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Issues Involved:
1. Deduction of gratuity liability based on actuarial valuation. 2. Charging of interest u/s 215 of the Income-tax Act, 1961. Summary: Issue 1: Deduction of Gratuity Liability Based on Actuarial Valuation The first issue concerns whether the Tribunal was justified in directing the Income-tax Officer (ITO) to allow a deduction of Rs. 19,71,126 on account of gratuity liability based on actuarial valuation. The ITO and the Appellate Assistant Commissioner (AAC) both disallowed the deduction on the grounds that there was no accrued gratuity liability. However, the Tribunal allowed the deduction, stating that the liability was based on an estimated actuarial valuation, even though no provision was made in the books of account. The court examined the relevant provisions of the I.T. Act, including sections 36(1)(v) and 40A(7). Section 40A(7) prohibits the deduction of any provision made for the payment of gratuity unless specific conditions are met, such as the creation of an approved gratuity fund. The court held that the prohibition in s. 40A(7) applies even if no provision is shown in the accounts. The court emphasized that the section should not be interpreted in a way that would lead to absurd results, such as allowing deductions for companies that did not make any provision for gratuity while denying it to those that did. The court concluded that the assessee is not entitled to claim any deduction for its estimated gratuity liability without making a provision for that liability. The court also referenced the case of Peoples Engineering and Motor Works Ltd. v. CIT, which supported this interpretation. Therefore, the first question was answered in the negative and in favor of the Revenue. Issue 2: Charging of Interest u/s 215 of the Income-tax Act, 1961 The second issue pertains to whether the Tribunal was correct in holding that the assessee is entitled to contest the levying of interest u/s 215 in a quantum appeal. The ITO had charged interest, but the AAC dismissed the appeal on this ground, stating that the rate of interest was beyond the purview of s. 246. The court referred to the case of CIT v. Lalit Prasad Rohini Kumar, which held that the ITO has the discretion to waive or reduce interest and must consider whether circumstances warrant such waiver or reduction. The court noted that it was unclear whether the ITO had exercised this discretion properly. The Tribunal was correct in restoring the issue to the AAC for fresh consideration on merits. Therefore, the second question was answered in the affirmative and in favor of the assessee. Conclusion: - First Question: Answered in the negative and in favor of the Revenue. - Second Question: Answered in the affirmative and in favor of the assessee. Each party is to bear its own costs. The court refused leave for appeal to the Supreme Court, stating that the question involved is not of public importance.
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