1989 (5) TMI 15 - HC - Income Tax

High Court Upholds Denial of Deductions for Casual Leave Payments and Gratuity

The High Court upheld the decisions of the lower authorities, denying deductions for both the provision of casual leave payments and the gratuity amount ... Accounting, Business Expenditure Issues:1. Deduction of casual leave payments provided in the books for the financial year 1974-75.2. Deductibility of gratuity calculated on the basis of actuarial valuation without provision in the books.Analysis:1. The first issue revolves around the deduction claimed by the assessee for casual leave payments provided in the books for the financial year 1974-75. The assessee, under a statutory obligation, made casual leave payments to its employees. The Income-tax Officer allowed the deduction for payments made during the previous year but denied the deduction for the provision made in the books for the year under consideration. The Income-tax Officer and the Commissioner of Income-tax (Appeals) held that the assessee had consistently followed the cash system of accounting, and the change in the method for the year under consideration was not bona fide. The Tribunal upheld this view, emphasizing that the change in accounting method should be genuine and not a casual departure from the regular practice. The High Court concurred, stating that the assessee cannot claim deductions both on payment basis for the previous year and on mercantile basis for the current year. The Court found the change in method to be a one-time deviation, lacking bona fides, and upheld the Tribunal's decision against allowing the deduction for the provision of casual leave payments.2. The second issue pertains to the deductibility of gratuity amounting to Rs. 5,30,476 based on actuarial valuation, despite no provision in the books. The Income-tax Officer rejected this claim citing non-satisfaction of conditions under section 40A(7) of the Income-tax Act. The Court highlighted that even if the liability for gratuity is ascertained through actuarial valuation, deductions cannot be claimed unless the conditions specified in the Act are met. As the assessee failed to satisfy these conditions, the deduction for gratuity provision was disallowed. Citing the Supreme Court judgment in Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585, the High Court ruled in favor of the Revenue on this issue as well.In conclusion, the High Court upheld the decisions of the lower authorities, denying the deductions for both the provision of casual leave payments and the gratuity amount based on actuarial valuation due to non-compliance with accounting principles and statutory conditions.