TaxTMI 
TaxTMI 
2009 (7) TMI 809
X X X X Extracts X X X X
X X X X Extracts X X X X
....e against the liabilities arising under the Payment of Gratuity Act, 1972 was not hit by the provisions of section 40A(7)(a) of the Income-tax Act, 1961 and was an allowable deduction under section 37(1) of the Act ?" 2. The matter related to the assessment year 1984-85. Before the Assessing Officer, the assessee-corporation had claimed deduction for an amount of Rs. 41,790 representing the insurance premium paid to the LIC to insure against all the liabilities that might arise under the Payment of Gratuity Act, 1972. It claimed that the payment of the said amount was an allowable deduction under section 37(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). The said condition did not find favour either with the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ered the respective submissions of the learned counsel for the parties and perused the record. 6. It has been found by the Assessing Officer that a sum of Rs. 41,790 has been debited as gratuity in the profit and loss account. It has been further found that there is no compliance with the provisions of section 40A(7) of the Income-tax Act, which requires that the fund should be created and the same should be approved by the Commissioner of Income-tax. Due to the failure of the compliance with the provisions of section 40A(7) of the Act, the claim of deduction was disallowed by the Assessing Officer and the assess-ment order was confirmed in first appeal. It may be noted that the Tribunal has not found on the facts as otherwise. Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... as deduction in the computation of profits and gains of the year of account. The provision of clause (a) was made subject to clause (b). The embargo is on deductions of amounts provided for future use in the year of account for meeting the ultimate liability to payment of gratuity. Clause (b)(i) excludes from the operation of clause (a) contribution to an approved gratuity fund and amounts provided for or set apart for payment of gratuity which would be payable during the year of account. Clause (b)(ii) deals with a situation where the assessee might provide by the spread-over method and provides that such provision would be excluded from the operation of clause (a) provided the three condi-tions laid down by the sub-clauses are satisfied.....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... The aforesaid judgment of the apex court came up for consideration before this court in Kumson Motor Owners Union Ltd. v. CIT [1993] 201 ITR 601 (All) wherein after noticing the judgment of Shree Sajjan Mills Ltd. [1985] 156 ITR 585 (SC) the following was held (page 605) : "In order, therefore, that the provision for payment of gratuity be admissible as a deduction, it must be shown that the provisions was made strictly in the manner laid down in clause (b) of section 40A(7). As already observed, in the present case, the deposit was not made in approved gratuity scheme as found by the Tribunal. Indeed, the application for recognition of the gratuity fund itself was allowed later making it effective from May 24, 1978." (emphasis ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nderstood (page 865 of 227 ITR) : "The liability, if any, arising during the accounting year, is fully covered by the payment of premium and for this reason it is allowable as a deduction under section 37 of the Act though it may be con-sidered even under section 36(1)(v) of the Act." 11. Even otherwise also, we find that the attention of the hon'ble judges of the Madras High Court was not invited towards the binding precedent of the apex court in the case of Shree Sajjan Mills Ltd. [1985] 156 ITR 585. The ratio of the judgment of the Madras High Court should be read in the light of the law laid down by the apex court in the case of Shree Sajjan Mills Ltd. [1985] 156 ITR 585. Moreover, the Division Bench judgment of this....