Court upholds disallowance of gratuity provision claim under Income-tax Act

The court upheld the disallowance of the assessee's claim for provision for gratuity under section 40A(7) of the Income-tax Act for the assessment years 1973-74 and 1974-75. The court agreed with the Income-tax Officer's decision to disallow the claim, as it did not meet the statutory requirements. The court affirmed the decisions of the lower authorities and a Supreme Court precedent, ruling in favor of the Revenue and against the assessee. The reference was disposed of without costs.

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Issues: Interpretation of section 40A(7) of the Income-tax Act, 1961 regarding provision for gratuity made by the assessee in the books of account for the assessment years 1973-74 and 1974-75.

The judgment pertains to a reference made under section 256(1) of the Income-tax Act, 1961 regarding the application of section 40A(7) in relation to the provision for gratuity made by the assessee for the assessment years 1973-74 and 1974-75. The court noted that the Tribunal should have made separate references for the two assessment years. The court directed the office to treat the references as arising from separate orders passed in two appeals. Despite the absence of filed paper books by the assessee, the court proceeded with the reference based on a Supreme Court decision in Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585, which covered the question at hand.

The assessee had debited a substantial sum as provision for gratuity in its account books, which was shown under "Current liabilities and provisions" on the balance sheet. The Income-tax Officer disallowed the claim for gratuity provision as it did not meet the requirements of section 36(1)(v) and section 40A(7)(b)(ii) of the Act. The Appellate Assistant Commissioner and the Tribunal upheld the disallowance, concluding that the conditions were not fulfilled. The court concurred with the lower authorities and the Supreme Court decision, holding that the claim of the assessee was rightly disallowed. Consequently, the court answered the question in the affirmative, against the assessee and in favor of the Revenue, disposing of the reference without costs.

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