1996 (6) TMI 36 - HC - Income Tax

Court denies deduction for incremental gratuity liability under sections 40A(7) or 36(1)(v) without provision in books

Commissioner Of Income-Tax Versus Jawahar Mills Limited

The court held that the incremental liability towards gratuity cannot be allowed as a deduction under sections 40A(7) or 36(1)(v) unless a provision is ... Assessment Year Issues Involved:1. Whether the Appellate Tribunal is correct in law in directing to allow the entire incremental liability towards gratuity claimed by the assessee for the assessment years 1975-76 and 1976-77.2. Whether the Tribunal is correct in law in directing to allow the sum of Rs. 6,92,175 being the gratuity liability for the assessment year 1978-79.Detailed Analysis:Issue 1: Incremental Liability Towards Gratuity for Assessment Years 1975-76 and 1976-77The assessee established a gratuity fund known as Jawahar Mills Ltd. Employees Gratuity Fund from December 1, 1972. The Income-tax Officer allowed actual payment of gratuity and payment of premium under section 36(1)(v) of the Income-tax Act, 1961, but did not allow the incremental liability. The assessee appealed, arguing that the incremental liability was determined on an actuarial basis and should be deductible. The Commissioner of Income-tax (Appeals) found that the provision for payment to the approved gratuity fund qualified for deduction under section 40A(7)(b)(i) and section 36(1)(v) of the Act. The Tribunal upheld this view, stating that the incremental liability was a charge on the assessee's profits and constituted a provision within the meaning of section 40A(7)(b)(i).Issue 2: Gratuity Liability for Assessment Year 1978-79For the assessment year 1978-79, the assessee claimed Rs. 8,82,960 as incremental liability based on actuarial valuation. The Inspecting Assistant Commissioner disallowed this claim under sections 36(1)(v) and 40A(7)(b)(i). The Tribunal, following its earlier decision, allowed the difference between the incremental liability and the premiums paid as a further deduction. The Department contended that without a provision in the books for the incremental gratuity liability, the deduction could not be allowed under section 40A(7).Court's Judgment:The court examined whether the incremental liability of gratuity could be allowed as a deduction under section 40A(7) or section 36(1)(v) of the Act. The Finance Act, 1975, introduced section 40A(7) with effect from April 1, 1973, which places conditions on the deduction of gratuity liabilities. The court referred to the Supreme Court decision in Shree Sajjan Mills Ltd. v. CIT, which held that section 40A(7) overrides other provisions and that no deduction is allowed for future gratuity liabilities unless provisions are made in the books of account. The court also cited similar judgments, including ITO v. Palani Andavar Mills Ltd. and Coimbatore Cotton Mills Ltd. v. CIT, which supported the view that section 40A(7) precludes deductions for incremental gratuity liabilities if no provision is made.The court concluded that the assessee is not entitled to claim incremental liability of gratuity either under section 40A(7) or section 36(1)(v) because no provision was created in the account books. Consequently, the Tribunal's decision to allow the incremental liability as a deduction was incorrect. The court answered the questions in the negative and in favor of the Department, with no costs awarded.Conclusion:The court held that the incremental liability towards gratuity cannot be allowed as a deduction under sections 40A(7) or 36(1)(v) unless a provision is made in the books of account. The Tribunal's decision to allow the incremental liability as a deduction was reversed, and the questions were answered in favor of the Department.