1978 (12) TMI 103 - AT - Income Tax

Summary

Issues:
1. Disallowance of provision for gratuity.
2. Disallowance of maintenance expenses for a guest house.

Issue 1: Disallowance of provision for gratuity:
The appeal by the assessee pertained to the assessment year 1973-74, where the Income Tax Officer (ITO) disallowed a provision made for gratuity in the accounts. The ITO's reasoning was that the gratuity fund established by the assessee was not approved by the Commissioner. The assessee then appealed to the Appellate Assistant Commissioner (AAC), who upheld the disallowance but allowed relief upon compliance with the requisite provisions. The assessee contended that the gratuity fund was constituted under a trust deed, and the fund was approved by the Commissioner from a later date due to amendments made in the trust deed. The Departmental Representative argued that the conditions for amending the trust deed were not met. However, the Tribunal found that the trust deed was amended by the same trustees, and the Commissioner's approval was granted from the date of the amended deed. Therefore, the Tribunal concluded that the assessee satisfied the requirements for deduction under Section 40A(7)(b) of the Income Tax Act, 1961.

Issue 2: Disallowance of maintenance expenses for a guest house:
The second contention involved the disallowance of an amount related to the maintenance of a guest house by the ITO. The AAC disallowed the expenditure, stating it fell within the meaning of Section 37(4) of the IT Act. The assessee argued that the apartment was used exclusively by its employees and directors, and any use by non-employees was minimal and involved executives of associate companies who were charged for their stay. The Departmental Representative claimed that the well-equipped facilities of the apartment indicated it was a guest house. The Tribunal analyzed the usage of the apartment and determined that, as primarily occupied by the assessee's employees and executives of associate companies who were charged for their stay, it did not qualify as a guest house under Section 37(4). Consequently, the Tribunal allowed the deduction for the maintenance expenses incurred.

In conclusion, the Tribunal ruled in favor of the assessee on both issues, allowing the deduction for the provision made for gratuity and the maintenance expenses for the apartment used by its employees and executives of associate companies.