Provision for estimated service gratuity payable to its employees -Deduction under section 37(1) and section 40A(7) after its insertion by the Finance Act, 1975, with effect from 1-4-1973
Circular No. 169 was issued by the Central Board of Direct Taxes on 23 June 1975. Its subject is Provision for estimated service gratuity payable to its employees -Deduction under section 37(1) and section 40A(7) after its insertion by the Finance Act, 1975, with effect from 1-4-1973.
This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.
Records the statutory end of the deduction for gratuity provisions. Circular No. 47 dated 21 September 1970 had allowed provisions made on a scientific basis for estimated service gratuity as a deduction under section 37(1); that was withdrawn by Circular No. 146 dated 26 September 1974, after which some High Courts held such provisions deductible where made on a scientific basis by actuarial valuation. To remove the uncertainty, Finance Act, 1975 inserted section 40A(7), which denies deduction for mere provisions in the employer's books for gratuity payable to employees on retirement or on termination for any reason. The amendment does not affect provisions made for contributions towards an approved gratuity fund that have become payable during the previous year, or for gratuity that has become payable to employees during the previous year, and those continue to be deductible as before.
There was uncertainty after the Board withdrew its earlier concession and some High Courts took the contrary view on actuarially computed provisions; Parliament settled it by inserting section 40A(7).
Provision for estimated service gratuity payable to its employees -Deduction under section 37(1) and section 40A(7) after its insertion by the Finance Act, 1975, with effect from 1-4-1973
In the Board’s Circular No. 47, dated 21-9-1970 [Clarification 2]. It was stated that provisions made by an assessee in his accounts on a scientific basis in respect of estimated service gratuity payable to employees would be admissible as deduction under section 37(1). The matter was re-examined by the Board in 1974 and the earlier instructions were withdrawn by the Board’s Circular No. 146 dated 26-9-1974 [Clarification 2]. Some of the High Courts have recently taken a view that a provision made by an assessee in his accounts in respect of estimated service gratuity payable to employees will be deductible in computing the taxable income in cases where the provision has been made on a scientific basis in the form of actuarial valuation. In order to remove uncertainty, in the matter, the Finance Act, 1975 has inserted a new sub-section (7) in section 40A which provides that no deduction will be allowed in the computation of taxable profits in respect of mere "provisions" made by employers in their books of account for payment of gratuity to their employees on their retirement or on termination of their employment for any reason. The amendment will not, however, affect provisions made for the purpose of payment of sums by way of contribution towards approved gratuity funds that have become payable during the previous year, or for the purpose of making any payment on account of gratuity to employees where such gratuity has become payable during the previous year and such provisions will continue to be eligible for deduction as hitherto.
Circular : No. 169 (para 27), dated 23-6-1975.
In a scrutiny assessment where a gratuity provision, however actuarially computed, is disallowed under section 40A(7).
Source: the Income Tax Department’s own published text — its page for this instrument.