Mercantile deduction of gratuity liability follows accrual year, so earlier-year arrears cannot be shifted to a later assessment year.

Under the mercantile system, gratuity liability is deductible only in the accounting year in which it accrues, and it cannot be shifted to a later assessment year merely because the claim is raised later. The Kerala High Court held that gratuity arrears arising under the earlier Ordinance remained governed by the year of accrual; the repeal and saving provision in the later Act did not override the general saving rule, and the assessee was therefore not entitled to deduct the earlier-years gratuity liability in assessment year 1971-72.

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Issues: Whether gratuity liability attributable to earlier years could be deducted in the later assessment year when the liability was claimed under the Kerala Industrial Employees' Payment of Gratuity Act, 1970, despite having arisen under the earlier Ordinance.

Analysis: Under the mercantile system, a deduction is allowable only for liability that accrues during the relevant accounting year. Liability for gratuity arising in earlier years cannot be shifted to a subsequent year merely because the claim is made later. The repeal and saving provision in section 13 of the Act did not evince a contrary intention sufficient to displace the general saving rule in section 4 of the Kerala Interpretation and General Clauses Act, 1125. The liability created under the Ordinance was of an enduring character and continued to bind the assessee, so the deduction had to be taken in the year in which that liability arose.

Conclusion: The assessee was not entitled to deduct the arrears of gratuity for earlier years in the assessment year 1971-72; the claim was disallowed and the answer was against the assessee.

Ratio Decidendi: Under the mercantile system, a liability deductible for income-tax purposes must be one that accrued in the relevant accounting year, and a gratuity liability arising under a temporary or repealed enactment remains deductible only in the year of accrual unless the later law clearly manifests a contrary intention.

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