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Issues:
Interpretation of section 40A(7)(b)(ii) of the Income-tax Act, 1961 regarding deduction of gratuity liability for a specific accounting year. Analysis: The judgment involved a question referred by the Income-tax Appellate Tribunal regarding the entitlement of the assessee to claim a deduction of Rs. 29,593 for gratuity liability for the accounting year ending June 30, 1972, for the assessment year 1974-75. The assessee maintained accounts on the mercantile system. The ITO disallowed the deduction, which was later allowed on appeal by the AAC and confirmed by the Tribunal. The Tribunal allowed the deduction for the accounting years ending on June 30, 1972, and June 30, 1973, respectively, but disallowed it for the year ending on June 30, 1971. The Revenue contended that the Tribunal erred in allowing the deduction for the accounting year 1972-73 as no provision was made in that year, relying on the provisions of sub-s. (7) of s. 40A of the Income Tax Act as amended by the Finance Act, 1975. The assessee argued that the liability arose only in the accounting year 1972-73 when the Central Act came into force, referencing a decision of the Madhya Pradesh High Court. However, the Kerala High Court clarified that the liability for gratuity arose when the Kerala Industrial Employees' Payment of Gratuity Ordinance was promulgated in December 1969. The Court emphasized that the liability for gratuity should have been accounted for in the year it arose, as per the Kerala Industrial Employees' Payment of Gratuity Ordinance. The judgment highlighted the provisions of sub-s. (7) of s. 40A, which prohibit deductions for mere provisions of gratuity unless falling under specific exceptions mentioned in clause (b). The Court concluded that the claim for deduction of Rs. 29,593 for the accounting year 1972-73 was rightly disallowed by the ITO and wrongly allowed by the AAC and the Tribunal. In conclusion, the Court ruled in favor of the Revenue and directed the parties to bear their respective costs in the tax referred case.
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