Gratuity provision disallowance upheld where no approved fund existed and no liability had become payable during the year.

Section 40A(7) disallows deductions for gratuity provisions unless the amount is contributed to an approved gratuity fund or relates to gratuity that has become payable during the previous year. On the facts stated, no approved gratuity fund existed in the relevant period and no gratuity liability had become payable, so a provision for a future contingent liability did not fall within the statutory exceptions. The disallowance of the gratuity provision was therefore upheld in favour of the Revenue.

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Issues: Whether the assessee was entitled to deduction of the provision made towards gratuity for the relevant accounting year under section 40A(7) of the Income-tax Act, 1961.

Analysis: Clause (a) of section 40A(7) bars deduction for provisions made for gratuity payable on retirement or termination of employment, subject to the exceptions in clause (b). The exception applies only where the provision is made towards contribution to an approved gratuity fund or for gratuity that has become payable during the previous year. On the facts found, no approved gratuity fund existed during the relevant period and no gratuity liability had become payable in that year. A provision made only for a future contingent liability does not satisfy either exception.

Conclusion: The disallowance of the gratuity provision was correct and the question was answered in favour of the Revenue.

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