Law:

Section:

Section 40A(7) of the Income-tax Act, 1961 – Business disallowance – Gratuity – Assessment year 1973-74 – Assessee-company, maintaining accounts on mercantile system, filed loss return – In computing said loss, assessee had claimed deduction of liability for gratuity based on actuarial valuation – On basis of said loss return, assessee claimed refund of advance tax paid – ITO referred matters to higher authorities and on basis of their guidance, rejected assessee's claim on ground that no provision for gratuity was made by assessee in its account books – Same High Court in one of its earlier decisions had held that claim for gratuity was admissible even if assessee had made no provision for it – Whether in view of said decision of High Court, it was not open to ITO to disallow claim merely on basis of instructions issued to him by higher authorities – Held, yes – Whether since clause (b) of section 40A(7) provides that provisions should be made in accordance with actuarial valuation of ascertainable liability and assessee should create an approved gratuity fund and some further conditions laid down by it have to be fulfilled in future section 40A(7) created no bar so far as instant case was concerned – Held, yes – Whether, therefore, impugned order of ITO had to be quashed – Held, yes FACTS For the assessment year in question, the assessee filed a loss return. In computing the loss, the following two items were claimed as deduction (a) liability for gratuity and (b) unabsorbed depreciation and development rebate carried forward from earlier years. As a result of said loss return, the entire advance tax became refundable. The petitioner accordingly applied to the Income-tax Officer for a provisional assessment. The Income-tax Officer referred the matter to the higher authorities for guidance and thereafter passed an order rejecting the assessee's claim for refund of advance tax. The ITO held that assessee that had claimed the estimated liability for payment of gratuity under its own gratuity scheme as per actuarial valuation; however, it had made no provision for the same in the accounts. He, therefore, held that the estimated liability was not prima facie…

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