Kochu Thommen, J.:— The following question has been, at the instance of the Revenue, referred to us by the Income-tax Appellate Tribunal, Cochin Bench:
“Whether, on the facts and in the circumstances and on an interpretation of section 40A(7)(b)(ii) of the Income-tax Act, 1961, the assessee is entitled to claim deduction of Rs. 29,593 being the gratuity liability relat-able to the accounting year ending June 30, 1972, for the assessment year 1974–75?”
2. The assessee maintains its accounts on the mercantile system. Its claim for deduction of a sum of Rs. 29,593 for payment of gratuity was disallowed by the ITO by his order dated September 22, 1976. However, it was allowed on appeal by the AAC, whose order was confirmed by the Tribunal. The Tribunal held that the liability relating to the year ending on June 30, 1972, in the sum of Rs. 29,593 “squarely falls under clause (b) of sub-s. (7) of s. 40A and has to be allowed”. The assessee claimed certain deductions in respect of its liabilities for the following accounting years:
Rs.
(a) Liability of the accounting year 30-6-1971.
86,928
(b) Liability of the accounting year 30-6-1972.
29,593
(c) Liability of the accounting year 30-6-1973.
31,690
3. The Tribunal disallowed the claim in regard to the accounting year ending on June 30, 1971, thereby confirming the order of the ITO and setting aside, to that extent, the order of the AAC. The Tribunal, however, allowed the claim in regard to the accounting years ending on June 30, 1972, and June 30, 1973, respectively. It has to be noticed that the claim in respect of the accounting year ending on June 30, 1973, was allowed by the authorities on the basis of a provision made in the relevant previous year, that is, 1973–74. However, the Tribunal also allowed the claim respecting the liability for the accounting year 1972–73, although no provision had been made for the same in that accounting year, but only in the subsequent year. The contention of the Revenue is that, in so far as the assessee had not made a provision respecting the claim for 1972–73 in that year of account, the Tribunal was in error in allowing the same for the purpose of deduction. The provisions of sub-s. (7) of s. 40A of the I.T Act, as amended by the Finance Act, 1975, with effect from April 1, 1973, relied on by the Tribunal, the Revenue points out, do not enable the assessee to claim deduction in respect of the liability of an earlier year.
4. Counsel for the assessee, on the other hand, contends that the liability arose for the first time in the accounting year 1972–73, when the payment of Gratuity Act, 1972 (Act 39 of 1972) (“Central Act”), came into force. Counsel refers to a decision of the Madhya Pradesh High Court in Jiwaji-rao Sugar Co. Ltd. v. CIT, [1983] 144 ITR 729 (MP), and contends that the liability arose, not under the Kerala Industrial Employees' Payment of Gratuity Act, 1970, or the Ordinance which preceded it, but only under the Central Act.
5. The decision of the Madhya Pradesh High Court does not support the proposition that, in so far as an assessee in Kerala State is concerned, the statutory liability for gratuity did not arise until the Central Act came into force. As stated by this court in CIT v. High Land Produce Co. Ltd., [1976] 102 ITR 803, the liability arose for the first time when the Kerala Industrial Employees' Payment of Gratuity Ordinance was promulgated in December, 1969. In respect of the liability of the years earlier to that year, as well as of that year, the claim had to be made in that year of account by making suitable provision before the assessee became entitled to deductions. In the instant case, however, the deductions were claimed by the assessee not in the year in which the liability arose, but only subsequently.
6. Counsel for the assessee points out that until 1973–74, there was no liability on the part of the assessee to pay gratuity to its employees as none of them had become qualified to receive the same as they had not completed five years of service. This argument is unsustainable in the light of the decision of this court in ITR Nos. 184 and 185 of 1979 [CIT v. Mittal Steel Re-rolling & Allied Industries (P.) Ltd.—[1985] 155 ITR 1] where it was pointed out (at p. 4):
“…………it makes no difference if, for the relevant year of account when the statute was enacted, some or all of the employees had not completed the requisite period of five years. A prudent employer ought to visualise that each of his employees is likely to complete five years in his service and would, therefore, become entitled to receive gratuity upon the happening of the event mentioned under section 4 of the Kerala Industrial Employees' Payment of Gratuity Ordinance, 1969, or the Act of 1970 which replaced it. If the employer was not prudent enough to make deduction in the year of account in which the liability arose for the first time under the Ordinance, in respect of that year's liability as well as for the earlier years, de hors the number of years an employee may have completed in his service, it would be too late for him after the expiry of that accounting year to make any deduction for the earlier years. In the subsequent years, he can only make deduction for the relevant accounting year and not for the earlier years…………….”
7. Sub-section (7) of s. 40A of the I.T Act, in so far as it is material, reads:
“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 for any reason.
(b) Nothing in clause (a) shall apply in relation to—
(i) 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 the purpose of payment of any gratuity, that has become payable during the previous year;
(ii) any provision made by the assessee for the previous year relevant to any assessment year commencing on or after the 1st day of April, 1973, but before the 1st day of April 1, 1976, to the extent the amount of such provision does not exceed the admissible amount, if the following conditions are fulfilled, namely…………”
8. Clause (a) of sub-s. (7) contains, subject to clause (b), a general prohibition against any deduction being allowed on the basis of a mere provision in respect of gratuity. The exceptions to the prohibition are mentioned in clause (b). Sub-clause (i) of clause (b) contains two limbs. The effect of the first limb of that sub-clause is that the prohibition under clause (a) shall not apply to a provision made in terms of s. 36(1)(v). The second limb of that sub-clause in effect provides that the provision made during the “previous year” shall be governed by the law as it stood prior to the amendment introduced by the Finance Act, 1975, with effect from April 1, 1973. This means that deduction on the basis of a provision made in the relevant previous year will be allowed, notwithstanding the amendment. The “previous year” for the purpose of sub-clause (i) of clause (b) has to be understood as the accounting year 1972–73, relevant to the assessment year 1973–74, during which the amendment of 1975 retrospectively came into effect as from April 1, 1973.
9. Sub-clause (ii) relates to a subsequent period during which deductions will b*e allowed on the basis of provisions made, subject to the fulfilment of the conditions mentioned under that sub-clause. Any provision made in the previous year relevant to any assessment year commencing on or after April 1, 1973, but before April 1, 1976, will be recognised for the purpose of deduction to the extent of the amount admissible as defined under Explanation 1 and subject to the three conditions mentioned under the sub-clause. These conditions relate to actuarial valuation, creation of an approved gratuity fund and payment of fifty per cent, of the admissible amount by way of contribution to the approved gratuity fund within the specified period.
10. These are the exceptions to the general prohibition contained in clause (a). Unless the assessee is in a position to show that its claim for deduction falls within one of the exceptions mentioned under clause (b), no deduction is allowable on the basis of any provision.
11. The assessee has no case, and cannot have a case, that its claim falls under sub-clause (i), for, admittedly, no provision had been made during the relevant previous year, that is 1972–73, which is the accounting year preceding the assessment year 1973–74. The case of the assessee, however, is that, in so far as provision had been made in the accounting year 1973–74, it is entitled to claim deduction in terms of sub-clause (ii), that is, in accordance with and subject to the conditions mentioned thereunder. To derive the advantage of that sub-clause in respect of a provision made in the accounting year 1973–74, such provision ought to relate to the liability of that year. In fact, deduction for that year was allowed by the Tribunal and other authorities to the extent of Rs. 31,690. However, the provision made in that year in the sum of Rs. 29,593, which is the subject-matter of this reference, relates not to the liability of that year, i.e, 1973–74, but to that of 1972–73. That claim, for the reasons which we have already stated, ought to have been made in that accounting year, and not subsequently. In the circumstances, the claim for deduction in regard to the sum of Rs. 29,593 was, in our view, rightly disallowed by the ITO, and wrongly allowed by the A AC and the Tribunal. In the circumstances, we answer the question in the negative, that is, in favour of the Revenue and against the assessee. We direct the parties to bear their respective costs in this tax referred case.
12. A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.