2005 (7) TMI 55 - HC - Income Tax

Section 40A(7) - unascertained liability - Whether Tribunal was legally correct in upholding the provisions of section 40A(7) applicable in the assessee s case even though the assessee has claimed unascertained liability being provision only not actually paid? - Respectfully following the principles laid down by the apex court in Shree Sajjan Mills Ltd. we are of the considered opinion that the amount paid was nothing else but gratuity and merely because the scheme has been mentioned as Gratuity Insurance Assurance Scheme it will not make any difference. The provisions of section 40A(7) of the Act would be attracted as the fund has not been recognised by the Department. The Tribunal was therefore not justified in upholding the deletion of the addition. Accordingly we answer the question referred to us in the negative i.e. in favour of the Revenue and against the assessee

Summary

Issues:
Interpretation of provisions of section 40A(7) of the Income-tax Act, 1961 regarding deduction claimed for gratuity-cum-life insurance scheme contributions.

Analysis:
The High Court of Allahabad was presented with a question of law regarding the application of section 40A(7) of the Income-tax Act, 1961. The respondent-assessee had claimed a deduction for contributions made to the Life Insurance Corporation of India under a Group Gratuity-cum-Life Insurance Scheme for the assessment years 1984-85, 1985-86, 1986-87, and 1988-89. The Assessing Officer disallowed the deduction under section 40A(7) on the basis that the funds were not paid to a recognized gratuity fund. However, the appellate authority allowed the deduction, stating that the contributions were for life insurance premiums and not gratuity. The Tribunal upheld this decision. The court noted that the tax audit report indicated the sums were paid for gratuity, contradicting the appellate authority's finding. The court referred to the Supreme Court's decision in Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585, emphasizing that deductions for future gratuity payments are subject to specific conditions under section 40A(7).

The court highlighted the interpretation of section 40A(7) by the Supreme Court, which clarified that any provision made by the assessee for gratuity out of gross profits for future use would not be allowed as a deduction unless specific conditions were met. The court rejected the assessee's argument that no provision for gratuity would still be deductible, as it would defeat the purpose of the section. The court emphasized that the legislative intent was to restrict deductions for gratuity liabilities. Therefore, the court concluded that the contributions made by the respondent-assessee were indeed for gratuity, despite being labeled as part of a Gratuity Insurance Assurance Scheme. As the fund was not recognized by the Department, the provisions of section 40A(7) applied, and the Tribunal's decision to delete the addition was deemed unjustified.

In conclusion, the High Court answered the question referred in the negative, favoring the Revenue and against the assessee, emphasizing the importance of adhering to the specific provisions of section 40A(7) when claiming deductions for gratuity contributions.