Provision for gratuity and leave encashment accepted when backed by actuarial valuation and reliable estimation methodology.

Provision for gratuity and leave encashment was treated as allowable where supported by an actuarial certificate and a scientific, reliable estimation method. On that basis, the conditions for recognising a provision were satisfied under the governing legal principle. A rectification under section 154 acknowledged that the earlier omission was an oversight and that the claim fell within the binding rule on provision recognition. The addition was therefore deleted and the Revenue's challenge failed.

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Issues: Whether the deletion of the addition made on account of provision for gratuity and leave encashment was justified.

Analysis: The provision for gratuity and leave encashment had been supported by an actuarial certificate and was found to be based on a scientific methodology and reliable estimation. In such circumstances, the conditions for recognition of a provision, as laid down in the governing legal principle, were satisfied. The rectification order under section 154 of the Income-tax Act, 1961 accepted that the earlier omission was an oversight and that the assessee's claim was covered by the binding principle governing recognition of provisions.

Conclusion: The addition was rightly deleted and the Revenue's challenge failed.

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