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TMI Blog1986 (7) TMI 201X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,72,583 (c) 31-12-1977 2,25,932 -------- Total 7,25,972 -------- The incremental liability for each of the years had been determined on an actuarial basis. The ITO disallowed the claim on the ground that the assessee had not actually made any contribution to the employees' gratuity fund. According to the ITO, the provisions of section 40A(7)(b)(ii) of the Income-tax Act, 1961, would apply and the conditions therein were not satisfied (sic). 2. The assessee appealed to the Commissioner (Appeals). It was submitted that the claim was actually a liability which was present and existing. Reliance was pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 28 of the Act; in view of these special features present in that case, I am afraid that I will be unable to support the contention of the learned representative. In the result the order of the Income-tax officer on this aspect is confirmed." 3. The assessee is in appeal before us. The case was argued at length. The learned counsel for the assessee, apart from relying on the decision of the Madras High Court in the case of Andhra Prabha (P.) Ltd. also relied on the decision of the Calcutta High Court in the case of CIT v. New Swadeshi Mills of Ahmedabad Ltd. [1984] 147 ITR 163 and in particular, the observations at p. 171. He also adverted to the notes on clauses whereby the provisions of section 40A(7) were amended by the Financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision is made for purposes of payment of a sum by way of contribution to an approved gratuity fund, then such provision is an admissible deduction, whether the gratuity to which such provision relates becomes payable during the previous year or not. The learned counsel submitted, the words 'that has become payable during the previous year' should be read as applicable only to the second limb of section 40A(7)(b)(i), i.e., 'for the purpose of payment of any gratuity' and would not be applicable to the first limb, viz., 'provisions which are made'. He submitted that even if the notes on clauses on which reliance was placed by the revenue are read, the intention of enacting section 40A(7)(b)(i) is clear from the first part of the notes on cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1973, and was made applicable to the assessment year 1973-74 and all the subsequent years. Section 40A is an overriding section and will apply notwithstanding anything contained in any other provisions of this Act relating to computation of income under the head 'Profits or gains of business or profession'. The section heading is 'Expenses or payments not deductible in certain circumstances'. Section 40A(7)(a) prohibits deduction of any provision by whatever name called made by an assessee for the payment of gratuity to his employees on their retirement or termination of their employment for any reason. This is, however, subject to the provisions of clause (b). Clause (b) lays down the conditions which have to be fulfilled by an assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the relevant provisions, as presently worded, do not secure the underlying objective and that a provision made by a taxpayer in his accounts in respect of estimated service gratuity payable to employees will be deductible in computing the taxable income in a case where the provision has been made on a scientific basis in the form of an actuarial valuation. In order to remove uncertainty in the matter, it is proposed to specifically provide in the law that no deduction will be allowed, in the computation of profits and gains of a business or profession, in respect of any reserve created or provision made for the payment of gratuity to the employees on retirement or on termination of employment for any reason. This restriction will, however ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use by the assessee out of the gross profits of the year of account for payment of gratuity to employees on their retirement or on the termination of their services would not be allowed as deduction in the computation of profits and gains of the year of account. The provision of clause (a) was made subject to clause (b). The embargo is on deductions of amounts provided for future use in the year of account for meeting the ultimate liability to payment of gratuity. Clause (b)(i) excludes from the operation of clause (a) contribution to an approved gratuity fund and amount provided for or set apart for payment of gratuity which would be payable during the year of account...." [Emphasis supplied] Their Lordships of the Supreme Court have st ..... X X X X Extracts X X X X X X X X Extracts X X X X
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