2001 PLP 2667 (PTD)

Y.R. MEENA, J.‑‑:On a reference application, the Tribunal has referred the following question for the opinion of this Court: "Whether, on the facts and in the circumstances of the case, the sum of Rs.13,35,467 is allowable under section 40A(7)(b)(i) of the Income Tax Act, 1961?" The assessee is carrying on business of production and sale of electricity. On July 17, 1975, the electricity undertaking was taken over by the Bihar State Electricity Board and all assets, liabilities etc., vested in the said Board under the Bihar Electricity Supply Undertakings (Acquisition) Act, 1979. The compensation money receivable by the assessee‑company for such acquisition was not finalised on the date of making assessment. The assessee had claimed the gratuity payable as on July 17, 1975, at Rs.13,35,467 excluding a sum of Rs.1, 17,418 which yeas allowed in the assessment for 1974‑

75. The Assessing Officer disallowed the claim of the assessee on the ground that there is' a provision for payment of gratuity to the employees of the assessee on their retirement or on termination of their employment. The employees of the assessee neither retired nor their services are terminated nor the gratuity amount has been paid directly by the assessee to its employees; under the Bihar Electricity Supply Undertakings (Acquisition) Act, 1979, there was a clause in the Act of 1979 that, adjustment of gratuity liability of the employees shall be made from the gross amount of compensation payable by the State. Therefore, the claim of the assessee for deduction of the amount of gratuity liability was rejected by the Income‑tax Officer. The Commissioner of Income‑tax (Appeals) has confirmed the view taken by the Assessing ,Officer. In appeal before the Tribunal, the Tribunal in following the decision of the Madras High Court in the case of CIT v. Sarada Binding Works (1985) 152 ITR 520, allowed the claim of the assessee. Learned counsel for the assessee submits that now the decision of the Madras High Court has been approved by the apex Court. No contrary decision is brought to our notice by learned counsel for the Revenue. The facts arc not in dispute that under the Bihar Electricity Supply Undertakings (Acquisition) Act, 1979, the company's business has been taken over by the State Government with all liabilities from the date of vesting of the business in the State Government, that is, from July 17, 1975. Clause 7‑ of the Act of 1979, provides for "vesting of undertakings". Sub -clause (5) of clause 7 provides that "all the liabilities and obligations,' other than those vesting in the State Government under subsections (1) and (3) shall continue to be the liabilities and obligations of the licensee, after the vesting date." Clause, 9 provides "deduction from the gross amount". Sub- clause (m) thereof further provides that "all wages or salary, bonus or any other payments of any employee in 'respect of the service rendered to the licensee and any compensation payable to any worker under any provisions of Chapter V‑A of the Industrial Disputes Act, 1947, is deductible from‑ the gross amount. Sub‑clause (n) further provides that "all. sums due to any employee in respect of provident fund, pension fund or gratuity fund or any other fund established for the welfare of the employees of the licensee is also deductible from the gross amount payable to the assessee as compensation." The funds which are deductible from the gross amount include the gratuity fetid which is due on the appointed date, that is July 17, 1975. In the case of CIT v. Sarada Binding Works (1985) 152 ITR 520 (Mad.), the facts before the Madras High Court were that during the accounting period ending on March 31, 1972, relevant to the assessment year 1972‑73, the assessee gave up possession of its assets and liabilities in respect of one of its businesses in favour of another concern. On a settlement of the assets and liabilities of the said business, it was noticed that the excess liabilities over assets came to Rs.67,687 and he assessee paid the said sum to the transferee, who succeeded to the business. The agreement entered into between the. assessee and the transferee stated that all the employees in the business would become the employees of the transferee on terms mar less favourable to them with continuity of service. Under the agreement, one of the items was of liability of a sum of Rs.80,309 which was the provision for gratuity due to the employees of the business taken over by the transferee. The assessee claimed before the Assessing Officer a deduction of provision for gratuity in respect of the business retained by it as well, as the business which was transferred. The Income‑tax Officer disallowed the claim. Finally, the Madras High Court has decided the issue in favour of the assessee holding that in respect of the business that was transferred, though the payment under the agreement was not made directly to the employees as such, the amount was paid for the discharge of the assessee's liability to pay gratuity to its employees for the period ending with the date of transfer: Hence, the payment should be taken to be a payment made to discharge the assessee s liability for gratuity, and, hence had to be allowed as a deduction. The decision of the Madras High Court has been approved by the Supreme Court in the case of W.T. Suren and Co.. Ltd. v. CIT (1998) 30 ITR

643. At page 659, the apex Court while considering the aforesaid decision of the Madras High Court observed as under: "One of the clauses of the agreement was that all the employees in that business would become employees of the transferee opt terms no less favourable to them with continuity of service. The liabilities as worked out in the schedule included an amount of Rs.80,309. which was a provision for gratuity due to the employees of the business taken over by the transferee. The assessee claimed this amount as deduction. The question before the High Court was whether the Appellate Tribunal was right, on the facts and in the circumstances of the case; in allowing deduction of gratuity liability of Rs.80,

309. The. Court answered the question in favour of the assessee and against the Revenue holding that in respect of the business that was transferred though the payment under the agreement was not made directly to the employees as such, the amount was paid for discharging the assessee's liability to pay gratuity to its employees for the period ending with the date of transfer, and, hence, the payment should be taken to be a payment made to discharge the assessee's liability for gratuity and, hence, had to be allowed as a deduction. Finally, their Lordships answered the question, in the affirmative, that is, in favour of the assessee and against the Revenue. The admitted facts are that after the date of vesting of the assessee company's business, the employees, became the employees of the State Government and the gratuity payable to the employees as gratuity" will be paid by the State Government and that will` be deducted from 'the gross amount payable by the State' Government to the assessee. Whether the assessee paid the gratuity amount directly or that amount has been paid on behalf of the assessee by the State Government‑‑‑that does not make any difference in view of the aforesaid decisions, including the decision of the apex Court. We answer the question in the affirmative, that is, in favour of the assessee and against the Revenue. The reference application is, accordingly, disposed of. RANJAN KUMAR MAZUMDAR, J.‑‑‑‑I agree. M.B.A/359/FC Order accordingly.