Law: Income Tax Act, 1961

Section: 36,36(1)(v),40A(7)

Income-tax-----Business expenditure---Amounts not deductible---Gratuity---Scope of S.40A(7)---Incremental liability for gratuity not shown in books of account-¬Not deductible---Indian Income Tax Act, 1961, Ss.36(1)(v) & 40A(7). Section 40A(7) of the Income Tax Act, 1961, introduced with effect from April 1, 1973, by the Finance Act, 1975, overrides all other provisions in the Act in the matter of allowing gratuity payment as a deduction. For gratuity to be deductible under the Act, it must fulfil the conditions laid down in section 40A(7). Therefore, after the introduction of section 40A(7), it is not possible for the assessee to contend that the assessee is entitled to deduction with regard to the incremental liability towards gratuity under section 36(1)(v) of the Act. Where the assessee has not created a provision in its accounts for incremental liability of gratuity, it is not entitled to deduction thereof, under section 40A(7) of the Act, nor would section 36(1)(v) operate in view of the introduction of section 40A(7) of the Act with effect fiom April 1, 1973. ITO v. Palam Andavar Mills Ltd. (1996) 218 ITR 364 (Mad.); Shree Sajjan Mills Ltd. v. CIT (1985) 156 ITR 585 (SC); Coimbatore Cotton Mills Ltd. v. CIT (1985) 154 ITR 240 (Mad.) and Kothari Sugars and Chemicals Ltd. v. CIT (1997) 227 ITR 864 (Mad.) fol. JUDGMENT K. A. THANIKKACHALAM, J.---At the instance of the Department, the Tribunal referred the following questions for the opinion of this Court under section 256(1) of the Income Tax Act, 1961, hereinafter referred to as the "Act":4a T. C. Nos. 103 and 104 of 1984: "Whether, on the facts and in the circumstances of the case and having regard to the provisions of sections 40A(7) and 36(1)(v) of the Income-tax Act, the Appellate Tribunal is correct in law in directing to allow the entire incremental liability towards gratuity claimed by the assessee for the assessment years 197 5-76 and 197677? T. C. No.625 of 1984: "Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in directing to allow the sum of Rs.6,92,175 being the gratuity liability for the assessment year 1978-79? The assessee had established a…

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