An assessee-company cannot claim a deduction for gratuity liability under section 40A(7) of the Income Tax Act, 1961, if it has not complied with the conditions under the section.

S. M. ALI MOHAMED J.

This reference under section 256(1) of the Income-tax Act, 1961 (hereinafter called "the Act"), has been made by the Income-tax Appellate Tribunal, Madras Bench "A", on the following three questions for the opinion of this court, namely

"1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in disallowing the claim of the assessee for deduction of Rs. 1, 56, 098 which represented the accrued liability of the assessee for the payment of gratuity to its employees based on actuarial valuation pertaining to the accounting year ended March 31, 1974 ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in coming to the conclusion that the assessee had not satisfied the requirements of section 40A(7)(b) of the Income-tax Act for claiming deduction of the provision for gratuity amounting to Rs. 4, 30, 245 made in the company's accounts for the year ended March 31, 1974, over and above the sum of Rs. 1, 56, 098 which represented the liability for the payment of gratuity for the accounting year ended March 31, 1974 ?

3. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in disallowing the claim of the assessee for deduction of Rs. 4, 30, 245 which represented the provision made by the assessee-company in its accounts for the year ended March 31, 1974, for payment of gratuity to its employees based on actuarial valuation ?" *

The relevant facts of the case are as follows

The assessee is a public limited company. The reference relates to the assessment year 1974-75, the relevant previous year being the financial year ending on March 31, 1974. Till the end of March 31, 1973, the assessee-company did not derive any taxable income, having sustained heavy losses for the earlier year. The assessee-company had carried forward depreciation allowance and development rebate. After the passing of the Payment of Gratuity Act, the assessee-company worked out its actuarial liability for the payment of gratuity as on March 31, 1973, at Rs. 4, 30, 245. The assessee's claim for deduction of this amount for the assessment year 1973-74 was not allowed by the Income-tax Officer, who held that it was a contingent liability and that only the actual amount of gratuity paid to an approved gratuity fund would be an admissible deduction under section 36(1)(v). For the accounting year, relevant to the assessment year 1974-75, the assessee made substantial profits and it adjusted the unabsorbed depreciation of the earlier years as well as the depreciation for the current year. The assessee found that its liability to pay gratuity in respect of its working for the previous year for this assessment year on actuarial valuation was only Rs. 1, 56, 098. Consequent on the adjustment of the earlier years and current years depreciation and development rebate of the earlier years, the assessee declared a nil income for the assessment year 197475. However, the assessee created a development rebate reserve of Rs. 3 lakhs in its accounts for the year ended March 31, 1974, and claimed before the Income-tax Officer the deduction for the sum of Rs. 1, 56, 098 being the actuarial valuation of the incremental liability and development rebate brought forward from earlier years. The assessee had created a provision for gratuity amounting to Rs. 4, 30, 245 in the accounts for the accounting year ended March 31, 1974. It also created a trust and applied for the approval of the trust. The Commissioner of Income-tax, by his order dated March 9, 1979, approved the assessee's gratuity fund with effect, from December 22, 1975. However, the assessee had not made payments to the gratuity fund as envisaged under section 40A(7), viz., the payments which should have been made in respect of the amount contemplated under section 40A(7)(b)(ii) in two instalments before April 1, 1976, and April 1, 1977The Income-tax Officer did not allow the assessee's