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Interpretation of Section 40A(7)(b)(ii) for deduction of provision for gratuity. Analysis: The case involved a dispute regarding the interpretation of Section 40A(7)(b)(ii) of the Income-tax Act, 1961, specifically related to the deduction of provision for gratuity. The assessee claimed a deduction of Rs. 32,16,950 as provision for gratuity for the assessment year 1975-76. However, the Income-tax Officer disallowed the claim as the provision was made towards a liability that arose prior to March 31, 1974, and was not relevant to the accounting year for the assessment year in question. The Inspecting Assistant Commissioner and the Commissioner of Income-tax (Appeals) upheld this disallowance. Upon further appeal, the Tribunal acknowledged that the assessee did not make a provision in the relevant accounting years for the respective assessment years but allowed a deduction of Rs. 11,96,413 as representing the "incremental liability to gratuity" for specific years. The Tribunal based its decision on the fact that the provision was made in the accounts for the year ending March 31, 1975, and certain amounts were paid to the gratuity fund in subsequent years. The High Court, however, noted that the assessee failed to make any provision for gratuity during the accounting years relevant to the assessment years in question. The Court emphasized that in order to claim a deduction under Section 40A(7)(b)(ii), a provision should have been made in the relevant accounting year in relation to the liability that arose in that year, which was not the case here. The Court also highlighted the Tribunal's misinterpretation of the term "incremental liability" and its erroneous allowance of the deduction based on this concept. Ultimately, the High Court held that the Tribunal incorrectly allowed the claim for deduction towards gratuity and answered the question referred in the negative, in favor of the Revenue and against the assessee. The Court dismissed the petition for reference and directed the parties to bear their respective costs in the case.
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