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Issues:
1. Interpretation of section 40A(7) of the Income-tax Act, 1961 regarding the deduction of provision for gratuity. 2. Timing of approval for the gratuity fund by the Commissioner of Income-tax and its impact on the deduction claim. Detailed Analysis: 1. The case involved a reference under section 256(1) of the Income-tax Act, 1961, for the assessment year 1975-76, regarding the deduction of Rs. 4,27,781 representing provision for payment of gratuity. The primary question was whether the Tribunal was justified in allowing the deduction under section 40A(7) based on the approval of the gratuity fund granted with effect from March 27, 1976. The Income-tax Officer initially disallowed the claim, which was upheld by the Commissioner of Income-tax (Appeals). However, the Appellate Tribunal ruled in favor of the assessee, stating that the conditions of section 40A(7) were met, and the approval was granted on time. 2. The Commissioner of Income-tax approved the gratuity fund on May 12, 1980, with retrospective effect from March 27, 1976. The approval was granted after the assessee had applied for it on December 30, 1975. The crucial issue was whether the delay in approval affected the assessee's entitlement to the deduction. The Tribunal held that since the application was made before January 1, 1976, as required by section 40A(7), the delay in approval did not disqualify the assessee from claiming the deduction. The Tribunal emphasized that the approval must relate back to the assessment year in question, even if it was granted after a considerable delay. In conclusion, the High Court ruled in favor of the assessee, affirming that the approval of the gratuity fund with effect from March 27, 1976, validated the deduction claim of Rs. 4,27,781. The Court highlighted that compliance with the statutory requirements within the stipulated timeline was crucial, and the delay in approval by the Commissioner of Income-tax did not prejudice the assessee's right to the deduction. The judgment underscored the principle that once the application for approval is made in accordance with the law, the approval, when granted, should be retroactively effective to uphold the assessee's legitimate claims.
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