Approved gratuity fund requirement governs deduction for gratuity provision; post-year approval prevents allowance.

A provision for gratuity is disallowable under section 40A(7)(a) unless it falls within the exception for a provision made towards an approved gratuity fund under section 40A(7)(b)(i). That exception applies only where an approved gratuity fund exists during the relevant accounting year, as required by section 2(5) and the applicable Fourth Schedule rules. Because the fund was approved only with effect from 1 July 1975, after the previous year had ended, no approved fund existed in that year. The deduction was therefore not allowable, and the disallowance was upheld in favour of the Revenue.

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Issues: Whether a provision made during the accounting year for contribution towards gratuity could be deducted under section 40A(7)(b)(i) when the gratuity fund was approved only from the following year.

Analysis: Section 40A(7)(a) prohibits deduction for provisions made for gratuity, subject to the exception in section 40A(7)(b)(i) for provision made towards an approved gratuity fund. An approved gratuity fund, within section 2(5) and the relevant rules in Part C of the Fourth Schedule, must exist during the relevant accounting year. Here, the fund was approved only with effect from 1 July 1975, after the accounting year had ended, and no approved fund was in existence during that year. The statutory exception therefore did not apply.

Conclusion: The deduction was not allowable under section 40A(7)(b)(i), and the disallowance made by the Income-tax Officer was correct; the answer to the referred question is in favour of the Revenue.

Ratio Decidendi: Deduction for provision made towards gratuity is permissible under section 40A(7)(b)(i) only if an approved gratuity fund exists during the relevant previous year.

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