SHREE SAJJAN MILLS LTD. vs. COMMISSIONER OF INCOME TAX, M.P, BHOPAL AND ANR,

CIVIL APPEAL No. 4221/1984Supreme Court1985 INSC 22408 October 1985Bench: 3 JudgesAuthor: V.D. TULZAPURKAR, SABYASACHI MUKHERJI, RANGANATH MISRA SAJJAN MILLS LTD22 pages
AI SummaryDismissed

What were the facts?

The appellant, Shree Sajjan Mills Ltd., is a public limited company. For the assessment year 1973-74, following the enactment of the Payment of Gratuity Act, 1972, the assessee determined its total gratuity liability actuarially at Rs. 48,59,431. Pending this valuation, a provision of Rs. 20 lacs was made in the balance sheet. The assessee added back this Rs. 20 lacs provision to its income and claimed deduction for the full actuarial liability. The Income-Tax Officer disallowed the claim, allowing only actual payments of Rs. 24,366. The Appellate Assistant Commissioner allowed a deduction of Rs. 30,25,662. The Revenue appealed to the Tribunal, which allowed Rs. 28,59,431 under Section 37(1). The High Court, on reference, held that Section 40A(7) barred deduction without compliance, reversing the Tribunal's decision.

What did the Supreme Court hold?

The Supreme Court held that the assessee's contention that Section 40A(7) would not apply if no provision was made for gratuity would defeat the very purpose and object of Section 40A(7), rendering it nugatory. Such an interpretation would lead to an absurd result where an assessee who made no provision could claim a deduction, while one who did would not unless the requirements of Section 40A(7) were fulfilled. The Court emphasized that the non-obstante clause in Section 40A(1) makes it clear that the provisions of Section 40A have effect notwithstanding anything to the contrary contained in any other provision of the Act relating to the computation of income under the head 'Profits and gains of business or profession'. Therefore, a deduction for gratuity liability could not be allowed on general principles under Section 37(1) without complying with the conditions laid down in Section 40A(7). The High Court was therefore justified in answering the questions in the negative. The appeals were dismissed.

What were the issues?

1. Whether, in view of the non-obstante clause in Section 40A of the Income Tax Act, 1961, a deduction for gratuity liability can be claimed under Section 37(1) without complying with the requirements of Section 40A(7)(a)? (Mixed question of law and fact, turning on Section 40A(7) and Section 37(1)). Assessee's contentions: The assessee argued that if no provision is made for gratuity, Section 40A(7) would not apply, and the liability would be deductible under Section 37(1). Reliance was placed on cases like Kedarnath Jute Mfg. Co. Ltd. v. C.I.T., Bombay High Court's decision in Tata Iron & Steel Co. Ltd. v. D.V. Bapat, Income-tax Officer, and C.I.T. Kerala v. High Land Produce Co. Ltd., which were decided before the enactment of Section 40A(7) or dealt with different situations. The assessee also referred to Swadeshi Cotton Mills Co. Ltd. v. Income-Tax Officer, Special Circle 'A' Ward, Kanpur, where the Allahabad High Court took a view that the bar did not apply if conditions were to be fulfilled in the future. Revenue's contentions: The Revenue contended that the assessee's interpretation would render Section 40A(7) nugatory and lead to an absurd result where an assessee making no provision would get a deduction, while one making a provision would not unless conditions were met. The Revenue relied on the principle that fiscal statutes should be strictly construed but also allow for reasonable construction to give effect to legislative intent. The Revenue also cited Calcutta High Court decisions in Peoples Engineering & Motor Works Ltd. v. Commissioner of Income-Tax West Bengal - II and Commissioner of Income Tax, Central-V, Calcutta v. New Swadeshi Mills of Ahmedabad Ltd., which held that Section 40A(7) overrides other provisions and that the prohibition on deduction applies irrespective of how the provision is termed.

Which sections of the Income-tax Act were involved?

Section 40A(7),Section 37(1),Section 36(1)(v)

AI-generated summary — verify with the full judgment below

SllREE SAJJAN MILLS LTD, v. COMMISSIONER OF INCOME TAX, M.P, BHOPAL AND ANR, OCTOBER 8, 1985 593 [V.D. TULZAPURKAR, SABYASACHI MUKHARJI AND RANGANATH MISRA, JJ,] Income Tax Act 1961, ss. 40A (7), 36 (1) (v) and 37 (1) - Deduction - Payment of Gratuity - ·Whether deduction can be claimed under any other provision under the head 11business or profession" without complying with the requirements of s. 40A (7) (b) - Distinction between an actual liability in praesenti and a liability de f uturo explained.

Interpretation of statutes - Taxing statutes - Principle of reasonable construction -·Applicability of - Words and Phrases - 11Provision 11 - Meaning of.

The appellant-assessee is a public limited company. The relevant assessment year in C,A, No. 4222 of 1984 is 1973-74, With the coming into force of the Payment of Gratuity Act, 1972 with effect from 16th September 1972 a statutory liability was created on the assessee to pay gratuity to its employees and the appellant arranged for actuarial determination of its liability, Pendin,; determination of such an actuarial valuation, the assessee made a provision of Rs, 20 lacs against the total accruing liability till

The order continues below.

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