CA Sandeep Kanoi
As far as the expression ‘gratuity’ is concerned, there is no definition of what ‘gratuity’ is, even under the Payment of Gratuity Act; yet, a monetary relief to an employee at the time of his retirement or termination of service is treated as ‘gratuity’. Section 4 of the Payment of Gratuity Act enjoins on the employer to pay gratuity to an employee on the termination of his employment after he has rendered continuous service for not less than 5 years on the employee attaining superannuation or retirement or resignation or on his death or disablement or due to accident or disease. The payment of gratuity itself is calculated based on the number of years of service put in by the employee, calculated at the rate of 15 days wages based on the rate of wages last drawn by the employee concerned.
A reading of the provisions of the Payment of Gratuity Act shows that it is a complete code containing detailed provisions covering all the essential features of a scheme for payment of gratuity. In the decision reported in (2004) 1 SCC 755 = AIR 2004 SC 1426 (Ahmedabad Pvt. Primary Teachers’ Assn. V. Administrative Officer), the Supreme Court held that gratuity in its etymological sense is a gift, especially for services rendered, or return for favours received. The Apex Court pointed out that the main purpose and concept of gratuity is to help the workman after retirement, whether retirement is a result of rules of superannuation or physical disablement or impairment of vital part of the body. The expression ‘gratuity’ itself suggests that it is a gratuitous payment given to an employee on discharge, superannuation or death. Gratuity is an amount paid unconnected with any consideration and not resting upon it and has to be considered as something given freely, voluntarily or without recompense. It is a sort of financial assistance to tide over post-retiral hardships and inconveniences.
In the background of the meaning given to the word ‘gratuity’, when we look into the agreement between the employee union and the employer, we find that the scheme seems to be in vogue for quite sometime even before this accounting year relevant to this assessment year and as far as the relevant assessment year under consideration is concerned, the scheme which had come into existence from 01.01.1997 would be relevant. As per this, at the time of retirement or superannuation or relieving from his employment, an employee shall be entitled to a payment based on the service weightage, the payment being the last drawn salary multiplied by 3 days and the number of years put in by the employee. Admittedly, the scheme is not a recognised one, but one reached as per the agreement between the parties. It is not denied by the assessee that a provision was made in the accounts as regards the gratuity payable based on the service weightage. Being a provision made for payment of gratuity to the employees on the retirement or termination of their employment, the claim stands clearly hit by Section 40A(7)(a) of the Income Tax Act.
Learned counsel appearing for the assessee submitted that in the grounds of appeal filed before this Court, the Department had contended that service weightage is neither a gratuity, nor a payment to any welfare fund and at best constitute only a provision which is to be disallowed. A question of law to that end was also raised as to whether on the facts and in the circumstances of the case, the Income Tax Tribunal was right in law in not considering that the amount paid to service weightage is neither a gratuity, nor a payment to any welfare fund and at best only a provision in the nature of a contingent liability and therefore to be disallowed? In the background of the ground thus raised, learned counsel appearing for the assessee submitted that it is not open to the Revenue to contend otherwise to somehow bring the case of the assessee under one of the clauses under Section 40A of the Income Tax Act. Thus, learned counsel submitted that it is not open to the Revenue to go against what had been raised as a question in the grounds of appeal before this Court.
It is no doubt true that the Revenue had contended in the grounds of appeal that it was neither a gratuity nor a payment made to any welfare fund and would constitute only a provision and that the focus throughout was only on Section 40A(9). Section 260A of the Income Tax Act deals with the appeal to the High Court. Sub-section(6) to Section 260A states that the High Court may determine any issue which has not been determined by the Appellate Tribunal or has been wrongly determined by the Appellate Tribunal, by reason of a decision on such question of law as is referred to in sub-section (1) of Section 260A. Sub-section (1) of Section 260A states that an appeal shall lie to the High Court from every order passed in appeal by the Appellate Tribunal before the date of establishment of the National Tax Tribunal, if the High Court is satisfied that the case involves a substantial question of law. Sub-section (4) provides that the appeal shall be heard only on the question so formulated. The proviso therein states that it, however, would not take take away or abridge the power of the Court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is satisfied that the case involves such question.
Reading the above said provisions and the issues raised before this Court, we find that the grounds taken by itself automatically cannot stand in the way of this Court considering the legal issue on the claim of deduction on the provision made by the assessee as to whether it would be covered by Section 40A(9) or under any other provisions of the Act, which includes Section 40A(7) too. It is no doubt true that neither the Assessing Officer nor in the course of the assessment proceedings or before any other authority, the issue was tested on the provisions of Section 40A(7). However, when the question of deductibility is a matter of dispute and being a pure question of law, on the facts found, we have no hesitation in holding that this Court has the jurisdiction to consider the applicability of Section 40A(7) too to the facts of the case.
The decision of the Apex Court reported in (2013) 358 ITR 252 (SC) (Commissioner of Income -Tax V. Mastex Ltd.) resolves the issue on the scope of jurisdiction under Section 260A of the Income Tax Act. The Apex Court observed “we are afraid that the Revenue is under some misconception. The proviso following the main provision of section 260A(4) of the Act states that nothing stated in sub-section (4), i.e., “The appeal shall be heard only on the question so formulation” shall be deemed to take away or abridge the power of the court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is satisfied that the case involves such question. The High Court’s power to frame substantial question(s) of law at the time of hearing of the appeal other than the questions on which appeal has been admitted remains under section 260A(4). This power is subject, however, to two conditions, (one) the court must be satisfied that appeal involves such questions, and (two) the court has to record reasons therefor.”
In the light of the provisions under Section 260A of the Income Tax Act on the extent of jurisdiction of this Court to decide the question of law arising on the facts stated, we hold that what was created was admittedly only a provision in the books of accounts, hence, not a fund or a contribution to a fund to be considered under Section 40A(9) of the Income Tax Act; the only other provision, which would hit the claim of the assessee herein would be Section 40A(7) of the Income Tax Act. Thus, going by Section 40A(7) of the Income Tax Act, on the facts admitted, we hold that the assessee’s claim for deduction is hit by Section 40A(7) of the Income Tax Act. The provision had been in the statute book with effect from 01.04.1973, inserted by Finance Act 1975, subsequently substituted by Finance Act, 1999, with effect from 1.4.2000. The provision as is relevant to the assessment year under consideration is one what prevailed prior to the substitution by Finance Act, 1999, effective from 1.4.2000.
In the light of our discussion, apart from the question of law raised, the question of law which has to be formulated for deciding the issue is as to “whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in granting the relief under Section 40A(9) when such claim is hit by Section 40A(7) of the Income Tax Act?”
For the reasons that we have given in the preceding paragraphs, even though the assessee succeeds on the applicability of Section 40A(9) of the Income Tax Act, the case of the assessee fails in view of Section 40A(7) of the Income Tax Act. Consequently, the order of the Income Tax Appellate Tribunal is set aside and this Tax Case (Appeal) stands allowed. No costs.