Gratuity deduction under section 40A(7)(b)(ii) denied as incremental liability was held irrelevant to the statutory test.

Deduction under section 40A(7)(b)(ii) for gratuity-related liability was rejected because the Tribunal's reliance on incremental liability was not relevant to the statutory condition. The amount claimed did not exceed 8-1/3% of each employee's salary, but that factor did not alter the legal position. The earlier binding decision on the point governed the issue, so the assessee was held not entitled to the deduction and the reference was answered in favour of the Revenue.

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Issues: Whether the assessee was entitled to deduction of Rs. 1,50,204 for the assessment year 1975-76 under section 40A(7)(b)(ii) of the Income-tax Act, 1961.

Analysis: The Tribunal had allowed the deduction by taking into account an incremental liability, though the amount allowed did not exceed 8-1/3% of the salary of each employee. The controlling principle applied was that incremental liability is not germane to section 40A(7)(b)(ii), and the earlier binding decision on the point governed the issue.

Conclusion: The assessee was not entitled to the deduction, and the question referred was answered in the negative, in favour of the Revenue.

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