TMI Blog1982 (11) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... 31st March, 1972. Company's practice was to account for gratuity on cash basis as and when paid. The company had made a provision in its books of account for payment of gratuity to its employees to the extent of Rs. 20,00,000 during the relevant accounting year. With the coming into force of the Payment of Gratuity Act, 1972, w.e.f. 16th September, 1972, a statutory liability was created on the company to pay gratuity to its employees as per the provisions of the said Act. The assessee-company, therefore, arranged for actuarial determination of its liability for gratuity to its employees. Pending the determination of such an actuarial valuation, the assessee had made a provision of Rs. 20,00,000 against the total accruing liability till the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the Appellate Tribunal. It was contended before the Tribunal that the assessee was not entitled to any deduction for gratuity except the amount actually paid because there was non-compliance with the statutory provisions of s. 40A(7) of the I.T. Act. The Tribunal held that the total liability for gratuity actuarially determined for the accounting year was Rs. 48,59,431. However, the assessee had made a provision of Rs. 20,00,000 without complying with the requirements of s. 40A(7) of the Act and, therefore, this sum of Rs. 20 lakhs could not be allowed as deduction. But the balance of Rs. 28,59,431 for which no provision was made in the books was allowable under s. 37(1) of the I.T. Act. At the instance of the Department the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e I St day of April, 1976, to the extent the amount of such provision does not exceed the admissible amount, if the following conditions are fulfilled, namely : (1) the provision is made in accordance with an actuarial valuation of the ascertainable liability of the assessee for payment of gratuity to his employees on their retirement or on termination of their employment for any reason ; (2) the assessee creates an approved gratuity fund for the exclusive benefit of his employees under an irrevocable trust, the application for the approval of the fund having been made before the I St day of January, 1976; and (3) a sum equal to at least fifty per cent. of the admissible amount, or where any amount has been utilised out of such pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... called as such or by any other name) made by the assessee for the payment of gratuity " occurring in sub-s. 7(a) of s. 40A. Learned counsel argued that for the operation of sub-s. 7(a) of s. 40A of the Act, it is imperative that the assessee should have made any provision for payment of gratuity. If, learned counsel urged, the assessee in its account books has not made any Provision, the bar under sub-s. 7(a) will not apply and the amount of gratuity worked out by the actuarial method and claimed in the return is allowable under s. 37 of the I.T. Act. In fact this very reasoning was adopted by the Appellate Tribunal and a sum of Rs. 20,00,000 shown as provision in the profit and loss account was disallowed for non-compliance with sub-s. 7( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company or branch office, as the case may be, and to explain its transactions." The assessee, therefore, had no option but to maintain accounts in accordance with the provisions of the Companies Act so that " a true and fair view of the state of affairs of the company " for the relevant accounting years was available. The assessee in the present case in accordance with its usual practice had made a provision of Rs. 20 lakhs towards gratuity but after the coming into force of the Payment of Gratuity Act sought to get its liability in that behalf determined by an actuary. It was only a fortuitous circumstance that the actuary did not submit his report to the company before the balance-sheet was drawn up. Had the report been received by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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