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TMI Blog1995 (3) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... llate Tribunal was right in holding that the assessee is entitled to the deduction of Rs. 1,74,314 being the provision for incremental liability to pay gratuity to the employees in the assessment year 1972-73 ? " and in the meanwhile, the law has suffered a change by the introduction of section 40A of the Income-tax Act, 1961 (hereinafter referred to as " the Act ") and the judgments of the courts have settled the law and it is the position till the provisions of section 40A(7) were inserted in the Act. (1) Payments of gratuity actually made to the employee on his retirement or termination of his services were expenditure incurred for the purpose of business in the year in which the payments were made and allowed under section 37 of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was total liability towards gratuity in the sense that it included not only the incremental liability in respect of the additional services rendered by the employees during the accounting year, but also the initial liability. The Income-tax Officer considered that the mercantile system of accounting adopted by the assessee justified only the allowance of incremental liability. He disallowed Rs. 8,80,848 pertaining to the initial liability, i.e., the liability in respect of the services rendered in the earlier years, and held that such initial liability was not admissible either under section 36 or section 37 of the Act. For 1972-73, he disallowed even the incremental liability worked out at Rs. 1,74,314 on the ground that an irrevocable tru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, which is not made in an approved and irrevocable fund created for the said purpose, is neither deductible under section 37 nor under section 28 of the Act. He has relied particularly on the observations in the said judgment : " Section 37, with the marginal note 'General', states in sub-section (1) thereof : 'Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee) . . . . . .' and held, 'Simply as a matter of construction we reach the conclusion that once a particular item of expenditure is of the nature specifically described in any of the statutory provisions contained in sections 30 to 43A of the Act, the said exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specific legislative command, such provisions relating to the computation of income shall have no effect if they are in conflict with anything contained in section 40A. The law stated in the judgment of this court (see [1977] 110 ITR 621) is not the one which has taken notice of section 40A and accordingly it is not an authority laying down, as contended by learned counsel for the Revenue, that expenditure on advertisement which is covered by sub-section (3) of section 37 of the Act shall suffer the inhibition under the Rules and the assessee shall not be permitted to seek the protection under the proviso aforementioned." Undeterred, however, learned counsel for the Revenue has pursued his argument and drawn our attention to a judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Payment of Gratuity Act, 1972, which came into force on September 16, 1972, as a statutory liability under the said Act. Although payment of gratuity is made on retirement or termination of service, it was not for the service rendered during the year in which the payment is made but it is made in consideration of the entire length of service and its ascertainment and computation depend upon several factors." It is not necessary for us to dilate any further as, in the case of CIT v. Andhra Prabha P. Ltd. [1986] 158 ITR 416, the Supreme Court considered a case similar to the one in hand in which the assessee had adopted the mercantile system of accounting and the liability for payment of gratuity had arisen in the case of working journalist ..... X X X X Extracts X X X X X X X X Extracts X X X X
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