Gratuity paid to employees on transfer to another organisation is generally deductible business expense under Section 37 (1) of the Income-tax Act, 1961, and Section 40a (7) cannot be invoked to defeat the assessee's claim if the conditions of the section are not satisfied.

Ajoy Nath Ray, Maharaj Sinha

( 1 ) THREE questions we have caused to be referred to ourselves under Section 256 (2 ). The questions are as follows :"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the order of the Commissioner of Income-tax (Appeals) deleting a sum of Rs. 11,08,658 on account of gratuity payable to the employees on transfer to telecommunication department of the State Government ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the provision of Section 40a (7) of the Income-tax Act, 1961, could not be invoked to defeat the assessee's claim for Rs. 11,08,656 on account of gratuity payable on transfer to Telecommunication Department of the State Government and that the same was allowable under Section 28 or under Section 37 (1) of the Income-tax Act, 1961 ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the amount of subsidy of Rs. 1,48,000 is not to be deducted from the cost of generator for the purpose of calculating depreciation ?"

( 2 ) IN regard to the first two questions the basic facts are that the telecommunications department of the assessee was transferred to Webel, a West Bengal Government organisation, as a going concern. The employees also got transferred maintaining continuity of service.

( 3 ) THE agreement of transfer is dated in 1978 and the memorandum of understanding involving the workers is dated February 29, 1980.

( 4 ) AS a result of this, the assessee had a liability accrued to itself as on March 1, 1980, as to the making over of the amounts of gratuity lying with them in regard to the workers transferred to Webel. Such making over of the gratuity amount was to be made to Webel.

( 5 ) AS such, for the previous year, corresponding to the calendar year 1980, relating to the assessment year 1981-82, the assessee admittedly made a provision for the accrued liability of making over the gratuity amounts of the transferred workers to Webel.

( 6 ) IN regard to the second question, Mr. Mullick argued before us that since the amounts relate to gratuity, Section 40a (7) has to be specifically satisfied before deduction can be claimed.

( 7 ) FOR expounding the scheme of that section, he relied on the case of Sree Sajjan Mills Ltd. v. CIT a Supreme Court decision.

( 8 ) NO objection based on this section was, however, taken by the Department before the Tribunal. The Tribunal dealt with the section none the less for what it felt, was the cause of completeness.

( 9 ) IT formed the view that the payment was not being made for the employees of the assessee who had ceased to be such. It, therefore, opined that generally under Section 37 (1) the provision for the liability was deductible.

( 10 ) MR. Pal gave us the case of W. T. Suren and Co. Ltd. v. CIT [1998] 230 ITR 643, a Supreme Court decision. There the employees were transferred by the subsidiary company to the holding one and the gratuity amounts of the employees were also paid over. There are clear indications in the judgment at and after page 662 that these payments are in the nature of generally deductible business expenses.

( 11 ) AS such, the second question has to be answered in favour of the assessee.

( 12 ) THE first question is intimately related to the second. We are of the opinion that if the second question is answered in favour of the assessee, the first question also has to be so answered. We are of the opinion that the provision made by the assessee for satisfying the liability arising out of the above agreements, although relating to payment of gratuity of the workers ultimately must cause the deletion of the said sum of Rs. 11,08,658, and in this regard the Commissioner of Income-tax (Appeals) and the Tribunal were both correct in law.

( 13 ) THE third question relates to calculation of depreciation. The sum of Rs. 1,48,000 was admittedly r

Click Here to Read the rest of this document