1993 (9) TMI 37 - HC - Income Tax

Appeal To AAC Assessment Year Business Expenditure Doctrine Of Merger Gratuity Fund Provision For Gratuity

Summary

Issues:
1. Whether the Commissioner of Income-tax's exercise of powers under section 263 was legal.
2. Whether the Tribunal was correct in setting aside the Commissioner's order and restoring the relief given by the Income-tax Officer.
3. Whether the calculation of the admissible amount for gratuity deduction was correct.

Analysis:
1. The Commissioner of Income-tax exercised revisional powers under section 263 of the Income-tax Act, challenging the deduction of gratuity claimed by the assessee. The High Court held that the order passed by the Income-tax Officer did not merge with the Appellate Assistant Commissioner's order, allowing the Commissioner to exercise powers under section 263. The Court found the Commissioner's exercise of powers valid, rejecting the Tribunal's view that the order was illegal. The first issue was decided in favor of the Revenue and against the assessee.

2. The Tribunal had set aside the Commissioner's order and reinstated the relief granted by the Income-tax Officer. The High Court analyzed the provisions of section 40A(7) of the Act, emphasizing that the admissible amount for gratuity deduction should be calculated based on specific criteria. It noted that the assessee had fulfilled the conditions under section 40A(7) by creating an irrevocable trust fund and obtaining approval from the Commissioner of Income-tax. The Court concluded that the Tribunal was correct in restoring the relief given by the Income-tax Officer, as the gratuity amount claimed was in compliance with the Act. Therefore, the second issue was decided in favor of the assessee and against the Revenue.

3. The Court further examined the calculation of the admissible amount for gratuity deduction. It clarified that the restriction on deduction under section 40A(7) applies to provisions made for gratuity payments, subject to certain exceptions. The Court determined that the admissible amount should be calculated based on the rate of eight and one-third per cent of the salary, as per the Act. Considering the facts of the case and the provisions of Explanation 1 to sub-section (7) of section 40A, the Court upheld the Tribunal's decision on the admissible amount, ruling in favor of the assessee. Thus, the third issue was also decided in favor of the assessee and against the Revenue.

In conclusion, the High Court disposed of the reference, answering all three questions in favor of the assessee and against the Revenue, with no order as to costs.