Ascertained Liability: a gratuity reserve is not deductible where the employer's liability is contingent and valuation is lacking.

Whether a gratuity reserve credited at the end of the previous year constituted an ascertained liability under section 25F is answered by distinguishing liabilities in praesenti from contingent future liabilities: a mere general reserve retained under the assessee's control and not earmarked or transferred does not constitute expenditure and is not deductible. The statutory obligation to pay retrenchment compensation is contingent on future events and, absent a fair, scientific valuation or actual payment, the three established tests - proper revenue expense, fair estimate of amount accrued, and actual expenditure - are not met; accordingly the reserve is not deductible.

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Issues: Whether the sum of Rs. 5,600 credited to a gratuity reserve at the end of the previous year constituted an ascertained liability under section 25F of the Industrial Disputes Act so as to be deductible in computing the assessee's profits for the assessment year 1956-57.

Analysis: The tribunal held that the statutory obligation under section 25F to pay retrenchment compensation made the liability ascertained and permitted provision by the assessee. Examination of the statutory scheme and authorities establishes the distinction between liabilities in praesenti (deductible) and liabilities de futuro or contingent (not deductible). A mere reserve for anticipated or contingent liabilities created by crediting a general reserve account does not amount to expenditure; the assessee retained dominion and control over the fund and did not earmark or transfer sums to specific employees. Even allowing the principle that a truly measurable future liability may be provided for annually, the present case fails both because the employer's liability to pay retrenchment compensation is contingent on future retrenchment events and because the assessee did not make a fair, scientific valuation of the prospective liability (no discounting or reliable appraisement). Established tests require (1) the expense be a proper revenue expense, (2) be a fair and proper estimate of the amount accrued due, and (3) be actually expended; these were not satisfied.

Conclusion: The sum of Rs. 5,600 credited to the gratuity reserve is not an ascertained liability at the end of the previous year and is not deductible; the reference is answered in favour of the department.

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