Law:

Section:

SECTION 40A(7)(b)(ii ) OF THE INCOME-TAX ACT, 1961 - BUSINESS DISALLOWANCE - GRATUITY - ASSESSEE, FOLLOWING MERCANTILE SYSTEM, DID NOT PROVIDE FOR GRATUITY LIABILITY IN THE ACCOUNTING YEAR IN WHICH IT AROSE AND TO WHICH IT RELATED - WHETHER DEDUCTION COULD BE ALLOWED IN SUBSEQUENT YEAR UNDER SECTION 40A(7)(b)(ii) ON THE GROUND THAT IT WAS PROVIDED FOR IN SUCH SUBSEQUENT YEAR - HELD, NO Facts The assessee maintained its accounts on the mercantile basis. For the assessment year 1974-75, the assessee claimed deduction of a sum of Rs. 29,593 in respect of its gratuity liability for the accounting year ending 30-6-1972 (relevant to the assessment year 1973-74), though during that accounting year, i.e., account year relevant to the assessment year 1973-74, the assessee had made no provision respecting the said amount. Its claim was disallowed by the ITO. On appeal, the AAC and the Tribunal, however, allowed the assessee's claim on the ground that the liability squarely fell under clause (b) of section 40A(7). On reference: Held It was held by this Court in CIT v. High Land Produce Co. Ltd. [1976] 102 ITR 803 that in Kerala State the statutory liability for gratuity arose for the first time when the Kerala Industrial Employees' Payment of Gratuity Ordinance was promulgated in December 1969 and that in respect of the liability of the years earlier to that year, as well as to that year, the claim had to be made, in that year of account by making suitable provisions before the assessee became entitled to deduction. In the instant case, no provision had been made during the relevant previous year, i.e., 1972-73, which was the accounting year preceding the assessment year 1973-74. The case of the assessee, however, was that, insofar as provision had been made in the accounting year 1973-74, it was entitled to claim deduction in terms of sub-clause (ii) of section 40A(7)(b), that is, in accordance with and subject to the conditions mentioned thereunder. To derive the advantage of that sub-clause in respect of a provision made in the accounting year 1973-74, such provision ought to relate to the liability of that year. However, the provision made in that year in the sum of…

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