Gratuity liability deduction limited where no account provision existed and statutory conditions were not met

Gratuity-related liability claimed on actuarial valuation was not deductible because section 40A(7) requires the statutory conditions for gratuity deduction, including a provision in the accounts and a pre-existing fund, and no provision had been made. Deduction was allowed only for the premium actually paid to cover gratuity liability, limited to the amount of Rs. 66,482; for the balance, there was no proof of provision or actual payment. The development rebate issue was not pressed and did not survive for adjudication.

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Issues: Whether the assessee was entitled to deduction of the gratuity-related liability claimed on actuarial valuation, where no provision had been made in the accounts.

Analysis: The claimed liability fell within section 40A(7) of the Income-tax Act, 1961, which bars deduction towards gratuity unless the statutory conditions are satisfied. Those conditions require, inter alia, the existence of a provision and a pre-existing fund. On the facts found, no provision had been made in the accounts. The alternative basis of deduction for the premium paid to cover gratuity liability was accepted only to the extent of Rs. 66,482, being the amount actually covered by the premium; for the balance, there was neither proof of provision nor actual payment. The question relating to the development rebate was not pressed and did not survive for adjudication.

Conclusion: The assessee was not entitled to the larger claim for gratuity liability, and deduction was confined to Rs. 66,482; the answer was against the assessee.

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