Law: Income Tax Act, 1961

Section: 40,40A(7)

Income-tax-----Business expenditure---Gratuity amount relating to pre-nationalisation period---Debited to approved gratuity reserve---Gratuity paid to employees during year under assessment---Is allowable deduction---Indian Income Tax Act, 1961, S.40A(7). The assessee-corporation had taken over certain sick textile mills alongwith certain specified liabilities includes the liability to pay gratuity. The evidence on record showed that such liability was estimated at Rs.5,48,86,706 and in the books of account provision was made for the same. The deduction during the year under consideration was claimed on the basis of actual payment: Held, that the amount paid related to the pre-nationalisation period and was not drawn from the income of the relevant year under assessment. But that did not militate against the fact that the corporation had taken over the liability of the sick units also at the time of nationalisation and had made approved provision for gratuity at that time. Therefore, it was not a case where any provision or reserve or fund was created or made to meet the liability of gratuity as it became payable in future which could be said to be hit by the provisions of section 40A of the Income Tax Act, 1961. On the contrary it was a case of the gratuity amount relating to the pre-­nationalisation period having been debited to the approved gratuity reserve which was in fact, paid to the employees during the year under assessment. It was also not a case where the sick units had claimed this amount prior to or after the nationalisation. Therefore, the Tribunal had rightly allowed the' deduction by treating the provision as' an appropriation of money for a known and existing liability. The assessee-corporation had made a provision of a reserve at the time of the nationalisation of the sick textile Units out of which gratuity was paid to the employees over a period of time and also during the year under assessment. Therefore, it was not a case where the assessee had made a provision for payment of gratuity to its employees on their retirement or termination of their services for future use out of its gross profits for the year of account which falls within the…

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