Statutory gratuity liability held deductible where it accrues in the year and can be fairly estimated on actuarial principles.

A statutory gratuity liability that arose during the accounting year was treated as an accrued business expense under mercantile accounting principles. The Court held that profits must be computed after charging liabilities that have genuinely accrued, even if payment is deferred, and that a provision based on reliable actuarial valuation is deductible where the liability is real rather than remote. It further held that contingencies defeating payment were too remote to prevent accrual in substance. The gratuity provision was therefore allowable as a revenue deduction in computing business profits.

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Issues: Whether, for the assessment year 1972-73, the provision made for gratuity under the newly introduced statutory gratuity regime was an allowable deduction in computing business profits.

Analysis: The statutory gratuity obligation arose for the first time during the relevant year under the West Bengal Employees' Payment of Compulsory Gratuity Act, 1971. The Court applied the commercial principle that profits must be computed after charging liabilities that have accrued in the accounting year, even if the actual payment is deferred. It relied on the distinction between a merely remote contingency and a real liability capable of fair actuarial estimation, and held that a provision based on a reliable actuarial valuation could be treated as a proper business deduction. The Court further noted that the statutory contingencies defeating liability were too remote to destroy the accrual of the liability in substance.

Conclusion: The provision for gratuity was an allowable revenue deduction and the answer to the reference was in the affirmative, in favour of the assessee.

Final Conclusion: A statutory gratuity liability that accrues during the accounting year and is capable of reasonable actuarial estimation is deductible in computing taxable business profits under mercantile accounting principles.

Ratio Decidendi: A liability created by statute during the accounting year, though payable in the future and subject only to remote contingencies, is an accrued business liability deductible in computing true profits if its present value can be fairly estimated on commercial principles.

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