2004 (12) TMI 54 - HC - Income Tax

Whether the assessee could claim deduction in lieu of the provision made for gratuity despite the fact that gratuity fund had not been approved by the Commissioner of Income-tax - assessee fulfilled the conditions enumerated in section 40A(7) only on March 26, 1979. Therefore, it was not entitled to claim deduction of Rs. 33,542 on account of provision for gratuity in the year 1978-79. Assessee could neither show that his client had challenged the order dated passed by CIT nor that the same suffers from any jurisdictional defect - we have no hesitation to hold that the Tribunal committed a serious error by ordering deduction of Rs. 33,542 on account of provision for gratuity made by the assessee - question referred to this court is answered in favour of the Revenue and against the assessee.

Issues Involved:
1. Whether the assessee could claim deduction for the provision made for gratuity despite the gratuity fund not being approved by the Commissioner of Income-tax (CIT).

Issue-wise Detailed Analysis:

1. Deduction for Provision of Gratuity:
The primary issue was whether the assessee could claim a deduction for the provision made for gratuity even though the gratuity fund had not been approved by the Commissioner of Income-tax (CIT). The assessee filed a return declaring a total income of Rs. 4,17,784 for the assessment year 1978-79. The Assessing Officer added Rs. 33,542 to the income, which was set apart as gratuity payable to employees. The Commissioner of Income-tax (Appeals) upheld this addition because the gratuity fund was not approved by the CIT. However, the Tribunal allowed the deduction, referencing a previous order in a similar case, stating that non-approval by the CIT could not be the basis for disallowance under section 40A(7) of the Income-tax Act, 1961.

2. Tribunal's Reference to High Court:
The Tribunal referred the question of law to the High Court, querying whether the assessee had complied with the provisions of section 40A(7) of the Act and whether the claim could be rejected despite the gratuity fund not being approved by the CIT for the assessment year 1978-79.

3. Arguments by the Assessee:
The assessee's counsel argued that the Tribunal correctly granted the deduction because the assessee had fulfilled all conditions under section 40A(7). The application for approval of the gratuity fund was made on December 31, 1975, and the delay in approval by the CIT should not deprive the assessee of the deduction. The counsel cited judgments from the Calcutta High Court and the Supreme Court to support this argument.

4. Arguments by the Revenue:
The Revenue's counsel argued that the deduction could not be claimed because the gratuity fund was not approved by the CIT. The original application submitted on December 31, 1975, was defective, and the amended trust deed was filed on March 15, 1979. The approval granted by the CIT was effective from March 26, 1979, and could not relate back to the date of the application. The counsel cited various judgments, including from the Supreme Court and multiple High Courts, to support the argument that the deduction could not be claimed for the assessment year 1978-79.

5. Legal Provisions and Judicial Precedents:
The court examined sections 40A(1) and 40A(7)(a) and (b) of the Act, which stipulate that no deduction is allowed for any provision made for gratuity unless it is in an approved gratuity fund. The Supreme Court's interpretation in Shree Sajjan Mills Ltd. v. CIT emphasized that the provision for future use for gratuity payment is not deductible unless the conditions in clause (b) are met. Several High Courts, including Punjab and Haryana, Allahabad, Madras, and Gujarat, have reiterated that the existence of an approved gratuity fund is essential for claiming such deductions.

6. Factual Analysis:
The court noted that the assessee's application for approval of the gratuity fund was not entertained due to discrepancies. The amended trust deed was filed on March 15, 1979, and the CIT granted approval effective from March 26, 1979. Therefore, the assessee fulfilled the conditions of section 40A(7) only on March 26, 1979, and was not entitled to claim the deduction for the assessment year 1978-79.

7. Distinguishing Previous Judgments:
The court distinguished the judgments cited by the assessee's counsel. In the Calcutta High Court case, the approval was granted with effect from March 27, 1976, and the court held that the approval would relate back to the assessment year in question. In the Supreme Court case, the deduction was allowed only on actual payment of duty under section 43B, which did not apply to the present case.

Conclusion:
The court concluded that the Tribunal erred in allowing the deduction of Rs. 33,542 for the provision for gratuity made by the assessee. The question referred to the court was answered in favor of the Revenue and against the assessee.

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