1994 (10) TMI 6 - HC - Income Tax

Issues Involved:

1. Entitlement to deduction of Rs. 1,92,871 representing provision for gratuity.
2. Compliance with the provisions of section 40A(7) of the Income-tax Act, 1961.
3. Crystallization of liability for the assessment year 1973-74.

Detailed Analysis:

1. Entitlement to Deduction of Rs. 1,92,871 Representing Provision for Gratuity:

The primary issue was whether the assessee was entitled to a deduction of Rs. 1,92,871 for gratuity provision from the income of the assessment year 1973-74. The Income-tax Officer initially disallowed the deduction, stating that the provision for gratuity related to earlier years and did not comply with section 40A(7) of the Act. The Appellate Assistant Commissioner supported this by noting that the liability crystallized only when the amount was paid into a trust in 1975. However, the Appellate Tribunal found that the gratuity scheme was approved by the Commissioner of Income-tax effective from April 1, 1975, and thus, the provisions of section 40A(7)(b)(ii) applied. The Tribunal concluded that the liability for gratuity crystallized in the financial year 1973-74 and was deductible.

2. Compliance with the Provisions of Section 40A(7) of the Income-tax Act, 1961:

Section 40A(7) specifies conditions under which gratuity provisions can be deducted. Sub-section (7)(a) generally disallows deductions for gratuity provisions, but sub-section (7)(b) provides exceptions if certain conditions are met:
- The provision must be made in accordance with an actuarial valuation.
- An approved gratuity fund must be created under an irrevocable trust.
- At least 50% of the admissible amount must be paid to the gratuity fund before April 1, 1976, and the balance before April 1, 1977.

The court found that the assessee created an irrevocable trust and transferred the gratuity amount to the fund before the due dates, fulfilling these conditions. The assessee had not claimed any deduction for the financial year 1972-73 or any previous year, confirming compliance with section 40A(7).

3. Crystallization of Liability for the Assessment Year 1973-74:

The court examined whether the liability for gratuity crystallized in the financial year 1972-73. The Payment of Gratuity Act, 1972, created a statutory liability for gratuity, enforceable from September 16, 1972, in Tamil Nadu. The court noted that the liability for gratuity crystallized in the financial year 1972-73 for employees who retired or whose services were terminated before March 31, 1973. The Supreme Court's ruling in Shree Sajjan Mills Ltd. v. CIT was referenced, which clarified that the liability to pay gratuity becomes an accrued liability when employees retire or their services are terminated, making it deductible.

The court concluded that the assessee's claim for deduction was valid as it pertained to actual liabilities for employees who had retired or whose services had been terminated before March 31, 1973. The creation of the irrevocable trust and the transfer of funds complied with section 40A(7)(b)(ii) requirements.

Conclusion:

The court answered the questions against the Revenue and in favor of the assessee, affirming the entitlement to the deduction of Rs. 1,92,871 for the assessment year 1973-74, given the compliance with section 40A(7) and the crystallization of liability in the financial year 1972-73. No costs were awarded.

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