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1Fix the driver behind crashes, sound loss and screen glitches2Repair Windows errors before they cause bigger problems3Scan for outdated or missing drivers - takes under a minuteThe Supreme Court upheld the disallowance of Shree Sajjan Mills Ltd.’s Rs. 20 lakh gratuity provision because it did not satisfy section 40A(7) of the Income-tax Act, 1961. The decision did not disallow every gratuity deduction: the case record says the Tribunal separately allowed Rs. 28,59,431 for which the company had made no provision. The ruling concerns assessment years 1973–74 and 1974–75 and should be read in that historical statutory setting.
What the Supreme Court decided
In Shree Sajjan Mills Ltd. v. Commissioner of Income Tax, M.P., Bhopal and another, decided on 8 October 1985, the Supreme Court dismissed the Revenue’s appeals and sustained the High Court’s decision. The central issue was whether the company could claim a deduction for gratuity without complying with section 40A(7). The reproduced judgment and case record describe the provision as restricting deductions for gratuity provisions, subject to the exceptions set out in clause (b). Read the reproduced judgment.
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The Court’s reasoning rejected using the general business-expenditure provision, section 37(1), to get around section 40A(7)’s specific restriction. The case is therefore not a rule that gratuity is never deductible; it distinguishes an inadequately compliant provision from an amount claimed in circumstances where no provision had been made.
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The company claimed a total gratuity liability of Rs. 48,59,431. The record distinguishes the Rs. 20 lakh provision from the remaining actuarially determined balance:
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| Amount in the case record | Provision made in the books? | Treatment described in the record |
|---|---|---|
| Rs. 20 lakh | Yes; the provision did not meet section 40A(7)’s requirements | Disallowed |
| Rs. 28,59,431 | No provision had been made for this balance | The Tribunal allowed it under section 37(1); the Revenue challenged that allowance, and the Supreme Court dismissed the appeals |
| Rs. 48,59,431 | Total gratuity liability claimed | The total is the sum of the two amounts above, not a single deduction outcome |
These are figures from this case, not general limits or thresholds. The distinction matters: the judgment upheld disallowance of the non-compliant provision while leaving intact the reported allowance for the balance for which no provision had been made.
Why section 40A(7) mattered
Section 40A is a set of rules that can restrict deductions otherwise claimed in computing business income. Section 40A(7) addresses provisions made for gratuity and includes exceptions in clause (b). The statutory text is available on the Income Tax Department’s section 40A page.
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For this dispute, the key point was that section 37(1)’s general deduction language could not be used to evade the specific gratuity-provision requirements in section 40A(7). The outcome depended on the legal and factual category of each amount, including whether a provision was made and whether the statutory exception requirements were met. It should not be reduced to a broad claim that every gratuity liability is treated alike.
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The Court’s framing of when gratuity becomes payable
The reproduced judgment describes gratuity, in ordinary terms, as payment by an employer to an employee on retirement or termination of service, with the right to receive it accruing on retirement or termination. That passage explains the Court’s framing of the liability in this case; it should not be treated as a complete accounting rule or as a statement of all tax treatment in other situations.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What the decision means—and does not mean—today
This is a Supreme Court decision from 1985 about assessment years 1973–74 and 1974–75. It explains how section 40A(7) operated in the dispute before the Court, but it is not, by itself, a complete guide to present-day tax treatment. The applicable statutory text and amendments for a later assessment year must be checked separately. The Income Tax Department’s section 40A page provides statutory context, but the historical result should not be applied to a current claim without confirming the law applicable to that year.
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