NATHALAL ASHARAM Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee registered firm filed its return for Samvat year 2030, i.e., year ended on November 13, 1974, showing total income of Rs. 11,34,329. Admittedly, the business of the firm was closed at the end of the year. The assessee made a provision of Rs. 74,500 in the gratuity account at the close of the year for all the six employees of the firm. Before the ITO, the assessee had claimed deduction in respect of the said amount on the ground that the provision was made on account of the retrenchment of these employees due to closure of the firm and considering their past services. The ITO considered the said claim of the assessee under S. 40A(7)(a) and (b) of the IT Act, 1961 (hereinafter referred to as "the Act"), and held that no such deduction was allowable to the assessee.

(2.) IN its appeal before the AAC, it was contended by the assessee that, though the payment was described as gratuity, it was not by way of gratuity but was compensation for the termination of the services of the employees of the firm. It was, in terms, contended that there was a statutory obligation on the assessee to pay such retrenchment compensation in view of the provisions of s. 25FFF of the Industrial Disputes Act, 1947. The AAC, after examining the relevant provisions of the Industrial Disputes Act, upheld the contention of the assessee that it was under a statutory obligation to pay to its employees compensation in view of the provisions of S. 25FFF of the Industrial Disputes Act. The assessee had worked out the compensation amount under the said provision payable to the employees at Rs. 51,800 and the AAC, accepting that figure, partly allowed the appeal to that extent.

(3.) THE assessee, feeling aggrieved by the decision of the Tribunal, sought reference and, at its instance, the following question has been referred to us, for our opinion, under S. 256(1) of the Act: