TMI Blog1981 (4) TMI 113X X X X Extracts X X X X X X X X Extracts X X X X ..... of his order. The assessee-company constituted a gratuity fund for the first time with effect from 1-12-1975. This fund was given approval by the Commissioner with effect from 1-12-1975. The initial contribution payable to the fund representing the accrued gratuity liability up to 1-12-1975 amounted to Rs. 71,29,547. The assessee has been allowed to pay the aforesaid amount to the approved gratuity fund in not more than five annual instalments. The assessee actually paid the entire amount in five annual instalments beginning with the year 1975 and ending in the year 1979. The assessment year 1972-73, a sum of Rs. 5,54,744 has already been allowed as deduction representing the incremental liability for gratuity in respect of the calendar ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d' as meaning 'incurred' in cases following the mercantile system of accounting. In this view of the matter, he held that the entire initial contribution payable by the assessee to the approved gratuity fund accrued as a liability during the year under consideration and was admissible as deduction under section 36(1)(v). He observed that the mere fact that the assessee did not actually pay the amount during the year under consideration but paid in five instalments annually, as permitted by the Commissioner, would not make any difference to the allowability of the assessee's claim because of the mercantile system of accounting followed by the assessee. Hence, he allowed the deduction. 16. Shri T.S. Srinivasan urged before us that the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here mercantile system of accounting is followed. Thus, the position is that if there is an approved gratuity fund, then any amount actually paid to it or which has in fact accrued as a liability for payment by way of contribution to it becomes allowable for deduction. Thus, under section 36(1)(v), amounts actually paid or liabilities definitely incurred during the previous year under consideration are deductible if they represent contribution to approved gratuity fund. This is so even if the liability which accrued during the previous year related to the services received by the assessee in the earlier years. Vide Board's Circular No. 30(XLVII-18), dated 30-11-1964 [see Taxman's Direct Taxes Circulars Vol. 1, 1980 edn., pp. 207-08]. 18. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the four corners of sections 36 and 40A . . .". It is, therefore, necessary to look into the provisions of section 40A(7) more closely with a view to understand its implications. 20. Section 40A(1) says that its provisions will have effect notwithstanding anything contained to the contrary in any other provisions of the Act. This means that section 40A has an overriding effect. Section 40A(7) enacts a prohibition regarding deduction of provision for gratuity liability which would have been otherwise allowable under section 36(1)(iv) or section 37 read with section 43(2). Clause (a) of section 40A(7) says that no deduction shall be allowed in respect of any provision for the payment of gratuity by whatsoever name it is called. Its effec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year ;" The above provisions evidently contain two alternatives which can be read as below : A. Any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund that has become payable during the year. B. Any provision made by the assessee for the payment of any gratuity that has become payable during the previous year. We are not concerned with the second alternative in this case, which apparently relates to the amounts that have become payable because of the actual retirement or death of some employees during the previous year under consideration. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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