1982 (4) TMI 205 - AT - Income Tax

Tribunal remands gratuity issue, stresses fund contributions for deductibility.

The tribunal partially allowed the appeal, remanding the issue of the disallowed gratuity provision back to the Commissioner (Appeals) for reevaluation ... Payment Not Deductible, Gratuity Issues:1. Disallowance of provision for gratuity - Rs. 18,5992. Interpretation of section 40A(7) of the Income-tax Act, 1961 regarding deduction for gratuity provisionDetailed Analysis:1. The appeal in question pertains to the assessment year 1978-79, with the accounting year ending on 31-3-1978. The primary issue revolves around the disallowance of Rs. 18,599 concerning the provision for gratuity made by the assessee-company. The Income Tax Officer (ITO) disallowed the excess amount of Rs. 18,599 claimed by the assessee, stating that only Rs. 7,603 could be allowed as a deduction for the incremental liability for the year. The assessee had debited Rs. 26,202 to the profit and loss account for gratuity, which was the subject of contention. The Commissioner (Appeals) upheld the disallowance, leading to the appeal before the tribunal.2. The tribunal delved into the interpretation of section 40A(7) of the Income-tax Act, 1961, which plays a crucial role in determining the deductibility of provisions for gratuity. It highlighted that post the enactment of section 40A(7), the concepts of incremental liability and actuarial valuation have lost significance. Section 40A(7) specifies that no deduction shall be allowed for any provision made by the assessee for gratuity payments unless falling under specific saving clauses. Notably, section 40A(7)(b)(i) saves provisions made for contributions towards an approved gratuity fund or for gratuity payments due in the previous year. The tribunal emphasized that the critical factor for deduction is whether the provision is made for contribution towards an approved gratuity fund. It stressed that payments into the fund post accounting year-end are crucial for determining deductibility. The tribunal directed the Commissioner (Appeals) to verify the dates and amounts of payments into the fund to ascertain if the provision qualifies for deduction under section 40A(7). Consequently, the tribunal set aside the appellate order and remanded the issue for fresh consideration.3. The judgment concluded by partially allowing the appeal and restoring the aspect related to the gratuity provision to the Commissioner (Appeals) for a fresh decision based on the findings regarding the payments made into the approved gratuity fund. The tribunal emphasized the importance of adherence to section 40A(7) in determining the deductibility of provisions for gratuity, emphasizing the need for actual contributions towards approved funds for availing deductions.