1982 (7) TMI 2 - HC - Income Tax

High Court rules on gratuity deduction: Liability accrual with service, actuarial valuation for deduction

The High Court upheld the Tribunal's decision, allowing the deductibility of the incremental liability towards gratuity from the profit of the year. The ... Business Expenditure Issues:1. Deductibility of incremental liability towards gratuity from the profit of the year.Analysis:The case involved a private limited company manufacturing and erecting transmission towers claiming a deduction for provision of gratuity for two directors. The Income Tax Officer (ITO) disallowed the deduction as the gratuity fund was not recognized by the Commissioner of Income-tax and it was only a provision, not an actual payment. The Appellate Assistant Commissioner (AAC) allowed the claim based on Circular No. 47 issued by the Central Board of Direct Taxes. The Tribunal upheld the claim but directed computation of the current year's liability on an incremental basis. The High Court referred to various precedents, including Vazir Sultan Tobacco Co. Ltd. v. CIT, to establish that a provision for gratuity based on actuarial valuation could be claimed as a deduction, even if the actual discharge of the liability arises later. The court emphasized that the liability accrues with each year of service, and a provision on a scientific basis can be spread over years and allowed as a deduction in the year of assessment. The consistent view of the Supreme Court supported the Tribunal's decision, upholding the deductibility of the incremental liability towards gratuity from the profit of the year.In conclusion, the High Court upheld the Tribunal's decision, citing precedents such as Standard Mills Co. Ltd. v. CWT, Metal Box Co. of India Ltd. v. Their Workmen, and Vazir Sultan Tobacco Co. Ltd. v. CIT. The court affirmed that a provision for gratuity based on actuarial valuation can be claimed as a deduction, even if the actual payment occurs later. The judgment emphasized the accrual of liability with each year of service and the allowance of a provision on a scientific basis as a deduction in the year of assessment. The decision was in favor of the assessee, allowing the deductibility of the incremental liability towards gratuity from the profit of the year.