1975 (5) TMI 23 - AT - Income Tax

Summary

Issues: Disallowance of provision for gratuity under the Income Tax Act, 1961 for assessment year 1972-73.

In this judgment by the Appellate Tribunal ITAT COCHIN, the main issue was the disallowance of a provision for gratuity claimed by the assessee for the assessment year 1972-73. The assessee had made a provision for gratuity to its employees who had served for more than five years, but the Income Tax Officer (ITO) disallowed the claim stating that only provisions based on actuarial valuation could be treated as business expenditure. The Assistant Commissioner (AAC) also upheld the disallowance, mistakenly referring to the wrong act. The Tribunal noted that while actuarial valuation should have been done, the absence of it should not lead to outright rejection of the claim. The Departmental Representative argued that the claim fell under a different section of the Income Tax Act, but the Tribunal disagreed, stating that it should be considered under section 37. The Tribunal referenced various judgments to support the allowability of the claim.

Furthermore, the Tribunal highlighted that this was not the first year of liability for the gratuity provision, as the first year was in the previous assessment years. Therefore, the quantum of the provision for the current assessment year should only consider the service period within that year, not past services. The Tribunal emphasized that the calculation should be based on actuarial valuation rather than a simple multiplication of days' wages by years of service. The Tribunal directed the assessee to provide an actuarial valuation of the liability to the ITO within a reasonable time, failing which the ITO could determine it based on the Tribunal's guidelines and additional information from the assessee.

Ultimately, the Tribunal allowed the appeal in part, referring the assessment of gratuity back to the ITO for redetermination in accordance with the Tribunal's directions.