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TMI Blog1981 (4) TMI 118X X X X Extracts X X X X X X X X Extracts X X X X ..... y upto 1st Dec., 1975 amounted to Rs... The assessee has been allowed to pay the aforesaid amount to the approved gratuity fund in not more than five annual instalments. The assessee actually paid the entire amount in five annual instalments beginning with the year 1975 and ending in the year 1979. In asst. yr.1972-73, a sum of Rs.....has already been allowed as deduction representing the incremental liability for gratuity in respect of the calendar year 1971. Besides, the assessee has debited a sum of Rs.......to the P L account of the year under consideration as gratuity liability which appears to have been allowed. The balance of Rs......out of the aforesaid sum of Rs............was separately debited to the P L account of the year under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction under s. 36(1)(v). He observed that the mere fact that the assessee did not actually pay the amount during the year under consideration but paid in five instalments annually, as permitted by the CIT would not make any difference to the allowability of the assessee's claim because of the mercantile system of accounting followed by the assessee. Hence, he allowed the deduction. 16. Shri T.S. Srinivasan urged before us that the ld. CIT(A)erred in his decision inasmuch as he ignored the provisions of s. 40A(7). He urged that s. 40A(7) prohibited the deduction of any sum which was not actually paid but merely kept as a provision and so the action of the CIT (A) was not tenable. Shri S.E. Dastur, on the other hand, supported the order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... represent contribution to approved gratuity fund. This is so even if the liability which accrued during the previous year related to the services received by the assessee in the earlier years, vide Board's Circular No.30 (XLVII-18) of 1964 dt. 30th Nov., 1964. 18. Prior to the enactment of s. 40A(7) with retrospective effect from the asst. yr. 1973-74, liabilities in respect of gratuity which accrued during the previous year were held to be admissible deduction under s. 37 of the Act even though there was no approved gratuity fund, provided the conditions in s. 37 were fulfilled. This liability was allowable on the basis of actual payment under cash system of accounting and on the basis of accrued liability in cases of mercantile system ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). Sub-cl. (a) of s. 40A(7) says that no deduction shall be allowed in respect of any provision for the payment of gratuity by whatsoever name it is called. Its effect is that provisions for gratuity liability which would have been otherwise allowable under s. 36(1)(v) or s.37 under the law prior to the amendment will no longer be admissible as a deduction. Then, sub-cl.(b) of s.40A(7) enacts certain exceptions to sub-cl.(a).To our mind, sub-cl.(b) is a proviso to sub cl.(a),so much so, that a case falling within sub-cl.(b) will not be hit by sub-cl.(a). This fact, however, does not mean that whatever falls within sub-cl (b) has to be automatically allowed as a deduction. When a case comes under sub-cl (b),it only means that it goes out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f some employees during the previous year under consideration. We are concerned in this case with the situation at 'A' above. If the conditions stated in that situation are satisfied, then, obviously the case goes out of the purview of s. 40A(7). 22. In the case before us, the amount has not actually been paid but has been provided for payment by way of contribution towards a gratuity fund that has admittedly been approved under the Act. The amount of Rs............ has been determined and payable on 1st Dec.,1975 out of which a portion has already been paid and allowed as deduction. We are now concerned with the balance of Rs....... which has been provided for in the accounts. The amount has been actuarially determined. This amount has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e second ground states that the CIT(A) erred in directing the ITO to include the excess provision for taxation in the capital base. We have heard Shri T.S. Srinivasan who urged before us that the CIT(A) erred in his decision. We have also heard Shri S.E. Dastur, who supported the order of the CIT(A). We have considered the contentions of both the parties as well as the facts on record. We find that CIT(A) has relied on the Bombay High Court decision in the case of CIT vs. Golden Tobacco Co. 1977 CTR (Bom) 126:(1977) 108 ITR 453(Bom) wherein it has been held that bad and doubtful debt reserves were includible in the capital base for the purpose of the Companies (Profits) Surtax Act. We also find that the CIT(A) has relied on the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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