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TMI Blog1995 (7) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... he circumstances of the case, the Appellate Tribunal should not have confirmed the Income-tax Officer's disallowance of the sum of Rs. 2,10,769 as not an allowable deduction either under section 40A(7)(b)(i) or under section 36(1)(v) or under section 37 ? " The assessee is a public utility company, engaged in the manufacture of cotton yarn. By a deed executed on September 7, 1973, and registered on October 12, 1973, it created an irrevocable trust to provide a fund for future payments of gratuity to its employees and the said fund was approved by the Commissioner of Income-tax with effect from the first of the aforesaid dates. Its liability to gratuity as on December 31, 1975, as per actuarial valuation amounted to Rs. 36,54,088 and when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 31, 1975, was irrelevant to decide the issue, disapproved the second line of reasoning adopted by the Commissioner of Income-tax (Appeals). According to the Tribunal, the incremental liability was towards contribution to an approved gratuity fund and it cannot be deemed to be a statutory liability. The Tribunal, however, held that the assessee was still entitled to succeed. According to the Tribunal, a provision made under section 40A(7)(b)(i) of the Income-tax Act, 1961, for the purpose of payment of a sum by way of contribution towards any approved gratuity fund is deductible. The Tribunal is also of the view that a mere claim made in the adjustment statement would amount to a "provision" within the meaning of section 40A(7) of the Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provision made for incremental liability is an allowable one. In Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 (SC), the distinction between " provision " and " reserve " is brought out in the following manner (headnote) : " ' Provision ' is a charge against the profits to be taken into account against gross receipts in the profit and loss account, a ' reserve ' is an appropriation of profits, the asset or assets by which it is represented being retained to form part of the capital employed in the business. Though the term 'provision' is defined in clause 7 of Part III of Schedule VI to the Companies Act, 1956, positively by specifying what it means, the definition of 'reserve' is negative in form and not exhaustive in the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by actuarial valuation in which all contingencies are taken into consideration, such liability is in praesenti and the amount so set apart is a permissible business expenditure in the year concerned for an assessee following the mercantile system of accounting ". In Coimbatore Cotton Mills Ltd. v. CIT [1985] 154 ITR 240, this court held that : " in view of section 40A(7), no provision for payment of any gratuity could be allowed as a deduction except a provision for contribution to an approved gratuity fund. As the amount claimed in the instant case as a deduction was not a provision in the accounts of the assessee, the Tribunal was justified in holding that the assessee was not entitled to the deduction and accordingly no question of la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the three conditions laid down by the sub-clauses are satisfied. " In CIT v. New Swadeshi Mills of Ahmedabad Ltd. [1984] 147 ITR 163, the Calcutta High Court held that : " the assessee was not entitled to claim any deduction on account of its liability to pay gratuity estimated on an actuarial basis without making any provision for that liability. In order to claim the deduction the assessee must follow the procedure and fulfil the conditions laid down in the Act ". Similarly, in CIT v. D. B. R. Mills Ltd. [1988] 174 ITR 442, the Andhra Pradesh High Court held that (headnote) : " Sub-section (7) of section 40A of the Income-tax Act, 1961, declares that no deduction shall be allowed in respect of any provision made by the assessee for pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of law, the making of, or the failure to make, an entry (debit entry) in the books of account is immaterial. But where the liability does not attach, or accrue, by operation of law, an entry is necessary to show that a particular sum has been appropriated for a particular purpose. In other words, such an appropriation is necessary to show that a provision has been made by the assessee for a particular purpose which in this case is for the purpose of payment into an approved gratuity fund. In the present case also, the assessee has not made any provision in the sum of Rs. 2,10,769 in the accounts, but has merely claimed this amount in the adjustment statement. Further, the amount available in the gratuity fund, viz., Rs. 36,66,134 is more ..... X X X X Extracts X X X X X X X X Extracts X X X X
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