the amalgamated company, to be the same as in the case of the amalgamating company. Further, for the purpose of the provision in the Income-tax Act that the aggregate amount of depreciation allowed from year to year in respect of any asset will be limited to its actual cost, the depreciation actually allowed to the amalgamating company on the assets transferred by it to the amalgamated company will also be taken into account. In other words, when the aggregate of the depreciation allowed to the amalgamating company and the amalgamated company in respect of such assets is equal to the actual cost of the assets in the hands of the amalgamating company, the amalgamated company will not be entitled to any further depreciation on such assets.”

15. That apart, the definition of the expression “written down value” is subject to “unless the context otherwise requires”. Section 43, it may be stated, while defining a number of expressions, makes it crystal clear that all definitions in that section are subject to the context requiring otherwise. In the circumstances, assuming we had come to the conclusion that the written down value of the assets in terms of section 43(6)(b) read with Explanation 2A and Explanation 3 is the actual cost of the assets reduced both by depreciation actually allowed and unabsorbed depreciation computed but not allowed, we might still have considered whether the context required some other equitable meaning of written down value.

16. In our judgment, the first question is also somewhat clumsily worded. However, the controversy is clear. Accordingly, we answer the first question in the assessee's reference in the negative and in favour of the assessee.

17. This takes us to the second question in the assessee's reference. The question has been reframed with a view to bring out the real controversy between the parties. The dispute is about the limit on the expenditure incurred by the assessee in relation to its former employees. The limit is prescribed under section 40a(5)(c)(i) which reads as under:

“(c) The limits referred to in clause (a) are the following, namely:—

(i) in respect of the expenditure referred to in sub-clause (i) of clause (a), in the case of an employee, an amount calculated at the rate of five thousand rupees for each month or part thereof comprised in the period of his employment in India during the previous year, and in the case of a former employee, being an individual who ceases or ceased to be the employee of the assessee during the previous year or any earlier previous year, sixty thousand rupees.”

18. The sub-clause has two parts. The first part provides a limit on the expenditure in the case of existing or continuing employees. That limit is an amount calculated at the rate of Rs. 5,000 for each month or part thereof. The previous year being of 15 months, the limit of expenditure in the case of existing or continuing employees is thus Rs. 75,000. The limit under the second part is Rs. 60,000. This limit is in the case of expenditure incurred by the assessee on former employees irrespective of whether such former employees had or had not worked with the assessee as employees for any time during the previous year. Former employees are persons who ceased to be employees of the assessee during the previous year or any earlier previous year. Referring to the second part of the provisions of section 40A(5)(c)(i), the Tribunal held that the Legislature had fixed the ceiling over the allowable expenditure at Rs. 60,000 without reference to the period the former employees actually worked as employees with the assessee during the previous year. Accordingly, the Tribunal confirmed the disallowance made by the Income-tax Officer in this behalf.

19. On analysing the provisions of section 40A(5)(c)(i), it appears to us that the fixation of the limit of Rs. 60,000 in the case of former employees without reference to the period during which the concerned persons were the assessee's employees during the previous year as against the limit at the rate of Rs. 5,000 per month in the case of existing employees is not without purpose. The purpose seems to be to take care of other payments that former employees were bound to receive by way of terminal benefits such as leave salary and gratuity. These payments were naturally expected to be over and above the remuneration for the period such persons worked as employees. That is why a straight limit of Rs. 60,000 was provided in their cases which was incidentally the limit in the case of continuing employees ordinarily. It was perhaps not in anybody's contemplation that a previous year could also be of 15 months. It may be that, for a period longer than 12 months, some of the former employees received remuneration as employees. To hold that in their cases also the limit will be Rs. 60,000 and not at the rate of Rs. 5,000 per month plus something is, to say the least, not equitable. It is not the case of the assessee in the present case that employees who became former employees during the previous year fell into two independent categories so that for the period they worked as employees, the limit will be at the rate of Rs. 5,000 per month and for the amounts they received after they ceased to be employees a separate limit of Rs. 60,000 will apply. It is, therefore, not necessary to examine that aspect in this case. What we are called upon to consider is whether, in the peculiar circumstances of the case, viz., where a previous year is of, 15 months and where, in the case of a continuing employee, the ceiling may go up to Rs. 75,000, there is any good reason for not holding that the limit in the case of former employees should also be Rs. 75,000. In our judgment, in a case like the one before us the mere fact that the Legislature fixed Rs. 60,000 as the limit in the case of former employees should not deter us from taking into account the fact that the provision with regard to former employees was to give them the maximum benefit as available to the existing employees as some of the former employees were likely to receive remuneration as employees at least for a part of the previous year and also terminal benefits. If that was so, and in our judgment it was so, there is no reason why the limit available to the existing employees should not be a limit in the case of former employees. Accordingly, we answer the second question at the instance of the assessee as reframed by us in the negative and in favour of the assessee.

20. This takes us to the third and the last question in the assessee's reference. This question relates to the assessment year 1979-80. During the previous year, another company by name Caltex Oil Refining India Ltd. was amalgamated with the assessee-company. As a result, almost all the assets of Caltex company including the closing stock were taken over by the assessee-company. There is no dispute that the method of valuing the closing stock in the case of Caltex company was different from the method of valuation of closing stock regularly followed by the assessee-company and that, if the method of valuation of closing stock followed by Caltex company was also adopted by the assessee-company with regard to that stock, its value would have been found more by Rs. 10,25,480. On the assumption that the stock taken over by the assessee-company from Caltex company was the assessee's opening stock, the Tribunal held that the assessee could not follow one method for valuing the opening stock and another method for valuing the closing stock. Valuing the closing stock of the assessee out of the stock taken out from Caltex company on the same basis as the stock was valued by Caltex company, the Tribunal confirmed the addition of Rs. 10,25,480 as undervaluation of the stock.

21. We are told by Shri Dastur, learned counsel for the assessee, that the closing stock in dispute was not the assessee-company's opening stock as such. It was the stock the assessee-company had taken over from Caltex company during the previous year at its book value. This fact is not disputed by Shri Jetley for the Department. It was thus like a purchase of the stock by the assessee-company from Caltex company at a particular price. In our view, the Income-tax Officer as well as the Tribunal fell into error in taking the said stock to be the opening stock of the assessee-company. In the circumstances, there is no question of applying the method of valuation applied to its stock by Caltex company as regards this stock so far as the assessee-company is concerned. As regards the valuation of the closing stock, the assessee has admittedly valued it on the method which it is regularly following for valuing its closing stock. That being so, we do not think that the Tribunal was right in holding that there was undervaluation of stock and confirming the addition of Rs. 10,25,480. Accordingly, we answer the third question also in the negative and in favour of the assessee.

22. There is only one question of law involving assessment years 1975-76, 1976-77, 1978-79 and 1979-80 in the departmental reference. The question is whether, for the purpose of considering disallowance under section 40A(5), the amount of gratuity in entirety or the amount in excess of the amount of gratuity exempt under section 10(10) alone is to be taken into account. For this purpose, it is desirable to refer to the provisions of section 40a(5) which reads as under:

“40A(5)(a) Where the assessee—

(i) incurs any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee, or

(ii) incurs any expenditure which results directly or indirectly in the provision of any perquisite (whether convertible into money or not) to an employee or incurs directly or indirectly any expenditure or is entitled to any allowance in respect of any assets of the assessee used by an employee either wholly or partly for his own purposes or benefit,

then, subject to the provisions of clause (b), so much of such expenditure or allowance as is in excess of the limit specified in respect, thereof in clause (c) shall not be allowed as a deduction :”

23. Gratuity is, admittedly, not an expenditure of the kind referred to in sub-clause (ii) and is an expenditure of the kind that may result in the payment of salary to the employee within sub-clause (i). The sub-clause evidently uses the expression “where an assessee incurs any expenditure resulting in the payment of any salary to an employee”. This means that the amount of gratuity should result in the payment of salary to the employee. For this purpose, it is necessary to refer to the definition of the word “salary” in Explanation 2 to section 40A(5) itself:

Explanation 2.—In this sub-section,—

(a) ‘salary’ has the meaning assigned to it in clause (1) read with clause (3) of section 17 subject to the following modifications, namely:—

(1) in the said clause (1)….”

24. Thus, the word “salary” for the purpose of clause (i) has the meaning assigned to it in clause (1) read with clause (3) of section 17 subject, to certain other modifications with which we are not concerned herein. clause (1) of section 17 defines salary. It is an inclusive definition. Item (iii) thereof is “any gratuity” while item (iv), inter alia, is “profits in lieu of salary”. The expression “profits in lieu of” is defined in clause (3) of section 17. Item (ii) thereunder clarifies that what is included in the expression “profits in lieu of” is the amount other than any payment covered by certain provisions including section 10(10). Having regard to item (iii) in clause (1) of section 17, it may be arguable that salary for the purpose of section 40a(5)(a)(i) includes the entire amount of gratuity. However, when one considers that item (iv) thereof includes “profits in lieu of salary” and clause (3) of section 17 defines “profits in lieu of salary” as any amount in excess of the amount of gratuity exempt under section 10(10), it will be difficult to accept that the entire gratuity is to be taken as salary despite a specific provision in clause (3) of section 17 to the contrary particularly when the meaning assigned to “salary” is as per clause (1) read with clause (3) of section 17. In our judgment, when there is a specific provision providing that payment other than a payment referred to in clause (10) of section 10 is “profits in lieu of” and thus a part of salary, it is not possible to accept that the entire amount of gratuity is to be treated as salary for the purpose of section 40a(5)(a)(i). Accordingly, we hold that gratuity in excess of the exemption under section 10(10) alone is required to be considered for disallowance for the purpose of section 40A(5). It may be clarified that the assessee's case was not that gratuity was not at all includible as salary for the purpose of considering disallowance under section 40A(5) and we have not considered that question in the present reference. Therefore, we answer the question referred to us at the instance of the Revenue in the affirmative and in favour of the assessee.

25. No order as to costs.