1995 (7) TMI 23 - HC - Income Tax

Summary

Issues:
1. Allowability of deduction for contribution to approved gratuity fund under section 40A(7)(b)(i).
2. Disallowance of deduction under section 40A(7)(b)(i), section 36(1)(v), or section 37.

Analysis:

Issue 1:
The case involves determining the allowability of a deduction claimed by the assessee for a sum towards contribution to an approved gratuity fund under section 40A(7)(b)(i) of the Income-tax Act, 1961. The assessee, a public utility company, had created an irrevocable trust for gratuity payments to employees, approved by the Commissioner of Income-tax. The incremental liability for the year ended December 31, 1975, amounted to Rs. 2,10,769. The Income-tax Officer disallowed the claim, stating the assessee had already made overpayments to the fund and did not make a provision in its accounts for the incremental liability. The Commissioner of Income-tax (Appeals) allowed the claim, considering the incremental liability as an expenditure of the year under section 36(1)(v). The Tribunal agreed with the Commissioner but disagreed with the second reasoning. The Tribunal held that the assessee's claim for deduction should be allowed under section 40A(7)(b)(i) as a provision made for contribution to the approved gratuity fund. The High Court, however, rejected the claim, stating that the amount claimed was not a provision in the accounts and, therefore, not deductible under section 40A(7).

Issue 2:
The second issue involves the disallowance of the deduction under various sections. The Department argued that the assessee's claim for deduction cannot be allowed as the amount available in the gratuity fund exceeded the actuarial liability. The Department contended that the claim made in the adjustment statement was not a provision and, therefore, not deductible. On the other hand, the assessee argued that if the claim is allowable under any provision of the Income-tax Act, it should be allowed. The High Court referred to various precedents, emphasizing that a provision for contribution to an approved gratuity fund is deductible under section 40A(7). However, in this case, as the assessee did not make a provision in the accounts for the sum claimed, the deduction was disallowed. The Court highlighted that the claim in the adjustment statement did not qualify as a provision under section 40A(7) and, therefore, upheld the disallowance of the deduction.

In conclusion, the High Court ruled against the assessee, disallowing the deduction claimed for contribution to the approved gratuity fund under section 40A(7)(b)(i). The Court held that the amount claimed in the adjustment statement did not qualify as a provision and, therefore, was not deductible under the Income-tax Act.