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TMI Blog1989 (3) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 351 of 1982: Whether, on the facts and in the circumstances of the case and on an interpretation of section 40A(7)(b)(i) of the Income-tax Act, 1961, the assessee is entitled to deduction of the gratuity provision for the assessment year 1976-77 ? ITR No. 7 of 1984: Whether, on the facts and in the circumstances of the case, the provision of gratuity was an allowable deduction under section 40A (7) of the Income-tax Act, 1961 ? It is agreed that the decision rendered in ITR No. 351 of 1982 will govern ITR No. 7 of 1984 also. The Appellate Tribunal in rendering the order in ITA No. 392(Coch)81, which is the subject-matter of ITR No. 7 of 1984, followed its earlier decision in ITA No. 681 (Coch) 77-78 dated November 26, 1979. ITA No. 681 (Coch) 77-78 is the subject-matter of ITR No. 351 of 1982. We will now consider ITR No. 351 of 1982. The respondent is a company in which the public are not substantially interested. For the assessment year 1976-77, corresponding to the previous year ended on June 30, 1976, it claimed deduction of Rs. 2,00,000 being the provision made for gratuity. The Income-tax Officer noticed that the assessee created a gratuity fund on December 22, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year; (ii) any provision made by the assessee for the previous year relevant to any assessment year commencing on or after the 1st day of April, 1973, but before the 1 st day of April, 1976, to the extent the amount of such provision does not exceed the admissible amount, if the following conditions are fulfilled, namely: (1) the provision is made in accordance with an actuarial 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; (2) the assessee creates an approved gratuity fund for the exclusive benefit of his employees under an irrevocable trust, the application for the approval of the fund having been made before the 1st day of January, 1976 ; and (3) a sum equal to at least fifty per cent. of the admissible amount, or where any amount has been utilised out of such provision for the purpose of payment of any gratuity before the creation of the approved gratuity fund, a sum equal to at least fifty per cent. of the admissible amount as reduced by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd effect of section 40A(7)(b) has been stated thus : "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 employers in their books of account for payment of gratuity to their employees on their retirement or on termination of their employment for any reason. The amendment will not, however, affect provisions made for the purpose of payment of sums by way of contribution 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 gratuity has become payable during the previous year and such provisions will continue to be eligible for deduction as hitherto." (Law of Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision made for the purpose of payment of the sum by way of contribution towards its approved gratuity fund under section 40A(7)(b)(i) of the Act.. In this connection, we should notice that ordinarily the accounting period for the assessment year 1976-77 will be April 1, 1975, to March 31, 1976. In this case, the assessee has chosen a different accounting period ending on June 30, 1975. The Finance Act, 1975, amended section 40A(7) of the Act with effect from April 1, 1973. The Finance Act was passed on May 12, 1975. For the three prior assessment years 1973-74, 1974-75 and 1975-76, provision has been made under section 40A(7)(b) of the Act. Certain conditions should be complied with by an assessee to claim deduction. In this case, we are not concerned with those conditions. The immediately preceding assessment year 1975-76, for which the accounting period will normally end on March 31, 1975, will be governed by section 40A(7)(b) of the Act. For the assessment year 1975-76, for which the accounting period will end on March 31, 1975, the approved gratuity fund, under an irrevocable trust, need be created and the application for the approval of the fund need be made only before Janu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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