Statutory fund contributions and approved gratuity provisions remain deductible when the liability accrues under law and falls within the statutory exception.

A statutory contribution to an education fund under the Haryana Co-operative Societies Rules is deductible on accrual because the liability arises as a compulsory charge under the governing rules, not as a voluntary or contingent expense; later payment does not defeat the year of accrual. A provision for gratuity is not barred by Section 40A(7) where it is made toward an approved gratuity fund, including payments connected with gratuity obligations through LIC, because the statutory exception applies. On that basis, both disallowances were deleted.

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Issues: (i) Whether the education fund contribution payable by a co-operative bank under Rule 73 of the Haryana Co-operative Societies Rules, 1989 was deductible on accrual basis as a statutory obligation. (ii) Whether the provision made for gratuity payment to an approved gratuity fund was disallowable under Section 40A(7) of the Income-tax Act, 1961.

Issue (i): Whether the education fund contribution payable by a co-operative bank under Rule 73 of the Haryana Co-operative Societies Rules, 1989 was deductible on accrual basis as a statutory obligation.

Analysis: The contribution was shown to be payable under the statutory framework governing co-operative societies and was fixed at 2% of net profit subject to a ceiling for central co-operative banks. Since the obligation arose from the governing rules and was a compulsory charge on the assessee's profits, the liability was not merely voluntary or contingent. The fact that actual payment was made later did not alter the statutory character of the liability for the year in which it accrued.

Conclusion: The deduction was allowable and the disallowance was not sustainable.

Issue (ii): Whether the provision made for gratuity payment to an approved gratuity fund was disallowable under Section 40A(7) of the Income-tax Act, 1961.

Analysis: Section 40A(7) disallows a provision for gratuity, but the prohibition does not apply where the provision is made for contribution towards an approved gratuity fund or for gratuity that has become payable. The material showed that the payments were made to LIC in connection with gratuity obligations, bringing the claim within the statutory exception. The provision therefore could not be rejected merely because it was described as a provision in the accounts.

Conclusion: The provision for gratuity was allowable and the disallowance was deleted.

Final Conclusion: Both additions were deleted and the assessee succeeded on all substantive grounds.

Ratio Decidendi: A statutory obligation to contribute to a fund is deductible when the liability accrues under the governing law, and a gratuity provision is not hit by Section 40A(7) where it is made towards an approved gratuity fund.

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