Actuarial gratuity liability and transfer-related settlement payments are deductible as revenue expenditure under accrued business obligations.

Incremental gratuity liability computed on an actuarial basis is treated as an accrued business liability, not a contingent one, and is allowable as a deduction because it represents an ascertainable charge arising year by year. Amounts paid to a transferee to discharge accrued gratuity liability of transferred employees are also deductible, since the payment settles a pre-existing business obligation incurred during the employees' service and is not capital outlay. The note thus recognises both actuarial gratuity provisioning and settlement of transferred gratuity obligations as revenue deductions.

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Issues: (i) Whether incremental gratuity liability computed on actuarial basis was an admissible deduction for the assessment year 1972-73. (ii) Whether the amount paid to the transferee towards accrued gratuity liability of transferred employees was deductible.

Issue (i): Whether incremental gratuity liability computed on actuarial basis was an admissible deduction for the assessment year 1972-73.

Analysis: Gratuity liability, when scientifically determined on an actuarial basis, is not a mere contingent liability but an accrued liability arising year by year. A provision based on such valuation represents a real and ascertainable business liability of the accounting year and is allowable as a deduction.

Conclusion: The issue is answered in favour of the assessee and against the Revenue.

Issue (ii): Whether the amount paid to the transferee towards accrued gratuity liability of transferred employees was deductible.

Analysis: The payment made to the transferee was not a capital outlay but was made to discharge the assessee's accrued gratuity obligation for the period during which the employees served the assessee. The liability had already been incurred in the course of carrying on business, and the settlement merely channelled its discharge through the transferee. Such payment is allowable as business expenditure.

Conclusion: The issue is answered in favour of the assessee and against the Revenue.

Final Conclusion: The gratuity provision on actuarial basis and the amount paid to discharge the accrued gratuity liability on transfer of the business were both allowable deductions.

Ratio Decidendi: An actuarially determined gratuity liability is an accrued business liability and a payment made to discharge such accrued liability in the course of a business transfer is deductible as revenue expenditure.

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