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Issues:
1. Allowability of a sum under section 40A(7)(b)(i) of the Income-tax Act, 1961. Analysis: The judgment by the High Court of CALCUTTA involved a reference application from the Tribunal regarding the allowability of a sum of Rs. 13,35,467 under section 40A(7)(b)(i) of the Income-tax Act, 1961. The assessee, engaged in the production and sale of electricity, had claimed this amount as gratuity payable as of July 17, 1975, when the electricity undertaking was taken over by the Bihar State Electricity Board. The Assessing Officer disallowed the claim, stating that the gratuity liability was to be adjusted from the compensation payable by the State Government. The Commissioner of Income-tax (Appeals) upheld this decision. However, the Tribunal, following a decision of the Madras High Court, allowed the claim of the assessee. In the case before the Madras High Court, it was held that even if the payment for gratuity was not made directly to the employees, but to discharge the assessee's liability for gratuity, it should be allowed as a deduction. This decision was later approved by the Supreme Court. The High Court of CALCUTTA, considering the facts that the employees became employees of the State Government after the business takeover and the gratuity would be paid by the State Government, concluded that the payment of gratuity by the State Government should still be deductible from the compensation payable to the assessee. Therefore, the High Court answered the reference question in favor of the assessee and against the Revenue. The judgment highlights the importance of understanding the nature of liabilities and obligations in cases of business takeovers by governmental entities, emphasizing that even if gratuity payments are not made directly by the assessee, but by the acquiring entity, they should still be allowed as deductions. This decision provides clarity on the treatment of such liabilities in the context of compensation payments in business acquisition scenarios.
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