Accrued gratuity liability deductible on mercantile principles, but asset-sale allowance fails when transfer occurs in a later year

A statutory gratuity liability that accrued during the accounting year was treated as a present and deductible business outgoing on mercantile principles, even though payment would arise later on a future event, and the deduction was therefore allowed. By contrast, allowance under section 32(1)(iii) depended on the previous year in which the sale or transfer of the assets actually occurred; because the sale deed was executed only in the following accounting year, the claim for that year was premature and was rejected.

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Issues: (i) Whether the amount retained out of the sale price towards gratuity liability was deductible in computing the assessee's business loss for the relevant assessment year; (ii) Whether the assessee was entitled to deduction under section 32(1)(iii) of the Income-tax Act, 1961 in respect of plant, machinery and buildings where the sale deed was executed in the following accounting year.

Issue (i): Whether the amount retained out of the sale price towards gratuity liability was deductible in computing the assessee's business loss for the relevant assessment year.

Analysis: Gratuity imposed by the statute was treated as a present and accrued liability, even though payment would arise later on the happening of a future event. The mercantile system permitted deduction of the present value of such future payment where the liability had arisen during the accounting year. The distinction between an accrued liability and a purely contingent liability was controlling. The transfer of the business did not convert the statutory gratuity liability into a contingent or non-deductible outgoing, because the liability had already arisen during the accounting year when the gratuity law came into force and covered past as well as current service.

Conclusion: The deduction was allowable and the issue was answered in favour of the assessee.

Issue (ii): Whether the assessee was entitled to deduction under section 32(1)(iii) of the Income-tax Act, 1961 in respect of plant, machinery and buildings where the sale deed was executed in the following accounting year.

Analysis: The deduction under section 32(1)(iii) is linked to the previous year in which the sale, discard, demolition or destruction takes place. Since the actual transfer by deed occurred after the relevant accounting year, the statutory condition for claiming the allowance in that year was not satisfied. The claim was therefore premature for the assessment year in question and could only arise in the subsequent year.

Conclusion: The deduction was not allowable for the relevant assessment year and the issue was answered in favour of the Revenue.

Final Conclusion: The reference was answered partly for the assessee and partly for the Revenue, with the gratuity-related deduction allowed and the depreciation-type claim under section 32(1)(iii) rejected for the year in question.

Ratio Decidendi: A statutory gratuity liability that accrues during the accounting year is a present liability deductible on mercantile principles, whereas an allowance tied to sale of assets can be claimed only in the previous year in which the sale actually occurs.

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