Gratuity liability deduction under the mercantile system is allowable as an accrued business expense despite unapproved fund status.

Actuarial gratuity liability under the mercantile system was treated as an accrued commercial liability, ascertainable in praesenti though payable later, and therefore deductible in computing business profits. The absence of approval of the employees' gratuity fund under section 36(1)(v) did not, on the facts considered, prevent the claim from falling within section 37(1). The deduction of the discounted value of gratuity liability, together with contribution to the gratuity fund, was held admissible and the issues were answered in favour of the assessee.

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Issues: Whether the assessee was entitled to deduction of the discounted value of its gratuity liability, and of its contribution to the employees' gratuity fund, under section 37(1) of the Income-tax Act, 1961 despite the fund not being approved under section 36(1)(v).

Analysis: The liability for gratuity, as computed on actuarial valuation, was treated as an accrued commercial liability under the mercantile system of accounting. Such liability was regarded as ascertainable in praesenti though payable in future, and therefore deductible in computing business profits. The absence of approval of the gratuity fund did not take the claim outside section 37(1) in the circumstances considered.

Conclusion: The deduction was admissible and the questions were answered in favour of the assessee.

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