' MUHAMMAD MUJEEBULLAH SIDDIQUI, J.---In this appeal under section 136(1) of the Income Tax Ordinance, 1979 (as it stood in the year 1999), the following questions of law arising out of the order of Tribunal have been proposed for our consideration:--- "(1) Whether on the facts and in the circumstances of the case, the learned Income Tax Appellate Tribunal was justified in confirming the order of the C.I.T.(A) that provision for gratuity is an admissible expense?
(2) Whether on the facts and in the circumstances of the case, the learned Income Tax Appellate Tribunal correctly relied on the judgment of High Court cited as 1989 PTD 579, when the judgment was based on provision of repealed Act of 1922 and the assessment in this case on the point of 'Provision' was covered by the section 24(g) of the Income Tax Ordinance, 1979?"
2. The facts giving rise to the above questions are that the respondent is a private Limited Company enjoying income from manufacturing of silk fabric. In the year 1991, the respondent claimed expenditure under the head gratuity at Rs,2,13,006. The Assessing Officer allowed an amount of Rs,57,545 which was actually paid while disallowed balance amount of Rs,1,55,461 for which mere provision was made, as inadmissible.
3. The respondent preferred appeal before the C.I.T.(A) contending that the respondent maintains mercantile system of accounting and gratuity being an obligatory expenditure for the employer, the provision of this liability has to be made on accrual basis every year. It was urged that the liability was allowed in the past and the Assessing Officer has deviated from the past practice by allowing gratuity to the extent of amount actually paid only and by adding back the provision. It was further contended that the addition was liable to be deleted in terms of the Sindh High Court judgment in the case of Messrs S.J.G. Fazal Ellahi Limited v. Commissioner of Income Tax, Karachi 1989 PTD 579. The contention was accepted and the addition was deleted with the observation that the High Court judgment was on all fours to the facts of the case.
4. The Department preferred appeal before the Income Tax Appellate Tribunal (hereinafter referred to as the ITAT) contending that the provision was not admissible expense. The contention was not accepted and the appeal was dismissed mainly placing reliance on the judgment of High Court in the case of Messrs S.J.G. Fazal Ellahi (supra). Being still dissatisfied, Commissioner of Income Tax has preferred this appeal proposing the questions of law reproduced in the earlier part of this judgment.
5. We have heard Mr. Jawaid Farooqui, learned counsel for the appellant. Nobody has appeared on behalf of the respondent though duly served with the notice of hearing.
6. Mr. Jawaid Farooqui, contended that the learned Tribunal misdirected in placing reliance on the judgment of this Court in the case of S.J.G. Fazal Ellahi (supra), as in the above judgment and the earlier judgment on which reliance was placed in this judgment, namely, Commissioner of Income Tax Central Zone, Karachi v. Pakistan Security Printing Press Corporation, 1985 PTD 413, the provisions contained in the Income Tax Act, 1922, were considered. With the promulgation of Income Tax Ordinance, 1979, the law was amended which has not been noticed by the learned, members of the ITAT. He has submitted that in the Income Tax Act, 1922; there was a provision in section 10(4)(c), which is analogous to the provisions contained in section 24(h) of the Income Tax Ordinance, 1979. A new provision was introduced in the Income Tax Ordinance, 1979, which is contained in section 24(g). There was no analogous provision in the Income Tax Act, 1922, with the result that the earlier judgments of this Court, wherein the provisions contained in the Income Tax Act, 1922, were considered are no more relevant. He has further submitted that no doubt, the respondent employed mercantile method of accounting and on the accrual basis the expenses representing the provision for gratuity shall be deemed to be paid but other condition provided in section 24(g) was not fulfilled as it was not shown that the gratuity fund was approved. He submitted that there is a complete bar in section 24(g) of the Income Tax Ordinance, 1979 to the allowability of mere provision or even transfer of such accrued liability to the gratuity fund until and unless it is approved. He has further submitted that if a provision for gratuity on account of accrual of liability or the amount transferred to the fund is allowed it would be violative of the mandatory requirements of law. He has maintained that if it is held that the provision for gratuity or amount transferred to the gratuity fund which is not approved is to be allowed by following the judgments of this Court, wherein the provisions contained in the Income Tax Act, 1922, were considered, it cannot be done without doing violence to the clear language of law and any such interpretation would render the provisions pertaining to the approved gratuity fund as redundant, which is against the principles of interpretation of statutes. He has argued that the plea that an ascertained liability is an admissible expenditure is also not sustainable because of the specific bar contained in section 24(g) of the Income Tax Ordinance, 1979.
7. We have given our anxious consideration to the contentions raised by Mr. Jawaid Farooqui, learned counsel for the appellant. Before dwelling on the contentions, we would like to reproduce the .Relevant provisions in the Income Tax Act, 1922, which have been considered by this Court in the judgments referred to above and the relevant provisions contained in the Income Tax Ordinance, 1979.
INCOME TAX ACT, 1922 "Section 10(4)(c)
(4) Nothing in clause (xvi) of subsection (2) shall be deemed to authorize---
(c) any allowance in respect of a payment to a provident or other fund established for the benefit of employees unless the employer has made effective arrangements to secure that tax shall be deducted at source from any payments made from the fund which are taxable under the head `Salaries'."
INCOME TAX ORDINANCE, 1979 Section 24. Deductions not admissible.---Nothing contained in section 23 shall be so construed as to authorize the allowance or deduction of--
(g) any sum paid to any provident fund, superannuation fund or gratuity fund, not being a recognized provident fund, an approved superannuation fund or an approved gratuity fund;
(h) any sum paid to any provident fund or other fund established for the benefit of employees of the assessee, unless the assessee has made affective arrangements to secure that tax shall be deducted at source from any payments made from the fund which are chargeable to tax under the head "Salary";
8. A perusal of the above provisions shows that in the Income Tax Act, 1922, there was no provision parallel to section 24(g) of the Income Tax Ordinance, 1979. In the Income Tax Act, 1922, there was a provision in section 10(4)(c) which is analogous to the provision contained in section 24(h) of the Income Tax Ordinance, 1979 and the bar contained in section 24(g) has been introduced by the Income Tax Ordinance, 1979, for the first time.
9. Mr. Jawaid Farooqui, learned counsel for the appellant argued that somebody may take plea that the provisions contained in section 24(g) shall not be applicable to the case where no gratuity fund has been created and that the bar contained in section 24(g) shall be applicable only if such fund is created but is not approved, but it shall not be tenable.
10. We find substance in the contention canvassed by Mr. Jawaid Farooqui. In the first instance, if the law requires that an approved gratuity fund is to be created and any sum paid to such approved gratuity fund is to be allowed and if no such approved gratuity fund exists then the person claiming the benefit is required to act in accordance with the law and cannot be allowed to take premium for circumvention of or noncompliance with the requirements of law. Secondly, even if no fund has been created formally, the provision created to which the gratuity accrued but not actually paid is transferred and on the basis whereof claim for gratuity is preferred itself amounts to creation of gratuity fund. The reason being that the expression "fund" in the ordinary common parlance means accumulation of money for some specific purpose. We are of the opinion that the expression 'fund' used in section 24(g) is to be taken as an ordinary expression and not as a term of art. The rules relating to approved gratuity fund are contained in Part-III of Sixth Schedule to the Income Tax Ordinance, 1979. The term gratuity fund has not been defined in these rules. However, the term "approved gratuity fund" has been defined in section 2(4) of the Income Tax Ordinance, 1979, to mean a gratuity fund which has been and continues to be, approved by the Commissioner in accordance with the rules contained in Part-III of the Sixth Schedule. Thus, the expression "approved gratuity fund" has been defined in the Income Tax Ordinance, 1979, but the expression 'gratuity fund' has not been defined in the Ordinance or rules framed thereunder. The result is that the expression shall not be treated as term of art and is to be given ordinary meaning as is understood in common parlance. A similar point has been considered by the Calcutta High Court in the case of Duncan Brothers & Co. Ltd. v. C.I.T. (1978) 111 ITR 885 and has been followed by the said High Court again in the case of Duncan Brothers & Co. Ltd. v. C.I.T. (1981) 128 ITR 302. It has been held in the above judgments of the Calcutta High Court, that etymologically fund means a sum of money available for the payment or discharge of liabilities and if the term fund is not defined in a particular statute, it is to be given to its ordinary meaning as understood in the common parlance.
The Calcutta High Court accepted the contention that an amount already earmarked for a particular liability such as provision for tax amounts to fund.
11. Examining the meaning of expression "fund" as defined in various dictionaries we find that in Jowitt's Dictionary of English Law', 2nd Edition, Vol. I, p.840 the term ",fund" has been defined as follows: "Fund, a sum of money available for the payment or discharge of liabilities. Thus the assets of a testator form a fund for the payment of his debts."
' In the Dictionary of Accountants, Fourth Edition by Eric L. Kohler, pages 204 to 208 the fund has been defined as under: "Fund.
1. An asset or group of assets within any organization, separated physically or in the accounts or both from other assets and limited to specific uses."
Examples.---A petty cash or working fund; a replacement and renewal fund; and accident fund; a contingent fund; a pension fund.
(2) Cash, securities, or other assets placed in the hands of a trustee, principal or income or both being expended in accordance with the terms of a formal agreement.
Examples.---A trust fund created by a will; and endowment fund; a sinking fund.
(3) (Government accounting): a self-balancing group of accounts "assets, liability, revenue and expenses" relating to specified sources and uses of capital and revenue.
(4) Current assets less current liabilities (on an accrual basis): working capital; a term used in flow statements.
(5) Cash.
' To convert currently maturing liabilities into a long term loan.
' To provide for the ultimate payment of a liability by the systematic accumulation of cash or other assets in a separate account or trust.
' A special revenue fund is created for taxes and other revenues levied or set aside for specified purposes. For example, if a separate fund is authorized for schools, a special revenue fund is set up to account for its disposition. The accounting principles, procedures, and final statements of a special revenue fund resemble those of the general fund....Other Funds; ' A balance-sheet combining a group of related, funds should indicate the amount of assets, liabilities, reserves and surplus applicable to each fund within the group. The revenues and expenditures of each fund must likewise be kept independent, and the revenues of one fund should not be used to meet the expenditures of another without legal authority or opinion behind the action."
In Cassell's English Dictionary the term fund has been defined to mean:--- "A sum of money or stock of anything available for use- or enjoyment; assets, capital; a sum of money set apart for a specific object permanent or temporary;"
In Shorter Oxford English Dictionary (Third Edition), page 761 the expression "fund" has been defined as follows:-- "Source of supply; a permanent stock that can be drawn upon, A D stock or sum of money, esp. One set apart for a particular purpose, Pecuniary resources. A portion of revenue set apart as a security for specified payments. The (public) funds; the stock of the national debts, considered as a mode of investment."
' In the Dictionary of Accounting Terms of Derek French First Edition at p.130 the term "fund" has been defined as follows:--- "Fund. (1) Noun.---A stock or sum of money, especially one set aside for a particular purpose.
(2) Verb. To provide money for a particular purpose.
(3) Noun. Plural form (funds). Financial resources; finances.
(4) Noun. Plural form (funds). Another term for 'working' capital.
(5) Noun. Plural form written with capital F (Funds) British Government stocks. (Originally, before the creation of the consolidated fund, the taxes or funds charged with rcpayment of loans; then the loans themselves).
(6) Verb. To provide for a financial obligation by borrowing money for a fixed period, especially for a long period.
(7) Verb. To provide for a future financial obligation by setting aside money and lending it to earn interest; to create a sinking fund."
12. A perusal of the above definitions leaves no room for any doubt that the provision for gratuity created by an assessee amounts to gratuity fund. The method adopted by the respondent shows that the liability on account of gratuity accruing on mercantile basis is earmarked to the provisions for the purpose of payment to the employees and discharge of such liability in future. Such provision for gratuity has all the attributes of a gratuity fund but admittedly this gratuity fund is not approved and therefore, by virtue of specific bar contained in section 24(g) of the Income Tax Ordinance, 1979, the claim was not admissible. At this stage we feel it appropriate to reproduce few provisions contained in Part-III of Sixth Schedule to the Income Tax Ordinance, 1979:
(2) Conditions for approval.---In order that a gratuity fund may receive and retain approval, it shall satisfy the conditions hereinafter specified and any other conditions which the Central Board of Revenue may, by rules prescribe---
(a) the fund shall be a fund established under a irrevocable trust in connections; with trade or undertaking carried on in Pakistan, and not less than ninety per cent of the employees shall be employed in Pakistan;
(b) the fund shall have for its sole purpose the provision of a gratuity to employees in the trade or undertaking on their retirement at or after a specified age or on their becoming incapacitated prior to such retirement, or on termination of their employment after a minimum period of service specified in the regulations of the fund or to the widows, children or dependents of such employees on their death;
(c) the employer in the trade or undertaking shall be a contributor to the fund; and
(d) all benefit granted by the fund shall be payable only in Pakistan."
(3)
(4) ..........................
(5) ..........................
(6) Liability of trustees on cessation of approval.---Whereby any contributions by an employer (including the interest thereon, of any,) are repaid to the employer, the amount so repaid shall be deemed for the purposes of tax to be the income of the employer of the income year in which they are so repaid.
(7) Particulars to be furnished in respect of gratuity funds.---The trustees of an approved gratuity fund and any employer who contributes to an approved gratuity fund shall, when required by notice from the Deputy Commissioner of Income Tax, furnish, within such period not being less than twenty-one days from the date of the notice as may be specified in the notice, such return, statement, particulars or information, as the Income Tax Officer may require.
(8) Provisions of the Part to prevail against regulations of the fund.---Where there is a repugnance between any rule of an approved gratuity fund and any provision of this Part or the rules made thereunder, the said rule shall, to the extent of repugnance, be of no effect and the Commissioner may, at any time, require that such repugnance shall be removed from the rules of the fund.
13. A perusal of above provisions shows that a well-designed mechanism has been devised under law in respect of approved gratuity fund. If any assessee claims a deduction on account of gratuity with out establishing an approved gratuity fund, he defies the law and consequently, cannot be allowed the benefit.
14. Consequent to the above discussion, it is held that the Assessing Officer rightly disallowed the claim for provision of gratuity on account of clear bar contained in section 24(g) of the Income Tax Ordinance, 1979. It is further held that no such bar was contained in the Income Tax Act, 1922, and therefore, this Court while considering the provisions contained in the Income Tax Act, 1922, held in the cases referred to above, that the provision of gratuity was admissible expenditure for the reason that it pertained to the ascertained liability. After introduction of bar contained in section 24(g) of the Income Tax Ordinance, 1979, the earlier judgments of this Court delivered on consideration of the provisions contained in the Income Tax Act, 1922, are no more applicable for the reason that no provision analogous to section 24(g) of the Income Tax Ordinance, 1979, was there in the Income Tax Act, 1922. It is therefore, held that the ITAT was not justified in confirming the order of C.I.T.(A), whereby the provision for gratuity was held to be an inadmissible expense under the law contained in the Income Tax Ordinance, 1979.
15. Consequent to the above findings, both the questions of law proposed in this appeal are answered in negative.
16. A copy of this judgment under the signature and seal of the Registrar of this Court, be sent to the ITAT, Karachi, who shall pass the order as is necessary to dispose of this case conformably to this judgment.