1987 (7) TMI 157 - AT - Income Tax

Tribunal decision: Deduction of gratuity fund contribution upheld, commission payment disallowed.

The Tribunal upheld the deduction of the initial contribution to the gratuity fund under Section 40A(7) of the Income-tax Act, allowing the deduction of ... Business Disallowance, Gratuity Issues Involved:1. Deduction of initial contribution to gratuity fund under Section 40A(7) of the Income-tax Act.2. Deletion of addition towards commission paid to M/s. Chhabra Auto Industries.Issue-wise Detailed Analysis:1. Deduction of Initial Contribution to Gratuity Fund under Section 40A(7):The primary issue in this case revolves around whether the initial contribution of Rs. 3,25,988 to the gratuity fund by the assessee-company is deductible under Section 40A(7) of the Income-tax Act. The Income-tax Officer (ITO) disallowed this provision, citing that it was merely a provision for gratuity and Section 40A(7) prohibits deductions for such provisions. He also pointed out that the liability related to earlier years and thus, could not be allowed in the current year.The Commissioner (A), however, allowed the deduction, relying on the Madras High Court's decision in CIT v. Andhra Prabha (P.) Ltd., interpreting that the initial contribution towards an approved gratuity fund is allowable under Section 40A(7)(b)(i). The Commissioner (A) opined that the provision for initial contribution is not the same as a provision for future liability and thus, should be allowed as a deduction.During the appellate proceedings, the departmental representative cited the Supreme Court's decision in Shree Sajjan Mills Ltd. v. CIT, asserting that provisions not complying with Section 40A(7) are not deductible. The representative argued that the Commissioner (A) wrongly relied on the Madras High Court's decision. The assessee's counsel countered, stating that the Supreme Court decision actually supported their view and emphasized that initial contributions, even if related to past years, are deductible under Income-tax Rules 103 and 104.The Tribunal analyzed that the gratuity fund was approved by the Commissioner of Income-tax with retrospective effect, making the liability to contribute an ascertained liability rather than a contingent one. The Tribunal concluded that Section 40A(7)(b) allows deductions for contributions to approved gratuity funds, provided they become payable during the previous year. The Tribunal found that the initial contribution, based on actuarial valuation, became payable during the accounting year and thus, is deductible. The Tribunal upheld the Commissioner (A)'s decision, allowing the deduction of Rs. 3,25,988.2. Deletion of Addition towards Commission Paid to M/s. Chhabra Auto Industries:The second issue concerns the deletion of an addition of Rs. 7,302 made by the ITO towards commission paid to M/s. Chhabra Auto Industries. The Commissioner (A) deleted this addition, noting that M/s. Chhabra Auto Industries was not examined by the ITO.The ITO had disallowed the commission, observing that despite several opportunities, the assessee failed to produce Shri Jagjeet Singh, a partner of M/s. Chhabra Auto Industries, for cross-examination. The ITO thus ignored the affidavit submitted by Shri Jagjeet Singh, concluding that no services were rendered.The Tribunal found that the assessee did not provide proper evidence to support the commission payment claim. It held that the Commissioner (A) was not justified in allowing the payment without the necessary verification by the ITO. Consequently, the Tribunal reversed the Commissioner (A)'s order on this issue and restored the ITO's decision to disallow the commission payment.Conclusion:The Tribunal allowed the appeal in part, upholding the deduction of the initial contribution to the gratuity fund but reversing the deletion of the addition towards the commission payment. The cross-objection by the assessee was dismissed as it was not pressed.