1979 (6) TMI 82 - AT - Income Tax

Tribunal denies gratuity provision deduction under Income-tax Act, distinguishing liability from expenditure.

The Tribunal upheld the disallowance of the gratuity provision claimed by the assessee-company under section 40A(7) of the Income-tax Act, 1961. The ... Mercantile System Issues:1. Disallowance of gratuity provision by ITO under section 143(3) read with section 144B of the Income-tax Act, 1961.2. Rejection of assessee's contention by AAC regarding gratuity provision.3. Interpretation of section 40A(7) in relation to the deduction of gratuity payment by the assessee.Detailed Analysis:1. The ITO disallowed a sum of Rs. 29,865 claimed as gratuity provision by the assessee-company, citing the absence of an approved fund as the reason for disallowance. The AAC upheld this disallowance, leading to the filing of a cross objection by the assessee.2. The assessee contended that, as per the mercantile basis of accounting and relevant legal precedents, the gratuity liability should be considered for income calculation. The counsel referred to various court decisions supporting the deduction claim despite the absence of a specific provision in the accounts.3. The interpretation of section 40A(7) was crucial in determining the deductibility of the gratuity liability. The Tribunal analyzed the provision's language and intent, emphasizing that the assessee's failure to create an approved fund led to the disallowance of the deduction claimed. The Tribunal highlighted the distinction between liability and expenditure, asserting that only the latter is eligible for deduction. The discussion delved into the definition of 'provision' and its broader implications beyond mere book entries.4. Ultimately, the Tribunal concluded that section 40A(7) applied to the case, and since the assessee did not adhere to the statutory requirements, the claimed deduction for gratuity provision could not be allowed. The cross objection was dismissed based on this interpretation of the law.