Gratuity liability by compensation adjustment remains deductible under statutory acquisition where vesting transfers the business

Gratuity liability up to the date of vesting remained deductible where a business undertaking vested in the State under a statutory acquisition scheme and the gratuity amount was adjusted against compensation payable to the assessee. The legal effect was that direct payment by the assessee to employees was not necessary if the liability was discharged on its behalf through set-off or adjustment under the acquisition framework. The principle, as noted in the cited precedent and approved by the Supreme Court, was applied in favour of allowing the deduction.

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Issues: Whether the amount of gratuity liability was allowable as a deduction under section 40A(7)(b)(i) of the Income-tax Act, 1961 where the business had vested in the State and the gratuity amount was to be adjusted from the compensation payable to the assessee.

Analysis: The business undertaking had been acquired under the Bihar Electricity Supply Undertakings (Acquisition) Act, 1979, and the statutory scheme provided for vesting of the undertaking and deduction from the gross compensation of sums due on account of gratuity. The liability for gratuity related to employees up to the date of vesting. The amount need not be paid directly by the assessee to the employees if, under the acquisition framework, it was discharged on the assessee's behalf by adjustment against compensation. The cited precedent accepted that such discharge of gratuity liability constituted an allowable deduction, and that principle had been approved by the Supreme Court.

Conclusion: The gratuity amount was allowable as a deduction. The question was answered in favour of the assessee and against the Revenue.

Ratio Decidendi: Where a gratuity liability up to the date of transfer or vesting is discharged by adjustment against compensation payable under a statutory acquisition scheme, the liability is deductible even though the payment is not made directly by the assessee to the employees.

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