Gratuity liability accrual under mercantile accounting did not justify deduction without statutory compliance under income-tax law.

Gratuity liability arising under an industrial tribunal award and accruing in the relevant assessment year may be recognised on the mercantile system even if quantification occurs later, but deductibility depends on satisfaction of the statutory conditions. The absence of an irrevocable trust, by itself, did not establish entitlement to deduction under section 37 of the Income-tax Act, 1961. On the facts found, the claim was not allowable and the reference was answered in favour of the Revenue, with the assessee held not entitled to the deduction.

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Issues: Whether gratuity liability, though not settled under an irrevocable trust and not covered by section 36(1)(v), was deductible as an accrued liability under section 37 of the Income-tax Act, 1961.

Analysis: The liability arose under an industrial tribunal award and related to the relevant assessment year. The assessee maintained accounts on the mercantile system. On those facts, the liability was treated as having accrued during the year, even if quantification took place later. The absence of a trust arrangement did not prevent deduction where the liability had crystallised in the relevant accounting year.

Conclusion: The deduction was not allowable under section 37 on the facts found, and the question was answered in the negative, against the assessee.

Final Conclusion: The reference was answered in favour of the Revenue and the assessee was held not entitled to the claimed deduction.

Ratio Decidendi: A gratuity liability that accrues during the relevant year under the mercantile system may be considered for deduction only if the statutory requirements are satisfied; mere absence of an irrevocable trust does not by itself establish deductibility under section 37.

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