Law:

Section:

Section 40A(7) of the Income-tax Act, 1961 - Business disallowance - Gratuity - Assessment year 1973-74 - Assessee made provision of gratuity not on basis of actuarial valuation but on basis of 15 days' salary for each completed year of service - Whether only incremental liability relating to accounting year was to be allowed as all conditions laid down in section 40A(7)(b)(ii) were not fulfilled by assessee - Held, yes FACTS For the assessment year 1973-74 the assessee, a registered firm, claimed that a sum of Rs. 1,96,402 towards gratuity liability was deductible while computing its income. The ITO allowed the claim to the extent of Rs. 30,328 on the ground that only the incremental liability could be allowed. On appeal, the AAC and the Tribunal confirmed the ITO's order. On reference : HELD Under section 40A(7)(a ) no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for payment of gratuity to his employees on their retirement or on termination of their employment for any reason. Section 40A(7)(b)( ii), however, permits allowance of such provisions relevant to the assessment years 1973-74 to 1975-76, subject to certain conditions which are: (1) provision should be made as per actuarial valuation of the ascertainable liability of the assessee for payment of gratuity, (2) an approved gratuity fund should have been created and its approval sought before 1-1-1976, and (3) actual payment as contribution to the fund before the prescribed date of at least 50 per cent of the assessee's liability less actual utilisation. In the instant case, it was not in dispute that section 40A(7(b)(ii ) would stand attracted and the assessee had to establish that the conditions specified in section 40A(7)(b)(ii ) were fulfilled. The assessee had conceded that the provision for gratuity was not based on any actuarial valuation but on the basis of fifteen days' salary for each year of completed service. Thus, all the conditions under section 40A(7)(b)(ii ) for claiming the benefit had not been complied with. Therefore, the Tribunal was justified in allowing deduction by way of provision for payment of gratuity…

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