Contingent liability reserve is not deductible when retrenchment compensation has not accrued and remains under assessee control.

A provision credited to a gratuity reserve for possible future retrenchment compensation was not an ascertained liability deductible in computing business profits. Liability under section 25F of the Industrial Disputes Act arises only when retrenchment actually occurs, so a mere anticipation of that event remains contingent even under mercantile accounting. Because the amount was neither paid nor credited to employees, was not placed in trust, and stayed under the assessee's control as a reserve, it was not expenditure actually incurred or a fair estimate of a present obligation. The deduction was therefore rightly disallowed.

---

---

Issues: Whether the amount credited to a gratuity reserve account for possible future retrenchment compensation under section 25F of the Industrial Disputes Act, 1947 was an ascertained liability deductible in computing business profits under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis: The liability under section 25F arises only when retrenchment actually takes place and is therefore dependent on a future contingency. A mere provision made in anticipation of a possible retrenchment is not a liability in praesenti, even under the mercantile system of accounting. The amount was not paid out, not credited to the employees, not placed in trust, and remained under the assessee's control as a reserve. The provision was also not shown to be a fair or scientific estimate of the present value of any future obligation, and a reserve for a contingent liability does not amount to expenditure actually incurred.

Conclusion: The amount was not an ascertained liability or deductible expenditure, and the deduction was rightly disallowed.

Ratio Decidendi: A reserve created for a contingent future liability, which is neither accrued nor actually expended and remains under the assessee's dominion, is not deductible in computing taxable business profits.

---