BITONI LAMPS LTD Vs. COMMISSIONER OF INCOME-TAX

JUDGEMENT

(1.) IN the accounting year relevant to the assessment year 1976-77, the assessee made a provision of Rs. 5,666 towards gratuity which may be found payable in future to its employees and during the assessment, claimed deduction of the same. The Income-tax Officer did not allow deduction as there was no liability for the payment of gratuity during the accounting year, nor had an approved gratuity fund been created. The order was upheld by the Appellate Assistant Commissioner. By the time the matter came up in appeal before the Income-tax Appellate Tribunal, Delhi, the Commissioner of Income-tax had granted approval to the gratuity fund with effect from August 18, 1980. The assessee pressed into service this fact for claiming deduction but the Tribunal rejected the appeal with the observation that the gratuity fund had not been approved during the relevant previous year and thus the matter was not covered by Section 40a (7) (b) (i) of the Income-tax Act, 1961 (hereinafter called "the Act" ). On these facts, the assessee got the following question referred for the opinion of this court:

(2.) SECTION 40a (7) (a) of the Act provides that no deduction shall be allowed in respect of any provision made by the assessee for the payment of gratuity to its employees on their retirement or on termination of their employment but this is subject to the provisions of Clause (b ). Clause (b) falls for our determination and the relevant portion of the same deserves to be reproduced:

(3.) THE exceptions contained in the aforesaid provision are two : (1) when provision is made for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, and (2) when provision is made for the purpose of any gratuity that has become payable during the previous year. For meeting the liability in future, no deduction is permissible. In this case, during the relevant period, there was no approved gratuity fund and the question of contributing towards that fund did not arise nor was any liability created during the previous year so as to make a provision for payment of gratuity. Both the ingredients being absent in this case, deduction could not be allowed. The view we have taken finds support from a decision of the apex court in Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 (SC ). The relevant observations are as follows (headnote) :