Law:

Section:

Section 40A(7) of the Income-tax Act, 1961 - Business disallowance - Gratuity - Whether estimated liability under a scheme of gratuity, if properly ascertainable and its present value is discounted, is deductible from gross profits - Held, yes - Whether where Tribunal did not consider question of deduction of liability for gratuity in light of section 40A(7), matter was to be remanded back to it for fresh disposal - Held, yes Facts In the course of the assessment proceedings for the assessment year 1974-75, the assessee claimed deduction of Rs. 15,76,941 being the provision for payment of gratuity. The ITO did not accept the claim holding that the provision included the liability relating to the earlier years and also that the liability was of a contingent nature. When the matter came up before the Tribunal in appeal, the Tribunal remanded the matter for considering the effect of the amendment brought out in section 40A(7). Thereupon the ITO allowed a deduction of Rs. 5,35,363 as provision for payment of gratuity. For the assessment year 1975-76, the ITO completed the assessment accepting the assessee's claim for deduction of a sum of Rs. 3,65,608 being the provision for payment of gratuity by way of incremental liability. The Commissioner, exercising his powers under section 263, however, held that in view of Explanation 1 to section 40A(7), only such amount as does not exceed an amount calculated at the rate of 81/ 3 per cent of the salary of each employee entitled to payment of such gratuity for each year of service could be allowed. He found that 81/ 3 per cent of the salary for the accounting years ending 30-6-1973 and 30-6-1974 of all the employees of the assessee entitled to payment of gratuity was only Rs. 1,73,236 and Rs. 2,05,781, respectively. The Commissioner, therefore, took the view that the admissible amount should not exceed 81/ 3 per cent of salary of the employees entitled to payment of gratuity during the particular accounting years. On appeal, the Tribunal held that the assessee should be directed to produce before the ITO an actuarial valuation of its liability for payment of gratuity to all its employees as at the end of the two relevant…

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