1993 (8) TMI 35 - HC - Income Tax

Summary

Issues:
1. Allowability of deduction for payment made to Hindu undivided family for staff gratuity.
2. Allowability of expenditure credited to individual staff members for gratuity.

Analysis:
The case involved questions regarding the deduction of a sum paid by the assessee to a Hindu undivided family for staff gratuity and the allowance of expenditure credited to individual staff members for gratuity. The assessee had made a provision for staff retirement gratuity during the accounting year, which included amounts for directly recruited staff and staff employed through the Hindu undivided family. The Income-tax Appellate Tribunal held that section 40A(7) of the Income-tax Act was applicable as the provision made by the assessee did not comply with the conditions prescribed, disallowing the deduction of Rs. 92,271 under the said section.

The Tribunal observed that transferring the amount to the associate concern did not affect the application of section 40A(7), which has overriding effect. The assessee argued that the amount was an allowable deduction under section 37(1) for business purposes and cited relevant case laws. However, the court noted that section 40A(7) introduced a special provision for gratuity payments, and compliance with its conditions was necessary for claiming deductions. The court rejected the argument that the amount did not constitute a provision, emphasizing that the gratuity liability had not arisen during the assessment year.

The court analyzed clause (b)(i) of section 40A(7) and concluded that as the gratuity was not payable during the previous year, the provision did not fall under the exceptions mentioned in the section. The court upheld the Tribunal's decision, stating that the emphasis on the term "his employees" in the section was irrelevant given the accepted liability of the assessee for gratuity payments to all staff categories. Consequently, question No. 1 was answered in the negative in favor of the Revenue.

Regarding question No. 2, it was agreed that the issue was covered by a previous Supreme Court judgment, leading to a negative response in favor of the Revenue. The court decided that no costs were to be awarded based on the case's facts.