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Issues:
1. Allowability of initial contribution to gratuity fund as deduction under s. 36(1)(v) 2. Interpretation of provisions of s. 40A(7) regarding deduction of provisions for gratuity liability Analysis: Issue 1: Allowability of initial contribution to gratuity fund as deduction under s. 36(1)(v) The dispute revolved around the CIT(A)'s decision to allow the initial contribution payable to the gratuity fund of the assessee as a deduction under s. 36(1)(v). The CIT(A) based his decision on the fact that the assessee followed the mercantile system of accounting, allowing for the deduction of any accrued liability during the previous year. He emphasized that any sum paid towards an approved gratuity fund is eligible for deduction under s. 36(1)(v). The CIT(A) held that the entire initial contribution payable by the assessee accrued as a liability during the year under consideration and was thus admissible as a deduction. The CIT(A) reasoned that the timing of the actual payment, made in annual installments, did not affect the allowability of the claim due to the accounting system followed by the assessee. Issue 2: Interpretation of provisions of s. 40A(7) regarding deduction of provisions for gratuity liability The appellant argued that the CIT(A) erred by not considering the provisions of s. 40A(7), which prohibit the deduction of sums not actually paid but kept as provisions. The appellant contended that the amount in question, though not paid, was still deductible under s. 36(1)(v) and even under s. 40A(7)(b)(i). The Tribunal analyzed the provisions of s. 40A(7) in detail, noting that it prohibits deductions for provisions for gratuity liability unless falling under specific exceptions. The Tribunal emphasized that if a provision is made for the purpose of payment towards an approved gratuity fund that has become payable during the previous year, it falls outside the purview of s. 40A(7). In this case, the Tribunal found that the conditions for the first exception under s. 40A(7)(b)(i) were met, as the amount had been actuarially determined and was payable towards an approved gratuity fund during the previous year. In conclusion, the Tribunal upheld the decision of the CIT(A) on both issues, allowing the initial contribution to the gratuity fund as a deduction under s. 36(1)(v) and finding that the amount provisioned for gratuity liability was admissible for deduction even under the provisions of s. 40A(7)(b)(i). The Tribunal provided a comprehensive analysis of the relevant legal provisions and precedents to support its decision.
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