1995 (3) TMI 125 - AT - Income Tax

Approved Gratuity Fund, Assessing Officer, Gratuity Liability, Provision For Gratuity, Supreme Court

Summary

Issues Involved:
1. Allowance of the claim for gratuity.
2. Additional liability for gratuity.
3. Provision for gratuity for prior years.
4. Actual contributions to the approved gratuity fund.

Issue-wise Detailed Analysis:

1. Allowance of the claim for gratuity:
The primary issue revolves around the allowance of the claim for gratuity, specifically the amounts disputed before the Tribunal. The amounts in question are:
- Additional liability for gratuity for the year 1977 as a result of actuarial valuation: Rs. 32,66,475.
- Provision for gratuity for 1976 based on actuarial valuation made in the accounts for 1976, disallowed in the assessment year 1977-78, now claimed (paid over to the MICO Gratuity Trust during 1977): Rs. 18,34,913.
- Provision for gratuity for prior years based on actuarial valuation made in the accounts for 1971, disallowed in the assessment for the assessment year 1972-73 and upheld in appeal, now claimed (paid over to MICO Trust during 1977): Rs. 14,84,649.

2. Additional liability for gratuity:
The Tribunal examined the additional liability for gratuity for the year 1977. The AO had disallowed the claim of Rs. 32,66,475, arguing that the assessee had a consistent practice of making claims of premium paid to LIC under the Group Gratuity Life Insurance Scheme and payments made through the Gratuity Trust. The first appellate authority allowed the amount, citing the Madras High Court's decision in CIT v. Madras Rubber Factory Ltd. and the Supreme Court's decision in Shree Sajjan Mills Ltd. The Tribunal concluded that the amount represented a provision created in the account of the assessee and remitted the matter back to the AO for verification of whether the entire amount was actually contributed to the approved gratuity fund in the near future.

3. Provision for gratuity for prior years:
The Tribunal addressed the provisions for gratuity for the years 1976 and prior years. The AO had disallowed these amounts on the ground that the liability in respect of these amounts did not arise in the year 1977. The CIT(A) allowed the amounts, reasoning that actual payments made to the gratuity trust based on actuarial valuation during the calendar year 1977 should be allowed as a deduction. The Tribunal agreed with the CIT(A), stating that section 36(1)(v) of the Income-tax Act provides for the deduction of any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created under an irrevocable trust. The Tribunal found that the assessee's contributions to the approved gratuity fund met the requirements of section 36(1)(v) and upheld the CIT(A)'s decision.

4. Actual contributions to the approved gratuity fund:
The Tribunal examined the actual contributions made to the approved gratuity fund. The CIT(A) had allowed the amounts of Rs. 18,34,913 and Rs. 14,84,649 based on actual contributions to the approved gratuity fund. The Tribunal concurred with the CIT(A), noting that section 36(1)(v) relates to actual payments made by the assessee towards an approved gratuity fund and is independent of section 40A(7), which deals with provisions for gratuity. The Tribunal held that the liabilities towards gratuity become accrued liabilities only when the contributions are made to the approved gratuity fund, and thus, the CIT(A) was correct in allowing the amounts as deductions.

Conclusion:
The Tribunal remitted the matter of the additional liability for gratuity back to the AO for verification of actual contributions to the approved gratuity fund. The Tribunal upheld the CIT(A)'s decision to allow the provisions for gratuity for prior years and the actual contributions to the approved gratuity fund, finding that these amounts met the requirements of section 36(1)(v) of the Income-tax Act.