Gratuity deduction denied where transferor merely funded transferee's possible future liability after employee transfer with continuity of service.

A payment made by a transferor-company to the transferee-company for employees taken over with continuity of service was not deductible as gratuity. Because the employees accepted fresh employment with the transferee-company, no enforceable gratuity claim accrued against the transferor on the date of transfer; the payment was only a voluntary contribution toward a possible future liability. The principle applied was that gratuity is deductible only where it is a real business liability paid in satisfaction of an enforceable employee claim, not where funds are provided to another entity to meet its future obligation. Authorities on actuarial valuation of accrued gratuity liabilities were distinguished, and the deduction was denied.

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Issues: Whether the amount paid by the assessee-company to the transferee-company towards gratuity in respect of employees who had been taken over with continuity of service was an allowable deduction.

Analysis: The gratuity scheme operated on cessation of employment, but the employees here accepted fresh employment with the transferee-company with continuity of service. Because of that arrangement, no enforceable right to claim gratuity accrued against the assessee-company on the date of transfer, and the payment made to the transferee-company was not a payment of gratuity to employees. The payment was only a voluntary contribution to enable the transferee-company to meet any future gratuity liability. The authorities dealing with actuarial valuation of gratuity liabilities in commercial accounts were distinguished, because this was not a case of estimating an accrued trading liability for profit computation. The governing principle applied was that an amount is deductible as gratuity only when it is a real liability incurred in the course of business and paid in satisfaction of an enforceable employee claim, not when it is a payment made on transfer of business to fund another entity's future obligation.

Conclusion: The payment was not an allowable deduction.

Ratio Decidendi: Where employees are transferred with continuity of service and no accrued claim for gratuity arises against the transferor, a payment made to the transferee-company to meet a possible future gratuity liability is not expenditure by way of gratuity and is not deductible.

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