1986 (5) TMI 4 - SC - Income Tax

Gratuity - Revenue urged that the provisions of section 40A(7)(b)(ii), have not been satisfied and, therefore, the respondent was not entitled to the deduction of the gratuity amount - provisions of section 40A(7)(b)(ii) have been recently construed by this court in Shree Sajjan Mills Ltd. v. CIT - in view of said decision, High Court should examine whether those provisions have been complied with in the present case having regard to what has been laid down in that case

Summary

Issues:
1. Allowability of the entire provision for gratuity as a deduction under the Income-tax Act, 1961.
2. Compliance with the provisions of section 40A(7)(b)(ii) of the Income-tax Act, 1961.

Analysis:
The case involved a dispute regarding the deduction of the entire provision for gratuity under the Income-tax Act, 1961. The respondent had introduced a gratuity scheme in 1970, and the amount claimed as a provision for gratuity was debited to the profit and loss account based on an actuarial report. However, the Income-tax Officer allowed only a portion of the claimed amount as a deduction, leading to subsequent appeals.

Upon appeal, the Appellate Assistant Commissioner allowed the entire amount as a deduction, relying on a previous decision by the Supreme Court. The Revenue then appealed to the Income-tax Appellate Tribunal, which upheld the decision of the Appellate Assistant Commissioner, citing various court decisions in support of allowing the full amount as a charge against profits.

The matter was further considered by the Bombay High Court in a separate case, where a similar view was taken regarding the deduction of gratuity provisions. Subsequently, a reference was sought from the Appellate Tribunal for the opinion of the High Court on the issue of deduction of the gratuity provision.

The Supreme Court, upon review, found discrepancies in the record regarding the reference to the High Court but decided that a question of law did arise in the case. The Court opined that the case should be disposed of on its merits, considering the attention it had received in previous court cases.

The Court highlighted the need to examine whether the provisions of section 40A(7)(b)(ii) had been satisfied in the case, based on a recent court decision. As there was a dispute regarding the satisfaction of the second and third conditions of the provision, the Court set aside the judgment and remanded the case to the High Court for fresh consideration in light of their observations.

In conclusion, the Supreme Court allowed the appeal, set aside the High Court's judgment, and remanded the case for further consideration by the High Court in accordance with the Court's observations.