1987 (1) TMI 68 - HC - Income Tax

Summary

Issues:
1. Whether gratuity payable to employees of the assessee in the electricity undertaking, compulsorily taken over by the Rajasthan Government, is an allowable deduction under section 40A(7) of the Income-tax Act, 1961?
2. Whether the case falls under the provisions of section 40A(7)(b)(i) of the Income-tax Act, 1961?

Analysis:
The case involved a reference under section 256(1) of the Income-tax Act, 1961, where the Income-tax Appellate Tribunal referred questions of law regarding the deductibility of gratuity payable to employees of the assessee in the electricity undertaking taken over by the Rajasthan Government. The assessee claimed a deduction for the accrued liability towards gratuity, which was disallowed by the Income-tax Officer citing section 40A(7) of the Act. The Commissioner of Income-tax (Appeals) allowed the deduction, but the Revenue appealed to the Tribunal. The Tribunal held that the liability for gratuity could not be allowed under section 40A(7) unless specific conditions were met. The Tribunal also ruled that the case did not fall under section 40A(7)(b)(i) of the Act.

The High Court referred to previous judgments and observed that amounts set apart for gratuity liability would not be deductible as per the Supreme Court decision. The Court noted that under section 40A(7)(b)(i), contributions to an approved gratuity fund or amounts set apart for gratuity payable during the year of account are excluded from the deduction embargo. The Court affirmed the Tribunal's decision that the debits made for gratuity liability could not be considered actual payments under section 40A(7)(b)(i) as the takeover by the Rajasthan Electricity Board occurred in a subsequent accounting year.

In conclusion, the High Court answered both questions in the affirmative against the assessee, upholding the Tribunal's decision. The Court held that the gratuity liability was not an allowable deduction under section 40A(7) and that the case did not fall under the provisions of section 40A(7)(b)(i) of the Income-tax Act, 1961. The parties were directed to bear their own costs in this reference.