Business transfer gratuity fund deposits are not deductible when no present liability has accrued under section 37(1).

A sum deposited with a transferee-bank for future gratuity payments to employees was not deductible under section 37(1) of the Income-tax Act, 1961, because it was not an actual payment in discharge of a present accrued liability. After transfer of the banking business, the assessee was treated as not carrying on that business merely by retaining income-yielding assets, so interest, rent, or dividend receipts did not alter the position. The deposit was viewed as a fund kept to meet a future contingency rather than expenditure laid out wholly and exclusively for business purposes. The deduction was therefore disallowed.

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Issues: Whether the sum deposited with the transferee-bank towards future gratuity payments to certain employees was allowable as a deduction under section 37(1) of the Income-tax Act, 1961.

Analysis: The assessee had transferred its banking business to another bank and, under the arrangement, deposited an amount with the transferee for future payment to 27 employees when gratuity became payable. The Court found that after the transfer the assessee had not continued its banking business merely because it retained some assets yielding income, and the receipt of interest, rent, or dividends did not amount to carrying on the banking business. The amount deposited was not an actual payment to employees in discharge of a present gratuity liability arising in the accounting year, but only a fund kept with the transferee to meet a future contingency. Following the principle that expenditure arising on transfer of business and not in the course of carrying on business is outside section 37(1), the claim could not be allowed.

Conclusion: The deduction was not allowable under section 37(1) and the answer was against the assessee and in favour of the revenue.

Ratio Decidendi: A sum set apart or deposited for future gratuity payments after the transfer of a business, in the absence of a present accrued liability and of the assessee carrying on the business in the relevant year, is not expenditure laid out wholly and exclusively for the purposes of business under section 37(1) of the Income-tax Act, 1961.

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