Section 40A (7): Disallowance of Gratuity

Section 40A (7): Disallowance of Gratuity :-

 (a) Subject to the provisions of clause (b), no deduction shall be allowed in respect of any provision whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason.

(b) Nothing in clause (a) shall apply in relation to any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year.

Explanation.—For the removal of doubts, it is hereby declared that where any provision made by the assessee for the payment of gratuity to his employees on their retirement or termination of their employment for any reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity to any employee shall not be allowed as a deduction in computing the income of the assessee of the previous year in which the sum is so paid.]

Question:  When the Gratuity is paid due to the cessation of the Employment to the employees during the previous year and no provision has been made earlier and neither the amount was contributed to the approved gratuity fund, whether the same is allowed as deduction ?

Answer . It is allowed as deduction: Where employees of assessee-co-operative bank on promotion ceased to be employees of assessee and inducted in apex bank, gratuity paid to such employees on cessation of their employment with assessee was allowable as deduction

[2013] 40 taxmann.com 163 (Amritsar - Trib.) IN THE ITAT AMRITSAR BENCH

Fazilka Central Co-op. Bank Ltd. v. Deputy Commissioner of Income-tax

Question: Whether the Premium paid to LIC for securing an insurance against liabilities arising under Payment of Gratuity Act, 1972 without getting the gratuity fund approved is allowed as deduction ?

Answer. Premium paid to LIC for securing an insurance against liabilities arising under Payment of Gratuity Act, 1972 was hit by provisions of section 40A(7)(a ) and, hence, was not deductible [2010] 325 ITR 583 (ALL.) HIGH COURT OF ALLAHABAD Commissioner of Income-tax

v. Pradeshiya Industrial & Investment Corpn. of U.P. Ltd.

Question  When the issue of provision for gratuity having been specifically examined by Assessing Officer in original assessment can the Assesseing Officer reopen the Assessement ?

Answer No . Section 40A(7), read with section 147, of the Income-tax Act, 1961 - Certain deductions - Gratuity, provision for [Reassessment] - Assessment year 2005-06 - Assessing Officer sought to re-open assessment on ground that provision for payment of gratuity had been wrongly allowed as deduction though it was an inadmissible expenditure as per tax audit report submitted by assessee - Reasons recorded by Assessing Officer itself showed that provision for gratuity had been shown in tax audit report submitted by assessee during assessment proceeding - Whether issue having been specifically examined by Assessing Officer in assessment, reopening amounted to a mere change in opinion - Held, yes [2013] 36 taxmann.com 106 (Delhi) HIGH COURT OF DELHI Microsoft Corpn. (I) (P.) Ltd. V.  Deputy Commissioner of Income-tax

Question : Where the Provision for Approved Gratuity  Fund is made but not paid , whether the same can be disallowed u/s 43B ?

Answer .The Provision can not be disallowed u/s 43B, Whether exception carved out in section 40A(7)(b), being a provision of special nature dealing with provision made for payment of a sum by way of any contribution towards an approved gratuity fund, etc., will prevail over general provisions of section 43B(b), dealing with contribution to any gratuity fund - Held, yes - Whether allowability of any provisions for payment of any contribution towards approved gratuity fund will be governed by exceptions carved out in section 40A(7)(b) and contrary provision contained in section 43B would not apply - Held, yes [2006] 9 SOT 349 (BANG.) IN THE ITAT BANGALORE BENCH ‘B’ Hinduja Exports v. Joint Commissioner of Income-tax, Spl. Range II, Bangalore

Question : Can the assessee claim the provision of additional liability of Gratuity towards the approved gratuity fund as a result of Actuarial Valuation ?

Answer : Yes , Section 40A(7) of the Income-tax Act, 1961 - Business disallowance - Gratuity - Assessment year 1978-79 - Assessee claimed deduction of certain sum being additional liability for gratuity in respect of year 1977 as a result of actuarial valuation - Tribunal held that amount in question represented additional liability and was nothing but a provision created in accounts of assessee in year in question inasmuch as amount had not been expended in relevant assessment year and disallowed assessee’s claim under section 40A(7) - Whether in view of section 40A(7)(b), assessee was entitled to deduction under section 40A(7) - Held, yes [2007] 160 TAXMAN 316 (KAR.) HIGH COURT OF KARNATAKA Motor Industries Co. Ltd.  v. Commissioner of Income-tax, Bangalore