Law:

Section:

Section 36(1)(v), read with section 40A(7) of the Income-tax Act, 1961 - Gratuity fund Contribution towards an approved - Assessment year 1976-77 - Assessee company neither made actual payment of gratuity nor made provision to contribute to an approved gratuity fund in assessment year in question - However, it claimed deduction of amount towards provision of gratuity fund on ground that it was an accrued liability - Whether merely because there was a liability to pay contribution to approved gratuity fund, it could not be treated as an accrued liability and liability should be taken to have accrued only when a provision was made in accounts - Held, yes - Whether, therefore, assessee was not entitled to deduction as claimed by it - Held, yes Words and phrases : Word "paid" as occurring in section 36(1)(v) of the Income-tax Act, 1961 FACTS The assessee-company a textile mill, for the previous year ended to the assessment year in question, did not make any provision for its liability to contribute to an approved gratuity fund. However, it claimed before the ITO that it was entitled to a deduction of the amount of gratuity fund as it was an accrued liability. The ITO disallowed the assessee's claim. The Commissioner (Appeals) held that the word "paid" occurring in section 36(1)(v) would also include a liability incurred in accordance with the method of accounting in view of the definition of the word "paid" in section 43(2) and, therefore, the omission to make a book entry, when in fact the liability had accrued, would make no difference to the assessee's claim for deduction. Accordingly, he allowed the appeal filed by the assessee. The Tribunal held since the assessee did not part with the fund, it was not entitled to claim deduction of a mere liability to pay gratuity, and even if a claim in the return of income could be treated as a provision, it could not be regarded as a decision of the assessee to set apart the amount for payment to the gratuity fund especially when such a provision was made only in the accounts of the subsequent year. On application under section 256(2): HELD The decision of the Commissioner (Appeals) overlooked the provision in section…

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