Deduction for Provision to Approved Gratuity Fund Allowed

Deduction for Provision to Approved Gratuity Fund Allowed Under Specific Section 40A(7)(b) Over Section 43B

Issue

Whether a provision made towards a contribution to an approved gratuity fund is allowable as a deduction under Section 40A(7)(b) of the Income-tax Act, 1961 (Section 36 of the Income-tax Act, 2025), or if it can be disallowed under the generic provisions of Section 43B(b) for non-payment before the return filing due date.

Facts

Deduction Claim: For Assessment Year 2005-06, the assessee claimed a deduction in respect of a provision made toward contribution to an approved gratuity fund.
Department’s Objection: The Assessing Officer / Department treated the claim as hit by Section 43B(b) on the ground that the provisioned amount was not actually paid before the due date for filing the return of income.
Specific Provision Applicability: The assessee contended that its claim fell specifically under Section 40A(7)(b), which governs provisions for approved gratuity funds.

Decision

Specific vs. General Provision: Section 40A(7)(b) specifically deals with provisions made toward an approved gratuity fund, whereas Section 43B refers in generic terms to payments made to a gratuity fund.
No Statutory Conflict: There is no conflict in applying the specific provisions of Section 40A(7)(b) in preference to the generic conditions of Section 43B in cases involving an approved gratuity fund.
Conclusion: The assessee’s claim for deduction toward the provision for an approved gratuity fund was held to be justified and allowable [In favour of assessee].

Key Takeaways

Precedence of Specific Provisions: Specific provisions in the Income-tax Act (Section 40A(7)(b)) override general statutory disallowance provisions (Section 43B) under the principle generalia specialibus non derogant.
Approved Gratuity Fund Treatment: Provisions made toward an approved gratuity fund meeting the criteria of Section 40A(7)(b) are eligible for deduction, irrespective of the strict actual payment timeline restrictions under Section 43B.
Distinction Between Approved and Unapproved Funds: The protection under Section 40A(7)(b) applies strictly to funds that hold formal approval under the Income-tax Rules.

HIGH COURT OF MADRAS

Commissioner of Income-tax

Flowserve Sanmar Ltd.

Dr. Anita Sumanth and K. Rajasekar, JJ.

TCA No. 257 of 2015

OCTOBER 12, 2026

T. Ravikumar, Sr. Standing Counsel for the Appellant. Vikram Vijayaraghavan and Subbaraya Aiyar Padmanabhan for the Respondent.

JUDGMENT

Dr. Anita Sumanth, J. – We have heard Mr.T.Ravikumar, learned Senior Standing Counsel, for the appellant/Department and Mr.Vikram Vijayaraghavan, learned counsel for the respondent/assessee.

2. The substantial questions of law arising in this appeal that have been admitted on 08.06.2015 are as follows:

“1)

Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the proceeding under Section 263 was debatable and therefore cannot be invoked?

Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the disallowance made u/s 40A overrides the provisions of Section 40A(7) and the fact remains that the assessee case squarely falls under Section 43B(b) which clearly calls for disallowance in respect of deduction which is otherwise allowable under any other provisions of the Act?

Is not the finding of the Tribunal bad, especially when the assessee has claimed as a deduction based on a provision for gratuity which was not paid before the due date for filing of the return in the assessment year 2005-06 which is against the statute and is contrary to law?”

3. Both learned counsel would accede to the position that the issues, as above, are covered by a decision of this Court in Sanmar Speciality Chemicals Ltd. v. Asstt. CIT (Madras)/TC(A) No.493 of 2013 pronounced on 24.03.2025, the operative portion of which reads as follows:

“16. Section 40A adumbrates those categories of expenses/payments that are not deductible under certain circumstances. Sub-section (1) to Section 40A contains a categoric, non-obstante declaration to the effect that the provisions of Section 40A shall have effect, notwithstanding anything to the contrary contained in any other provision of the Income-Tax Act, 1961 relating to the computation of income under the head ‘Profits and Gains of Business or Profession’.

17. Sub-section 7(a) of Section 40A reads thus:-

“40(A) Expenses or payments not deductible in certain circumstances.-

(1)

The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head “Profits and gains of business or profession”.

(7)

(a) No 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. “

18. Clause (a) of Section 40A(7) states that no deduction shall be allowed in respect of any provision made by the assessee for the payment of gratuity to their employees on their retirement or on termination. Clause (b) carves out an exception to the stipulation under clause (a), to the extent of a contribution made towards an approved gratuity fund or for the purpose of payment of any gratuity that has become payable during the previous year.

19. Section 43B too commences with a non obstante clause that ‘notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of – expenditures adumbrated in clauses (a) to (h) of that Section shall be allowed only if actually paid by that assessee.

20. We are concerned with two special provisions as both Sections 43B and 40A commence with non – obstante clauses. In such situations, one may make useful reference to a series of judgments of the Supreme Court dealing with preference to be accorded in the case of an interpretation involving two special provisions.

21. Three Judges of the Supreme Court in Sarwan Singh and anr v KasturiLal [AIR 1997 SC 265] stated that, where both the enactments in question contain a non obstante clause and ‘when two or more laws operate in the same field and each contains a non obtante clause stating that its provisions will override those of any other law, stimulating and incisive problems of interpretation arise since statutory interpretation has no conventional protocol case of such conflict has to be decided in reference to the object and purpose of the laws under consideration’.

22. In R.S.Ragunath v State of Karnataka and Ors [AIR 1992 SC 81], the Supreme Court noted its earlier observations in the case of Justiniane Augusto De Piedade Barreto v Antonio Vincente Da Fortseca and ors [AIR 1979 SC 984] to the effect that a law which is essentially general in nature may contain special provisions on certain matters and in respect of these matters it would be classified as a special law. Therefore unless the special law is abrogated by express repeal or by making provisions which arc wholly inconsistent with it, the special law cannot be held to have been abrogated by mere implication.

23. In Ashoka Marketing Limited and anr v Punjab National Bank and others, [AIR 1991 SC 855], a Constitution Bench of the Supreme Court also considered two special enactments, the Public Premises Act and the Rent Control Act and which would override the other. They concluded as follows:-

One such principle of statutory interpretation which is applied is contained in the latin maxim: leges posteriors priores conterarias abrogant, (later laws abrogate earlier contrary laws). This principle is subject to the exception embodied in the maxim: generalia specialibus non derogant, (a general provision does not derogate from a special one). This means that where the literal meaning of the general enactment covers a situation for which specific provision is made by another enactment contained in an earlier Act, it is presumed that the situation was intended to continue to be dealt with by the specific provision rather than the later general one (Benion: Statutory Interpretation p. 433-34).

24. The Rule that a general provision should yield to specific provision springs from the common understanding that when two directions are given one encompassing a large number of matters in general and another to only some, the latter directions should prevail as being more specific in nature. Section 40A has been inserted by the Finance Act, 1968 with effect from 01.04.1968 whereas Section 43B has been inserted later vide Finance Act, 1983 with effect from 01.04.1984.

25. One of the parameters to determine priority of one legislation / provision over the other, is as to which was the later provision and the general understanding is that the later would prevail. However, in the present case, the provisions of Section 40(A)(7), particularly clause (b) are specific to a claim of deduction based on a provision for payment towards an approved gratuity fund.

26. This is a stipulation which does not feature in the other provision i.e., Section 43B which is general its application and, relates to a ‘gratuity fund’ in clause (b) thereof in general terms. Seen in that context, the two provisions could be reconciled easily as, in our considered view, there is no real conflict inter se.

27. Had Section 43B also made reference to an approved gratuity fund, a conflict might have arisen. In the present circumstances, where Section 40(A)(7)(b) refers specifically to an approved gratuity fund and Section 43B, in generic terms, to a gratuity fund, we see no conflict in applying the provision of Section 40(A)(7)(b) in preference to Section 43B in the case of an approved gratuity fund.

28. The decisions in Commonwealth Trust (I) Limited (Kerala High Court) and Bechtel India Private Limited (Delhi High Court), support the legal position canvassed by the assessee on all fours. In Commonwealth Trust (supra), the Court answered this issue in favour of the assessee after a detailed discussion where the provisions of Sections 43B and 40(A)(7) have been compared and several case law referred.

29. In Betchal India (supra) the Court was concerned with the computation under Section 115JB of the Act, being Minimum Alternate Tax. On the issue of allowability of the claim for gratuity, the Court accepts the assessee’s stand noting thus:

“6. Further, we are in agreement with the Tribunal that s.40A(7)(b) of the Act will have an overriding effect over s.43B of the Act. In the first place s.40A(1) is an unequivocal non obstante clause and since S. 40A(7)(b) specifically permits a deduction of a sum constituting the provision towards an approved gratuity fund, the said provision will take precedence over a comparatively general provision like s.43B. Secondly, s.40A(7)(a) which disallows deduction of any provision of gratuity to employees on their retirement is itself made subject to s.40A(7)(b) which allows such deduction as long as it is made towards an approved gratuity fund. There is no dispute that in the instant case the provision made is towards contribution to an approved gratuity fund. Therefore the claim by the assessee for deduction on this score was clearly justified. We are accordingly of the opinion that no substantial question of law arises in this regard as well.”

30. We find support for our conclusion at paragraph 20 supra, in the observations of the Delhi Court above to the effect that a specific provision such as Section 40A(7)(b) will take precedence over ‘a comparatively general provision like Section 43B’