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Issues Involved:
1. Disallowance of the sum of Rs. 2,15,651 claimed by the assessee as deductible u/s 37 of the Income-tax Act, 1961. 2. Applicability of the provisions of section 40A(7) of the Income-tax Act, 1961. Summary: Issue 1: Disallowance of the sum of Rs. 2,15,651 claimed by the assessee as deductible u/s 37 of the Income-tax Act, 1961. The assessee, a company, claimed a deduction of Rs. 2,15,651 on account of provision for payment of gratuity to employees under the Payment of Gratuity Act, 1972, for the assessment year 1973-74. The Income Tax Officer (ITO) disallowed this amount, allowing only Rs. 28,649, as the claim was not based on the actuarial method. The Appellate Assistant Commissioner (AAC) upheld this disallowance. The Tribunal also upheld the disallowance, citing the overriding provisions of section 40A(7) of the Income-tax Act, 1961, which was inserted with retrospective effect from 1st April, 1973. The Tribunal noted that the assessee had not fulfilled the provisions of section 40A(7), and thus, the claim for deduction could not be allowed. The Tribunal acknowledged that, in the absence of section 40A(7), the assessee would have been entitled to the deduction, but due to non-fulfillment of the conditions laid down in section 40A(7), the deduction was rightly disallowed. Issue 2: Applicability of the provisions of section 40A(7) of the Income-tax Act, 1961. Section 40A(7) stipulates that no deduction shall be allowed in respect of any provision made by the assessee for the payment of gratuity to employees on their retirement or termination of employment unless certain conditions are fulfilled. The Tribunal found that the assessee had not fulfilled these conditions, specifically the creation of an approved gratuity fund and the payment of contributions to such a fund. The Tribunal referred to the statutory liability created by the Payment of Gratuity Act, 1972, and noted that while this liability arose during the relevant accounting period, the provisions of section 40A(7) of the Income-tax Act, 1961, took precedence. The court emphasized that the computation of income and allowable deductions must be guided by the provisions of the Income-tax Act, and section 40A(7) specifically excluded certain deductions unless the stipulated conditions were met. Conclusion: The court concluded that the Tribunal was correct in its decision to disallow the deduction of Rs. 2,15,651 claimed by the assessee. Question No. 1 was answered in the affirmative, in favor of the revenue. Regarding Question No. 2, the court held that section 40A(7) of the Income-tax Act, 1961, was applicable, and since the conditions had not been fulfilled, the assessee was not entitled to the deduction. Each party was directed to bear its own costs. Separate Judgment: Sudhindra Mohan Guha J. concurred with the judgment.
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