1980 (3) TMI 114 - AT - Income Tax

Issues Involved:
1. Deduction in respect of gratuity.
2. Disallowance of professional tax.
3. Disallowance out of miscellaneous expenses.

Detailed Analysis:

1. Deduction in Respect of Gratuity:
The primary issue in these appeals revolves around the deduction of gratuity. The amounts in dispute for the assessment year (AY) 1974-75 are Rs. 24,194, bifurcated into Rs. 5,925 from the original assessment and Rs. 18,270 from the reassessment. For AY 1975-76, the disputed amount is Rs. 13,812. For AYs 1976-77 and 1977-78, the disputed amounts are Rs. 8,098 and Rs. 2,166, respectively.

The assessee claimed compliance with Section 40A(7) of the IT Act, 1961, inserted by the Finance Act, 1975, effective from 1st April 1973. The Revenue contended that for AY 1976-77, the AAC had directed the ITO to allow the claim based on the approval granted by the CIT to the trust created by the assessee for gratuity purposes.

The legislative history indicates that before the Payment of Gratuity Act, 1972, gratuity payments were deductible under Section 37 if they were accrued and paid. Post-1972, the Payment of Gratuity Act mandated gratuity payments without requiring the creation of a trust. The Finance Bill, 1975, introduced Section 40A(7), which restricted deductions for gratuity provisions unless specific conditions were met.

For AYs 1974-75 and 1975-76, the assessee created a trust and deposited 50% of the gratuity payable before 1st April 1976, fulfilling the conditions under Section 40A(7). The CIT granted approval to the fund. Therefore, the assessee was entitled to deductions for these years.

For AYs 1976-77 and 1977-78, the AAC directed the ITO to examine the claim in light of the CIT's approval. The appeals for these years were deemed infructuous as the AAC's orders effectively directed the ITO to allow the claims.

2. Disallowance of Professional Tax:
For AYs 1974-75 and 1977-78, the assessee claimed professional tax as a deductible expense under Section 37(1) of the IT Act, relying on a CBDT circular. The circular clarified that professional tax, levied by local authorities, is not covered by Section 40(a)(ii) and should be allowed as a deduction under Section 37(1).

However, the Punjab and Haryana High Court in Saraswati Industrial Syndicate held that professional tax is not an admissible deduction in computing business income. Consequently, the claim for professional tax for these years was rejected.

3. Disallowance Out of Miscellaneous Expenses:
For AY 1975-76, the ITO disallowed Rs. 200 out of miscellaneous expenses of Rs. 8,155 on an estimated basis. The Tribunal found no evidence to sustain this disallowance and deleted it.

Conclusion:
- ITA No. 648 of 1977-78: Partly allowed.
- ITA No. 489 of 1979: Fully allowed.
- ITA No. 490 of 1979: Allowed.
- ITA No. 578 of 1979: Partly allowed.
- ITA No. 579 of 1979: Dismissed.

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