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For the assessment year 1974-75, the assessee company sought to deduct a sum of Rs.18,37,727 towards the amount of gratuity payable to its employees and worked out actuarially. The break up of this liability was as follows:

- for periods ending on 31st March, 1972, 31st March, 1973 and 31st March, 1974, assessee's liability was worked out at Rs. 64,31,286. Out of this amount, provision had been made during these years to the tune of Rs. 45,93,559. No provision had been made for the balance amount of Rs. 18,37,727. The claim for deduction was set up on the ground that this liability was ascertained by actuarial valuation and was deductible under section 37(1) of the Act. The Income-tax Officer allowed the deduction of a sum of Rs. 2,65,872 only which was actually paid by the assessee and the rest was disallowed on the ground of non-compliance with the provisions of section 40A(7) of the Act. The assessee preferred an appeal but the same was dismissed by the Commissioner of Income-tax (Appeals). The assessee thereafter preferred a second appeal to the Tribunal. The Tribunal, for the reasons mentioned, held that for the assessment year relating to 1973-74, actuarially ascertained liability for gratuity especially arising under the Payment of Gratuity Act, 1972 was an allowable detection. The Tribunal had consistently taken the view that the assessee would not be eligible for deduction under section 37 in respect of such liability to the extent of the provision made by the assessee in its account without simultaneously conforming to the requirements of section 40A(7). Where however, the actuarially determined liability was not provided for or was in excess of the provision made by the assessee in the books of account, the relevant amount could be allowed as liability under Section 37 as the provisions of section 40A(7) would not reach it.

Civil Appeal NO. 4222 (NT) of 1984 arises out of the assessment year 1973-74. The High Court observed that the assessee company had entered into agreements with the Workers Union for payment of gratuity by the 31st March, 1972. Company's practice was to account for gratuity on cash basis as and when paid. The company had made a provision in its books of account for payment of gratuity to its employees to the extent of Rs. 20,00,000 during the relevant accounting year. With the coming into force of the Payment of Gratuity Act, 1972 with effect from 16th September, 1972, a statutory liability was created of the company to pay gratuity to its employees as per the provisions of the said Act. The assessee company, therefore, arranged for actuarial quantification of its liability for gratuity to its employees. Pending the determination of such an actuarial valuation, the assessee had made a provision of Rs. 20,00,000 Against the total accruing liability till the date of the preparation of the balance-sheet. At the time of the filing of the return of income for the assessment year 1973- 74, the assessee added back this provision for gratuity amounting to Rs. 20,00,000 and claimed the total liability of Rs. 48,59,431 which was the actuarial determination of liability arising under the Payment of Gratuity Act, 1972 in the relevant accounting year.

Before the Income-tax Officer, the assessee claimed deduction of the entire liability of Rs. 49,59,431 as determined actuarially. It was contended that the provisions of section 40A(7) of the Act were not applicable. The Income-tax Officer had disallowed the claim on the ground that there was non-compliance with the requirements of section 40(A)(7) of the Act. The Income-tax Officer allowed deduction only to the extent of actual payment made towards gratuity to the employees during the relevant accounting year. This amount came to Rs. 24,366. The assessee preferred an appeal against the Income-tax Officer, order before the Appellate Assistant Commissioner. The Appellate Assistant commissioner was of the view that provisions of section 40(A)(7) did not constitute any bar to the assessee's claim for deduction as the assessee had not made any provision in its books in respect of the amount of gratuity determined actuarially and the provision of Rs. 20,00,000 had also been added back in the statement of income. However, the Appellate Assistant Commissioner allowed deduction of Rs. 30,25,662 on this head which according to him constituted assessee's liability for the relevant accounting year.

The revenue appealed against this decision. It was contended that the assessee was not entitled to any deduction for gratuity except the amount actually paid because there was non-compliance with the statutory provisions of section 40A(7) of the Act. The Tribunal held that the total liability for gratuity actuarially determined for the accounting year was Rs. 48,59,431. However, the assessee had made a provision of Rs. 20,00,000 without complying with the requirements of section 40A(7) of the Act and, therefore, this sum of Rs. 20 lakhs could not be allowed as deduction. But the balance of Rs. 28,59,431 for which no provision was made in the books was allowable under section 37(1) of the Act.