JUDGMENT A.N. Verma, J.
1. At the instance of the assessee, the following questions have been referred by the Income-tax Appellate Tribunal for our opinion.
" 1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the claim of the assessee is not allowable in the years under consideration by virtue of the provisions of Section 40A(7) of the Income-tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the case of the assessee-company is not covered by the provisions of Section 40A(7)(b)(i) of the Act?"
2. The assessee is a company limited by guarantee and had adopted the mercantile system of accounting. For the assessment years 1977-78 and 1978-79, the assessee-company had debited certain amounts under the head " Gratuity " in the income and expenditure account. The auditors in their footnote to their balance-sheet for both the years have stated as under :
" Gratuity.--No provision exists for the payment of gratuity to the employees of the company under the Payment of Gratuity Act, 1972. The accrued liability according to actuarial valuation amounted to Rs. 2,72,436 as on March 31, 1977, for which no provision has been made in the accounts. During the year under report, the management has, however, deposited a sum of Rs. 59,633.51 in the scheduled bank on account of part payment of gratuity to the employees. The accounts in various banks stand in the joint names of the company and the individual employee. In our opinion, this amount should have been shown in the balance-sheet instead of the profit and loss account because the amount has not been transferred to the trustees of the employees gratuity trust fund which has not been executed so far."
3. The Income-tax Officer called upon the assessee to show cause why the claim for deduction on account of gratuity should not be disallowed. After hearing the assessee and considering the evidence, the Income-tax Officer held that the claim for deduction was hit by Section 40A(7) of the Income-tax Act. It was pointed out by the Income-tax Officer that the assessee had moved the application for recognition of the gratuity fund with effect from May 24, 1978. That being so, the claim for gratuity made in the assessment year 1977-78 could not be allowed as the gratuity fund was not recognized by the Income-tax Officer, Lucknow, for the period under consideration. For the same reasons the claim of gratuity could not be allowed for the assessment year 1978-79 as well.
4. On appeal by the assessee, the Commissioner of Income-tax (Appeals) also took the same view and negatived the assessee's claim. On a further appeal before the Tribunal, it was urged on behalf of the assessee that the gratuity amount having been deposited by it in the fund of the employee in respective banks the same should have been allowed. For the Department, on the other hand, it was contended that gratuity was not deductible unless the deposit fulfils the conditions laid down in Clause (b) of Section 40A(7). Accepting the Department's contention, the Tribunal rejected the claim of the assessee and dismissed the appeal. The Tribunal held that a claim of gratuity could be allowed only if the amount was paid by the assessee by way of contribution to an approved gratuity fund for the exclusive benefit of employees under an irrevocable trust. The Tribunal noted the fact that the gratuity fund was approved by the Commissioner of Income-tax only with effect from May 24, 1978.
5. In order to appreciate the rival contentions, it will be necessary to have a look at the relevant provisions. We begin with Section 40A(1) of the Income-tax Act which provides :
"40A.(1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head ' Profits and gains of business or profession '. "
Clauses (a) and (b) of Sub-section (7) of Section 40A state :
" (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, 1976, to the extent the amount of such provision does not exceed the admissible amount, if the following conditions are fulfilled, namely : --
(1) the provision is made in accordance with an actuarial valuation of the ascertainable liability of the assessee for payment of gratuity to his employees on their retirement or on termination of their employment for any reason."
6. It will thus be seen that notwithstanding any other provision in the Income-tax Act, the provision for future use by the assessee out of its gross profits of the year of account for payment of gratuity to its employees is not allowable as a deduction in the computation of profits and gains of the year of account unless the case is covered by one or the other of the two sub-clauses of Clause (b) of Section 40A(7). Sub-clause (i) of Clause (b) which alone is relevant for this case would have been attracted only if the assessee had made provision for payment of gratuity in an approved gratuity fund. In the present case, the gratuity fund was approved by the Commissioner only with effect from May 24, 1978. Further, on the assessee's own showing, provision for payment of gratuity to its employees had been made by making deposits in banks and not in any approved gratuity fund during the relevant years. That being so, the assessee's claim for deduction was not covered by Clause (b) of Section 40A(7) and consequently it was rightly disallowed by the Tribunal.
7. In the case of Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585, their Lordships of the Supreme Court 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 the 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 been used in any artificial sense, i.e., of setting apart specifically by the assessee 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 payments 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.
8. In order, therefore, 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. Indeed, the application for recognition of the gratuity fund itself was allowed later making it effective from May 24, 1978.
9. We, therefore, answer both the questions in the affirmative, in favour of the Revenue and against the assessee. The Revenue shall be entitled to its costs which we assess at Rs. 250.