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Issues:
1. Interpretation of provisions of section 40A(7) of the Income-tax Act, 1961 regarding the deductibility of gratuity payments. 2. Whether the claim for deduction on account of gratuity by the assessee is allowable under the specified conditions. Analysis: The judgment by the High Court of Allahabad, delivered by Judge A. N. Verma, pertains to the interpretation of provisions of section 40A(7) of the Income-tax Act, 1961 regarding the deductibility of gratuity payments made by an assessee company limited by guarantee. The case involved the assessment years 1977-78 and 1978-79, where the assessee had debited certain amounts under the head "Gratuity" in the income and expenditure account without making a provision in an approved gratuity fund. The Income-tax Officer disallowed the claim for deduction citing section 40A(7) of the Act, as the gratuity fund was not recognized during the relevant period. This decision was upheld by the Commissioner of Income-tax (Appeals) and the Tribunal. Upon appeal, the Tribunal held that the claim of gratuity could only be allowed if the amount was paid into an approved gratuity fund for the exclusive benefit of employees under an irrevocable trust. As the gratuity fund was approved only from May 24, 1978, the deposits made by the assessee in banks did not fulfill the conditions of clause (b) of section 40A(7). The Tribunal relied on the decision in Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585, which emphasized that provisions for gratuity could not be deducted unless the conditions specified in clause (b) of section 40A(7) were met. The High Court concurred with the Tribunal's decision, stating that the provision for payment of gratuity must strictly adhere to the requirements of clause (b) of section 40A(7) to be admissible as a deduction. Since the deposits were not made in an approved gratuity scheme and the fund was recognized only after the relevant period, the assessee's claim for deduction was rightly disallowed. The judgment highlighted the legislative intent behind section 40A, emphasizing that deductions for gratuity payments are subject to specific conditions outlined in the Act. In conclusion, the High Court answered both questions in the affirmative, in favor of the Revenue and against the assessee, upholding the disallowance of the gratuity deduction. The Revenue was awarded costs amounting to Rs. 250. The judgment serves as a precedent emphasizing the importance of adhering to statutory requirements for the deductibility of gratuity payments under the Income-tax Act.
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