1981 (4) TMI 113 - AT - Income Tax

Summary

Issues:
1. Allowability of initial contribution to gratuity fund as deduction under section 36(1)(iv) of the Income-tax Act, 1961.
2. Interpretation of provisions of section 40A(7) in relation to deduction of provision for gratuity liability.

Analysis:

Issue 1:
The appeal involved the consideration of whether the initial contribution of Rs. 57,29,637 payable to the gratuity fund was allowable as a deduction under section 36(1)(iv) of the Income-tax Act, 1961. The Commissioner (Appeals) allowed the deduction based on the fact that the gratuity fund was approved, and the amount accrued as a liability during the year under consideration. The Commissioner relied on the mercantile system of accounting, which allows for the deduction of liabilities that have accrued during the previous year. The Tribunal upheld the decision, emphasizing that under section 36(1)(v), amounts paid or liabilities incurred during the previous year for contribution to an approved gratuity fund are deductible, regardless of the actual payment timing.

Issue 2:
The appellant contended that the Commissioner (Appeals) erred by not considering the provisions of section 40A(7) of the Act. Section 40A(7) prohibits the deduction of sums not actually paid but kept as a provision. However, the Tribunal noted that section 40A(7) has exceptions, including clause (b)(i), which allows for the deduction of provisions made for payment towards an approved gratuity fund that became payable during the previous year. In this case, the amount in question had been provided for in the accounts, determined on an actuarial basis, and was payable during the year under consideration. Therefore, the Tribunal held that the case fell under the exception provided in section 40A(7)(b)(i) and was admissible as a deduction under section 36(1)(v) or section 37.

In conclusion, the Tribunal upheld the decision of the Commissioner (Appeals) regarding the allowability of the initial contribution to the gratuity fund as a deduction under section 36(1)(iv) of the Income-tax Act, 1961. Additionally, the Tribunal interpreted the provisions of section 40A(7) and found that the case fell under the exception provided in section 40A(7)(b)(i), allowing for the deduction of the provision made for payment towards an approved gratuity fund that became payable during the previous year.