2014 (5) TMI 14 - HC - Income Tax

Entitlement for deduction on gratuity u/s 40A(7) of the Act Held that - The assessee is a limited company - By virtue of the Gratuity Act of 1972, gratuity was deductible in three cases only as to where it is paid or has become payable during the accounting year or where a contribution is made towards an approved gratuity fund or provision is made for such contribution and where a contribution is made towards an unapproved gratuity fund and under a trust - after considering Section 40A(7) when the assessee has complied with all the conditions laid down, the assessee was certainly entitled to the entire deduction of the gratuity paid/payable or provision made by the assessee. Under the Gratuity Act, 1972, the assessee company is liable to pay gratuity to its employees who have completed five years of service for the total length of their service as provided under the said Act - The assessee company would become liable to pay gratuity to its employees for their past services rendered in accordance with the provisions of the Payment of Gratuity Act - On coming into force of the Gratuity Act, the assessee company became liable to provide an amount of ₹ 48,17,760/- by way of gratuity to its employees which included current as well as past liability for which provision was made - the liability to pay the said amount arose in the previous year, relevant to the assessment year 1973-74 and all the conditions laid down in the sub-clause (ii) of clause (b) of Sec. 40A(7) have been fulfilled, the Tribunal has rightly upheld the claim Decided against Revenue.

Summary

Issues Involved:
1. Competence of the Appellate Assistant Commissioner (AAC) to decide the appeal after the original assessment order was set aside under Section 263.
2. Entitlement of the assessee to deduction under Section 40A(7) of the Income Tax Act for gratuity provisions related to earlier years.
3. Specific entitlement to deductions for gratuity liability amounts in various contexts and assessment years.

Issue-wise Detailed Analysis:

1. Competence of the AAC to Decide the Appeal:
The primary issue was whether the AAC was competent to decide the appeal against the original order of assessment dated 11.03.1974 after it had been set aside for fresh assessment by the Commissioner of Income Tax (CIT) under Section 263. The Tribunal held that the AAC was competent to decide the appeal. The court observed that since the AAC had already decided on the merits of the case before the CIT's order, the AAC's competence remained unaffected. Therefore, the question of the AAC's competence was deemed academic and not requiring further examination.

2. Entitlement to Deduction under Section 40A(7):
The second issue revolved around the assessee's entitlement to deductions under Section 40A(7) for provisions made for gratuity liabilities. The court noted that the assessee had made provisions for gratuity based on actuarial valuations and had complied with all the conditions stipulated under Section 40A(7), including setting up an irrevocable trust fund and obtaining approval from the Commissioner of Income Tax. The Tribunal found that the assessee had fulfilled all the necessary conditions, such as actuarial valuation of liabilities, creation of an irrevocable trust, and payment into the trust fund before the stipulated deadlines. Consequently, the court upheld the Tribunal's decision allowing the deduction of Rs.48,17,760/- as the assessee had met all the statutory requirements.

3. Specific Entitlement to Deductions for Gratuity Liability Amounts:
Several questions were raised about the specific amounts and conditions under which the assessee could claim deductions for gratuity liabilities. The court examined the detailed provisions of Section 40A(7) and the Payment of Gratuity Act, 1972. It was established that the assessee had made a provision for gratuity according to actuarial valuations and had fulfilled all conditions, including setting up a recognized gratuity fund. The court referred to various judgments, including those from the Supreme Court and High Courts, which supported the view that if the statutory conditions were met, the provision for gratuity could be allowed as a deduction. The Tribunal's findings that the assessee had complied with all the necessary conditions were upheld, and the questions regarding the specific amounts were answered in favor of the assessee.

Conclusion:
The court concluded that the assessee was entitled to the deductions claimed for gratuity provisions, having met all the statutory requirements under Section 40A(7) and the Payment of Gratuity Act, 1972. The questions of law were answered in favor of the assessee, affirming the Tribunal's decisions. The issue of the AAC's competence was considered academic and did not affect the substantive outcome of the case. The court made no order as to costs.