N.V. Balasubramanian, J.@mdashThe following two questions have been referred to us by the Income Tax Appellate Tribunal in relation to the assessment year 1974-75 of the assessee :
"1. Whether, on the facts and in the circumstances of the case and having regard to provisions of rule 103 of the Income Tax Rules, 1962, the Appellate Tribunal was right in law in holding that the assessee-company is eligible for deduction of gratuity of Rs. 3,41,202 as admissible u/s 36(1)(v) of the Income Tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case and having regard to provisions of Rule 103 of the Income Tax Rules, 1962, the Appellate Tribunal''s interpretation that the last drawn salary could also be construed to be salary during the year is sustainable in law ?"
2. The short point that arises for consideration is whether the assessee is entitled to the deduction of gratuity amount of Rs. 3,41,203 paid to an approved gratuity fund as a contribution made to the fund. The Income Tax Officer applied Rule 103 of the Income Tax Rules, 1962, and held that the assessee would be entitled to claim a deduction of a sum of Rs. 2,27,037, and disallowed the balance on the ground that the amount is not covered under Rule 103 of the said rules and completed the assessment. The Commissioner of Income Tax (Appeals), allowed the appeal preferred by the assessee, but proceeded on a different footing and held that the assessee would be entitled to the deduction of the entire amount. The Revenue has challenged the said order in appeal before the Tribunal and the only point that was raised before the Tribunal was that under Rule 103 of the Income Tax Rules, the salary paid to an employee at the end of the year should not be taken into consideration for the purpose of allowability of the expenditure under Rule 103 of the Rules but the salary paid during the entire year should be taken into consideration for the said purpose. The Tribunal held that under the Payment of Gratuity Act, the gratuity is paid on the basis of the last drawn salary and equally for the purpose of applicability of Rule 103 of the Rules, the amount of gratuity contributed to the fund would constitute expenditure and the payment to the approved gratuity fund, calculated on the basis of the salary paid at the end of the year would not exceed the ceiling limit prescribed under Rule 103 of the Rules. The Tribunal thus dismissed the appeal preferred by the Revenue. It is against the order of the Appellate Tribunal, the reference has been made at the instance of the Department.
3. Heard Mr. T.C.A. Ramanujam, learned senior standing counsel for the Revenue, and Mr. Srinath Sridevan, learned counsel for the assessee. The submission of Mr. T.C.A. Ramanujam is that for the purpose of determining the ceiling limit prescribed under Rule 103 of the Income Tax Rules, the salary drawn by an employee during the entire year should be taken into account and it is not permissible to take into account the salary paid at the end of the year as increments might have been sanctioned during the year and, therefore, the calculation should be made on the salary paid during the entire year. Mr. T.C.A. Ramanujam also submitted that Section 40A(7) of the Act would apply and the Tribunal has not considered the applicability of Section 40A(7) of the Act and, therefore, the matter requires to be remitted to the Income Tax Appellate Tribunal to consider the applicability of Section 40A(7) of the Act to the facts of the case.
4. Mr. Srinath Sridevan, on the other hand, submitted that the amount is allowable u/s 36(1)(v) read with the Income Tax Rules, 103. He further submitted even assuming that there was an excess amount, the excess amount would be allowable u/s 37 of the Act as there was an actual payment of gratuity to an approved gratuity fund and, therefore, the entire amount would be allowable either u/s 36(1)(v) or u/s 37 of the Income Tax Act, 1961. Mr. Srinath Sridevan referred to the decision of this court in
5. We have carefully considered the submissions of learned counsel for the Revenue and the assessee. We are of the view that to decide the issue that arises in the instant case, it is not necessary to go into the question whether the ceiling limit prescribed under Rule 103 should be calculated on the basis of the last drawn salary of the employee or the entire salary drawn by the employee during the entire year. We find that the assessee had made contribution to an approved gratuity fund and that would necessarily constitute the expenditure incurred by the assessee for the purpose of business and is allowable as expenditure in the year in which the payment was made. There is no dispute that the assessee had contributed a sum of Rs. 3,41,203 to the approved gratuity fund and we are of the view that if the entire amount is not allowable u/s 36(1)(v), the balance amount would necessarily have to be allowed as a business expenditure u/s 37 of the Income Tax Act, 1961, as the money has gone out of the hands of the assessee and it was a business expenditure incurred by the assessee wholly and exclusively for its business purpose. This court in
