TMI Blog1987 (7) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... led to the deduction of the incremental liability for the assessment years ? " The assessment years with which we are concerned are 1974-75 and 1975-76. The assessee filed returns for the above assessment years claiming deduction of Rs. 15,76,941 and Rs. 6,81,781, respectively, being the provision made for payment of gratuity in accordance with the provisions of the Payment of Gratuity Act, 1972. For the year 1975-76, a revised return was filed restricting the claim to Rs. 3,65,608 alter excluding future increments of the employees from computation of the liability. The Income-tax Officer did not accept the claim for the assessment year 1974-75 holding that the provision included the liability relating to the earlier years and also that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner of Income-tax was wrong and that the assessee was entitled to deduction of the incremental liability for the assessment years concerned, since the amount provided was less than 8 1/3% of the amount worked out on the basis of the entire period of service of each employee and the salary last drawn. Thereafter, the Commissioner of Income-tax moved the Appellate Tribunal under section 256(1) of the Act to refer certain questions of law to this court for decision. The Appellate Tribunal has referred the questions of law stated hereinabove for the decision of this court. Hence these cases. We heard learned counsel appearing for the Revenue, Sri P. K. R. Menon, and learned counsel appearing for the assessee, Sri P. Radhakrishnan. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, the Income-tax Appellate Tribunal came to the following conclusion: " It is, therefore, necessary that the assessee should be directed to produce before the Income-tax Officer an actuarial valuation of its liability for payment of gratuity to all its employees as at the end of the two relevant accounting years without taking into consideration the increase in salary that might be earned by the employees and their future years of service. It is also to be stated that the assessee would be entitled for the deduction of only the incremental liability for the two assessment years under consideration. The Income-tax Officer will pass fresh orders in accordance with our above direction." The liability to pay gratuity is not in prae ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds, it is permissible for the assessee if he so chooses to provide in his profit and loss account for the estimated liability under a gratuity scheme by ascertaining its present value on actuarial basis and claim it as an ascertained liability to be deducted in the computation of profits and gains of the previous year. To give legal recognition to the provision made by the employer in his account deducting an estimated service gratuity payable to the employees from the taxable income where the provision has been made on scientific basis in the form of an actuarial valuation, the Legislature enacted section 40A(7). Clause (a) of the said sub-section provides that no deduction will be allowed in respect of any provision (whether called as suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction during the relevant assessment years under section 40A(7) of the Act towards gratuity, the conditions laid down in that section should be satisfied. The provisions of the section will have effect notwithstanding anything to the contrary contained in any other provision of the Act relating to the computation of income under the head " Profits and gains of business or profession ". According to their Lordships of the Supreme Court, section 40A would have effect notwithstanding anything contained in sections 30 to 39 of the Income-tax Act, vide the decision in Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 (SC). The scope and effect of section 40A(7) was considered by the Supreme Court in the abovementioned decision. The Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment of such gratuity for each year of his service in respect of which such provision is made." It shows that "admissible amount" should not exceed 81% of the salary of each employee entitled to the payment of such gratuity for each year of his service in respect of which such provision is made. This means that in respect of each of the years, provision can be made and deduction can be effected up to 8 1/3% of the salary of each employee entitled to the payment of gratuity. The amount to be paid to an employee towards gratuity for an year can only be 15 days' salary. Fifteen days' salary will be 4 1/6% of the total salary due for the year. Even though while calculating the gratuity, the employee will be getting only 15 days' salary, i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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