1983 (4) TMI 9 - HC - Income Tax

Court denies deduction claim for gratuity liability transfer as revenue expenditure; citing s. 40A(7) conditions.

The court upheld the decision of the Income Tax Officer (ITO) and the Appellate Assistant Commissioner (AAC) in rejecting the assessee's claim for a ... Business Expenditure, Reference Issues:1. Allowability of gratuity liability deduction transferred to another entity.2. Determination of payment as capital account or revenue expenditure.Analysis:The assessee, engaged in a transport service, transferred a portion of its business to another company along with the gratuity liability for employees. The assessee claimed a deduction of the sum paid as representing the gratuity liability as revenue expenditure for the assessment year 1974-75. However, the Income Tax Officer (ITO) rejected the claim, which was upheld by the Appellate Assistant Commissioner (AAC) and the Income-tax Appellate Tribunal. The Tribunal found that the sum transferred was a provision, not satisfying the conditions under s. 40A(7), and there was neither actual payment nor qualification under s. 40A(7) for the gratuity liability. The Tribunal also held that the transfer cannot be treated as a charge on profits for the year, citing precedents like Stanes Motors (South India) Ltd. v. CIT [1975] 100 ITR 341.The Tribunal distinguished a decision of the Kerala High Court and relied on the Madras High Court's decisions in Stanes Motors (South India) Ltd. v. CIT [1975] 100 ITR 341, CIT v. Pathinen Grama Arya Vysya Bank Ltd. [1977] 100 ITR 788, and CIT v. Salem Bank Ltd. [1979] 120 ITR 224. The court found that the view in Stanes Motors case was in line with the Supreme Court's decision in CIT v. Gemini Cashew Sales Corporation [1967] 65 ITR 643, leading to the dismissal of the petition for reference.In contrast, the assessee cited cases where actual payment of gratuity to employees was considered a revenue expenditure entitled to deduction. However, in this case, no direct payment of gratuity to the transferred employees occurred, and the conditions of s. 40A(7) were not met. Therefore, the court declined to refer the questions raised by the assessee, ultimately dismissing the petition without costs.