Balasubramania Foundry vs Commissioner of Income Tax

At the instance of the assessee, the Appellate Tribunal has stated a case and referred the following question of law for our opinion u/s 256(1) of

the Income Tax Act, 1961 :

Whether the Tribunal was right in law in holding that in view of the provisions of section 40A(7) of the Income Tax Act, 1961, the applicant is not

entitled to the deduction of the sum of Rs. 3,14,614 being the gratuity liability that has arisen under the provisions of the Payment of Gratuity Act,

1972 ?

The assessee is a registered firm and during the course of assessment proceedings for the assessment year 1975-76, the assessee had claimed

deduction of the gratuity of a sum of Rs. 3,14,614 which included actual payment as well as the provision made towards the gratuity. The Income

Tax Officer in the order of assessment passed for the assessment year 1975-76 allowed the deduction for the gratuity actually paid but disallowed

the sum of Rs. 2,98,433 as it was not an actual payment to the employee, but it was only a provision towards a contingent liability.

The assessee preferred an appeal before the Appellate Assistant Commissioner against the order of the Income Tax Officer disallowing the

provision for payment of gratuity of Rs. 2,98,433. The Appellate Assistant Commissioner held that no gratuity fund had been separately created

which had been recognised by the Commissioner and actual transfer of the funds had not also been effected. The Appellate Assistant

Commissioner, therefore, held that the assessee had not complied with all the three conditions provided in section 40A(7) of the Act and,

therefore, the provision made towards the gratuity cannot be allowed as a deduction in the computation of income under the Income Tax Act. On

further appeal before the Income Tax Appellate Tribunal, the Appellate Tribunal found that the assessee had not complied with the requirements of

section 40A(7) of the Act and, therefore, the assessee is not entitled to deduction of the provision made for the gratuity liability. It is this order of

the Appellate Tribunal that is the subject-matter of the present tax reference.

Mr. Meenakshisundaram, learned counsel appearing for the assessee, submitted that the assessee had time till January 1, 1976, to create the

gratuity fund and filed an application before the Commissioner for approval of the trust and, therefore, the assessee is entitled to claim deduction of

the provision made towards gratuity liability. We are, however, of the view that the statement made by learned counsel for the assessee is

untenable. The Appellate Assistant Commissioner as well as the Income Tax Appellate Tribunal have found that the assessee had not complied

with the requirements of section 40A(7) of the Act. Since the assessee had failed to fulfil the three statutory conditions prescribed, u/s 40A(7) of

the Act, we are of the view that the assessee is not entitled to claim deduction of the provision made by the assessee towards the gratuity liability. If

any authority is needed, it is found in the decision of the Supreme Court in Shree Sajjan Mills Ltd. Vs. Commissioner of Income Tax, M.P.,

Bhopal and Another, , wherein the apex court has held that for the gratuity to be deducted the conditions laid down in section 40A(7) of the Act

had to be fulfilled and the deduction could not be allowed on general principles under any other section of the Act. Following the decision of the

Supreme Court, we hold that the Tribunal is correct in holding that the assessee is not entitled to the deduction of the provision made towards the

gratuity liability without complying with the provisions of section 40A(7) of the Act.

There is a slight typographical mistake in the question of law referred to us and the question refers to the disallowed sum as Rs. 3,14,614. But

the actual amount which was disallowed by the Income Tax Officer is only Rs. 2,98,433. Accordingly, the sum of Rs. 2,98,433 shall be

substituted as the correct sum for the figure of Rs. 3,14,614 in the question of law referred to us. Following the decision of the Supreme Court, we

answer the question of law referred to us in the affirmative and against the assessee. There will be no order as to costs.