Law: Income Tax Act, 1961

Section: 40,40A(7)

Income-tax--Business expenditure---Gratuity---Mercantile system of accounting--­Provision for gratuity---Liability worked out on actual valuation is allowable as business expenditure---Indian Income Tax Act, 1961, S.40A(7). For the assessment year 1972-73, the assessee, a firm, claimed a sum of Rs. 18,472 as deduction under the head "Gratuity to staff". The claim was trade as per actuarial valuation but the Assessing Officer disallowed it on the ground that neither the gratuity fund was approved by the Commissioner nor an irrevocable trust created for the said purpose. The Tribunal held that the same was allowable. On a reference: Held, that the provision for payment of gratuity had been made under a scheme on an actuarial basis and was allowable as business expenditure. CIT v. Dalmia Dadri Cement Ltd. (1992) 195 ITR 290 (Delhi); CIT v. Kelviator of India Ltd. (1994) 210 ITR 933 (Delhi); Dalmia Dadri Cement Ltd. v. CIT (1980) 126 ITR 851 (Delhi) and Shree Sajjan Mills Ltd. v. CIT (1985) 156 ITR 585 (SC) ref. JUDGMENT D.K. JAIN, J.---In this reference under section 256(1) of the Income Tax Act, 1961 (for short the Act), at the instance of the Revenue, pertaining to the assessment year 1972-73, the following question has been referred for the opinion of this Court: "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in allowing the provision for gratuity to staff amounting to Rs.18,472 as an admissible deduction in the computation of the assessee's business income for the assessment year 1972-73?" The assessee is a firm. In its annual accounts for the previous year ended on June 30, 1971, the assessee, claimed as business expenditure a sum of Rs.18,472 under the head "Gratuity to staff". According to the assessee, the claim was made as per the actuarial valuation. However, during the course of the assessment proceedings, the Assessing Officer disallowed the said claim on the ground that neither the gratuity fund has been approved by the Commissioner of Income-tax nor an irrevocable trust has been created by the assessee for the exclusive benefit of the employees. The assessee's appeal to the Appellate Assistant…

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