Gratuity liability crystallising in the year and export-development salary can qualify for deduction when statutory conditions and facts support it.

A gratuity provision is deductible when the liability first crystallises in the relevant year under the Payment of Gratuity Act and the statutory conditions for deduction are satisfied; the fact that employees rendered earlier service does not prevent deduction of the full provision. Salary expenditure on staff engaged in export development may also qualify for weighted deduction under section 35B(1)(b)(v) where the activity is substantially export-promotional and the Tribunal's factual allocation is supportable on the record. The result is that both the gratuity claim and the export-related salary deduction were sustained in favour of the assessee.

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Issues: (i) Whether the assessee was entitled to deduction of the full gratuity provision created for meeting liabilities under the Payment of Gratuity Act, 1972, notwithstanding that the employees had rendered service in earlier years; (ii) Whether salary expenditure incurred on staff engaged in export development qualified for weighted deduction under section 35B(1)(b)(v) of the Income-tax Act, 1961.

Issue (i): Whether the assessee was entitled to deduction of the full gratuity provision created for meeting liabilities under the Payment of Gratuity Act, 1972, notwithstanding that the employees had rendered service in earlier years.

Analysis: The liability to pay gratuity arose for the first time when the Payment of Gratuity Act, 1972 came into force during the relevant previous year. The provision was not a mere estimate of an existing pre-ordained obligation from earlier years but represented a liability that crystallised in the accounting year. Since the conditions of section 40A(7)(b)(ii) stood satisfied, the disallowance could not be sustained. The rectification mechanism under section 155(13) was also noted as applicable if the statutory conditions were later fulfilled.

Conclusion: The assessee was entitled to deduction of the entire gratuity provision. The issue is decided in favour of the assessee and against the Revenue.

Issue (ii): Whether salary expenditure incurred on staff engaged in export development qualified for weighted deduction under section 35B(1)(b)(v) of the Income-tax Act, 1961.

Analysis: The expenditure on salaries of staff engaged in export business was treated by the Tribunal as falling substantially within the qualifying export-promotion activity. The allocation of 75 per cent was supported by the departmental circular accepting the earlier Tribunal view and, in any event, the extent of qualifying expenditure was a matter of appreciation of facts and material on record. No sufficient basis was shown to disturb the Tribunal's factual estimate.

Conclusion: The salary expenditure was entitled to weighted deduction to the extent upheld by the Tribunal. The issue is decided in favour of the assessee and against the Revenue.

Final Conclusion: The reference was answered by sustaining the assessee's claims on both the gratuity provision and the export-related salary expenditure, leaving no ground for interference with the Tribunal's view.

Ratio Decidendi: A liability that first crystallises during the relevant previous year is deductible when the statutory conditions for deduction are satisfied, and the extent of qualifying export-promotion expenditure under section 35B may be determined on the basis of factual appreciation where the Tribunal's estimate is supportable.

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