1999 (12) TMI 53 - HC - Income Tax

Summary

Issues: Allowability of provision for gratuity as business expenditure under the Income-tax Act, 1961 for the assessment year 1972-73.

Analysis:
The High Court of Delhi addressed the issue of whether a provision for gratuity to staff amounting to Rs. 18,472 was an admissible deduction in the computation of the assessee's business income for the assessment year 1972-73. The assessee, a firm, had claimed this amount as business expenditure in its annual accounts, based on actuarial valuation. However, the Assessing Officer disallowed the claim, stating that the gratuity fund was not approved by the Commissioner of Income-tax, nor had an irrevocable trust been created for the employees' benefit. The Appellate Assistant Commissioner upheld this disallowance.

The Income-tax Appellate Tribunal (ITAT) allowed the deduction, considering the mercantile method of accounting, the introduction of a gratuity scheme by the assessee, and the actuarial report submitted. The Tribunal's decision was based on the allowance of a similar deduction in the preceding year. The Revenue contended that the provision for gratuity should not be allowed as business expenditure due to the lack of an approved gratuity fund. They cited the Supreme Court's decision in Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 for support.

The High Court, referencing legal precedents, held that under the mercantile system of accounting, a provision for gratuity based on actuarial valuation is permissible as business expenditure. They cited CIT v. Kelvinator of India Limited [1994] 210 ITR 933 and Dalmia Dadri Cement Ltd. v. CIT [1980] 126 ITR 851 to support this view. In the present case, the Tribunal had found that the provision for gratuity was made under an actuarial scheme, supported by a filed report. Given these findings, which were undisputed, the High Court concluded that the Tribunal's decision to allow the liability as business expenditure was correct in law.

Thus, the High Court ruled in favor of the assessee, allowing the provision for gratuity as a deductible business expenditure for the assessment year 1972-73. No costs were awarded in this judgment.