1998 (11) TMI 54 - HC - Income Tax

Summary

Issues:
Interpretation of provision for gratuity under section 40A(7)(b)(ii) of the Income-tax Act, 1961.

Analysis:
The case involved a question regarding the allowance of a provision made for gratuity under section 40A(7)(b)(ii) of the Income-tax Act, 1961. The assessee, engaged in the business of tiles and potteries, made a provision for gratuity in the accounting year ended on 30-6-1974, amounting to Rs. 1,06,889, based on actuarial valuation. This provision was made after the amendment to the Gratuity Act came into force on 16-9-1972. The entire amount was paid to a fund created for this purpose on 9-9-1975. The dispute arose when the Income-tax Officer disallowed the deduction claimed by the assessee for the assessment year 1975-76, which was later allowed by the Commissioner and upheld by the Income-tax Appellate Tribunal.

The key provision in question was section 40A(7)(b)(ii) of the Income-tax Act, which allowed for the provision made by the assessee for the previous year relevant to any assessment year between 1-4-1973 and 1-4-1976, subject to certain conditions. Explanation 1 clarified that the 'admissible amount' for gratuity provision was calculated at the rate of 8-1/3 per cent of the salary of each employee entitled to gratuity for each year of service. The provision was not limited to the amount payable for the service in the immediately preceding year, but for all years of service rendered by the employees up to the year in which the provision was first made.

The court emphasized that section 40A(7)(b)(ii) was a special provision aimed at protecting employees during a transition period and giving employers an opportunity to credit at least 50 per cent of the amount payable as gratuity to the fund created for this purpose. Since the assessee had credited the entire amount to the fund on 9-9-1975, falling within the specified period, the provision was considered eligible for deduction. The judgment favored the assessee, allowing the provision of Rs. 1,06,889 as a deduction for the assessment year 1975-76.