849/CBDT. - Income Tax - 849/CBDT

INSTRUCTION NO. 849/CBDT Dated : July 10, 1975 Section(s) Referred: 40A(7) Statute: Income - Tax Act, 1961 The Finance Act, 1975 has inserted a new sub-section (7) in section 40A of the Income-tax Act. 1961 which provides that no deduction will be allowed in the computation of taxable profits in respect of mere "provisions" made by employers in their books of account for payment of gratuity to their employers on their retirement or on termination of their employment for any reason. The amendment, however, does not affect provisions made for the purpose of payment of sums by way of contributions towards approved gratuity funds that have become payable during the previous year or for the purpose of making any payment on account of gratuity to employees where such provisions will continue to be eligible for deduction as hitherto. 2.With a view to mitigating hardship in cases where provision has been made by the assessee in their accounts for the previous years relating to assessment years 1973-74 to 1975-76 on the basis of their understanding of the law and the clarification given by the Board in Circular No. 47 dated 21-9-70, the new section 40A(7) has made a saving provision. Under this provision the prohibition regarding allowance of provision for gratuity will not apply in relation to such amount of the provision as does not exceed an amount calculated at the rate of 8 1/3 per cent, of the salary as defined in rule 2(h) of Part A to the Fourth Schedule of the Income-tax Act, 1961 of each employee entitled to the payment of gratuity for each year of service in respect of which the provision is made, provided the following conditions are fulfilled:- (i) The provision in the accounts for the relevant previous year is made in accordance with an actual valuation of the ascertainable liability of the assessee for payment of gratuity to his employees on their retirement or on termination of their employment for any reason; (ii) The assessee sets up a gratuity fund for the exclusive benefit of his employees under an irrevocable trust before 1st January, 1976 and files an application to the Commissioner for approval thereof before that date; (iii) A sum equal to least 50 per cent of the admissible amount (i.e., an amount calculated at the rate of 8 1/3 per cent of the salary of each employee entitled to the payment of gratuity for each year of service in respect of which the provision is made) is paid by the assessee by way of contribution to the approved gratuity fund before 1st April, 1976 and the balance of the admissible amount has been utilised out of the provision made in any previous year for the purpose of payment of any gratuity before the creation of the approved gratuity fund the amount to be paid to the approved gratuity fund will be calculated with reference to the admissible amount as reduced by the actual payment made before the date of creation of the approved gratuity fund. 3. For the removal of doubts, it has been specifically provided that where any provision made by the assessee in his accounts for payment of gratuity to his employees has been allowed as deduction in any previous year, any sum paid out of such provision by way of contribution to an approved gratuity fund or by way of gratuity to any employee will not be allowed as deduction in computing the income of the assessee in later previous year in which the sum is so paid. 4. It will be seen that the bar on allowance of provisions made for the payment of gratuity to employees will not apply for the assessment years 1973-74 to 1975-76 only if all the conditions referred to in para 2 above are fulfilled. In cases where the above conditions are not fulfilled the provisions made in the relevant years will have to be disallowed. For this purpose, it will be permissible for the income-tax Officer to rectify or reopen completed assessment for the assessment years 1973-74 and 1974-75 for the purpose of with-drawing the deduction in respect of provisions for payment of gratuity allowed in computing the taxable profits. In view, however, of the position that the time for complying with the various conditions specified in the law may not have expired when the reassessment or rectification proceedings are initiated by the Income-tax Officer to keep these proceedings in abeyance to enable them fulfill all the conditions laid down in the law within the specified time. Since the time for fulfilling these conditions for the assessment years 1973-74 and 1974-75 will expire before the time limit for completion of the reassessment or rectification proceedings in such cases, there should be no objection in granting such requests. In their cases the proceedings for rectification or reassessment will have to be finalised in accordance with law. 5. With a view to avoiding hardship arising from the rectification or reassessment of such cases, Board have decided as under:- (a) The demand raised for the assessment years 1973-74 and 1974-75 as a result of rectification or reassessment proceedings in such cases may be allowed to be paid by granting suitable instalments to the assessees. It may be noted that as the provision in section 220(2) of the Income-tax Act relating to payment of interest on the unpaid demand is mandatory assessees will have to pay interest under this provision on the demand allowed to be paid in instalments. (b) Penalty is exigible for making a false estimate of the current income for purposes of advance tax as also for filing an incorrect return of income. Interest is also charged in cases where advance tax paid by a person on the basis of his own estimate falls short of 75 per cent of the tax determined on regular assessment. In view of the position that the deduction of the provisions for payment of gratuity in computing the correct income for purpose of payment of advance tax was in accordance with the Circular issued by the Board in September, 1970. Income-tax officer should not initiate penalty proceedings under the relevant provisions in cases where the inadequacy in the estimate of the correct income is attributable to the deduction of such provisions. Interest chargeable for short payment of advance tax in such cases should also be waived by the Income-tax Officers. 6. The above instructions may kindly be brought to the notice of all the officers working in your charge for their guidance and compliance.