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TMI BlogProvision for estimated service gratuity payable to its employees -Deduction under section 37(1) and section 40A(7) after its insertion by the Finance Act, 1975, with effect from 1-4-1973X X X X Extracts X X X X X X X X Extracts X X X X ..... duction under section 37(1). The matter was re-examined by the Board in 1974 and the earlier instructions were withdrawn by the Boards Circular No. 146 dated 26-9-1974 [Clarification 2]. Some of the High Courts have recently taken a view that a provision made by an assessee in his accounts in respect of estimated service gratuity payable to employees will be deductible in computing the taxable income in cases where the provision has been made on a scientific basis in the form of actuarial valuation. In order to remove uncertainty, in the matter, the Finance Act, 1975 has inserted a new sub-section (7) in section 40A which provides that no deduction will be allowed in the computation of taxable profits in respect of mere provisions made by e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t a real liability of the employer to the employees. Accordingly, the Board decided that such provision would not be a contingent liability and may be treated as admissible deduction under section 37(1). 2. The decision of the Board has been re-examined in the light of the unreported judgment of the Supreme Court in the case of Bombay Dyeing Manufacturing Co. Ltd. v. CWT [since reported in [1974] 93 ITR 603]. In this judgment, their Lordships have confirmed their own views in Standard Mills Co. Ltd. v. CWT [1967] 63 ITR 470 and have observed that the decision in Metal Box Co.s case (supra) was rendered under a different Act and in a different context. 3. In view of the later pronouncement of the Supreme Court in the case of Bombay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been dismissed on account of misconduct. The Board have, therefore, come to the conclusion that the liability so ascertained cannot be considered as a contingent liability. Such provision of gratuity may be treated as an admissible deduction under section 37(1). Circular : No. 47 [F. No. 9/100/69-IT(A-II)], dated 21-9-1970 1 clarification 4 I am directed to refer to your letter dated 25-1-1971, on the above subject and to say if an assessee decided to start making a provision on gratuity from the current year, then the provision made in respect of the current year only will be allowable as deduction under section 37. The liability for paying gratuity in respect of earlier years will not be allowed as deduction in computing the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that would not reflect the correct provision for gratuity. Letter : F. No. 204/10/71-IT(A-II), dated 17-8-1971. ANNEX - LETTER, DATED 31-5-1971 REFERRED TO IN CLARIFICATION With reference to your Circular No. 47, dated 21-9-1970 on the above subject, our clients are raising a doubt as to actuarial valuation of gratuity liability. It appears that actuarial valuation can be made only in respect of general gratuity liability of the company, covering all the employees entitled to gratuity and not in respect of a particular employee of the company. It appears from your circular that the actuarial valuation for the gratuity liability should be obtained in respect of each and every employee and record is to be maintained by the co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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