Guide to .. Tax Management ,Tax Planning and Tax Saving
 

[Section-40A(7)] : Amount Not Deductible in respect of Provision for Un-approved Gratuity Fund.

Gratuity is a liability which normally arises according to the length of the service of the employees' of the assessee. The liability would generally accrue year after year. However, due to practical difficulties in computing the deduction allowable on accrual basis, it has been provided under section 40A(7) that deduction on account of provision for gratuity shall be allowed only when:—

  1. the amount of gratuity has actually become payable during the previous year to the employees' (provided deduction has not been claimed under clause (b) below); or

  2. when a provision has been made for payment of a sum by way of any contribution towards an approved gratuity fund.

Therefore, no deduction shall be allowed in respect of any provision made for the payment of gratuity to the employees, even though the assessee may be following the mercantile system of accounting, unless it is a provision for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund.

In other words, any provision for unapproved gratuity fund (for meeting future liability) is not deductible.

The following points should be noted—

  1. An employee retires during the current year. The employer does not maintain any gratuity fund. Gratuity is paid to him during the current year. It is deductible during the current year.

  2. An employee retires during the current year. Gratuity is payable to him. A part of the amount is paid during the current year and the balance will be paid in the next year. A provision is made towards gratuity in the books of account of the current year for making payment in the next year. The entire amount is deductible during the current year (if no deduction was claimed earlier). In this case, deduction is available during the current year even if provision is made for gratuity fund, which is unapproved.

  3. A company has 50 employees. To meet future liability to pay them gratuity at the time of retirement, a gratuity fund is created and the employer makes contribution every year. Employers’ contribution to this fund is deductible only if the fund is an approved gratuity fund.

Table showing the Amount Deductible in different Cases : -

Cases Deductible Amount

CASE-1 :

X retires from the service of Y Ltd. on May 31, 2018. The company pays gratuity of Rs. 1,60,000, according to the provisions of the Payment of Gratuity Act, 1972. Y Ltd. does not maintain any provision for gratuity account.

Where gratuity is paid during the previous year or where gratuity has become payable during the previous year, it is deductible if no deduction has been claimed on the basis of provisions earlier. Consequently, Rs. 1,60,000 is allowed as deduction for the assessment year 2019-20.

CASE-2 :

Z Ltd. maintains an approved gratuity fund. A sum of Rs. 1,00,000 being the employer’s contribution towards the gratuity fund, is debited to the profit and loss account for the year ending March 31, 2019.

Where any provision is made for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, it is allowed as deduction. It is assumed that provisions of section 43B are satisfied .

Topics...on ‘Profits and Gains of Business or Profession’

Define … ‘Profits and Gains of Business or Profession’ and its Computation (Section 28)
Method of Accounting for Computing Business Income (Section 145)
Principles for Allowing Business Deductions / Allowances from Profits and Gains of Business or Profession.
Expenses Allowed as Deductions against Profits and Gains of Business or Profession [Section-30-37]
[Section 37(1)] : General Or Allowable Deductions under Business or Professions
Business Losses Deductible under the head  'Profits and Gains of Business or Profession'.
Expenses Not Deductible under the head 'Profits and Gains of Business or Profession (Section 40, 40A, 43B)
DEEMED PROFITS Chargeable to Tax as Business Income Under Profits and Gains of Business or Professions [Section 41]
Taxation of Undisclosed Business Income/Investments from Undisclosed Sources
Deduction in respect of Expenditure incurred on setting up of a Specified Business [Section-35AD] :
When Maintenance of Books of Accounts becomes Compulsory (Section 44AA)
Compulsory Audit of Books of Accounts by Chartered Accountant (Section 44AB)
Computation of Income On Estimated Basis Under Sections 44AD, 44ADA and 44AE

Tag ...

 

Buy..Tax Management Book @ Rs.550 Buy..Tax Management Book @ Rs.550 Buy..Tax Management Book @ Rs.550

Tag ...




Get.. Tally.ERP9 Book + GST Practical Assignment @ Rs.550 Tally.ERP9 Book Online Order Tally.ERP9 Book Content

| About Us | Privacy Policy | Disclaimer | Sitemap |
© 2019 : IncomeTaxManagement.Com