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Section 40A(7) of the Income-tax Act, 1961 - Business disallowance - Gratuity - Assessment year 1976-77 - Whether provision made towards gratuity for being paid to employees in future was not allowable for deduction unless a liability had been created or an approved gratuity fund existed during relevant year - Held, yes Facts In the accounting year relevant to the assessment year 1976-77, the assesses made provision towards gratuity for being paid in future to its employees and claimed deduction. The ITO disallowed the claim on the ground that there was no liability for the payment of gratuity during the accounting year nor approved gratuity fund had been created. The AAC upheld the disallowance. Meanwhile, the Commissioner granted approval for gratuity fund with effect from 18-8-1980. The Tribunal, however, rejected the assessee's appeal. On reference : Held The exceptions contained in section 40A(7)(b ) are two : (1) when provision is made for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, and (2) when provision is made for the purpose of any gratuity that has become payable during the previous years. For meeting the liability in future no deduction is permissible. In the instant case, during the relevant period, there was neither any approved gratuity fund and, hence, the question of contributing towards that fund did not arise, nor there was any liability created during the previous year so as to make a provision for payment of gratuity. Both the ingredients being absent in this case, deduction could not be allowed. Case referred to Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 (SC). O.P. Hoshiarpuri for the Applicant. Ashok Bhan and Ajay Mittal for the Respondent. JUDGMENT Mital, J.-In the accounting year relevant to the assessment year 1976-77, the assessee made a provision of Rs. 5,666 towards gratuity which, may be found payable in future to its employees and during the assessment, claimed deduction. The ITO did not allow deduction as there was no liability for the payment of gratuity during the accounting year, nor approved gratuity fund had been created. The order was upheld by the AAC. By the time…

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