Crystallised ex gratia liability allowed as deduction after Board approval, accounting entry and actual payment to employees.

Ex gratia expenditure was held to be an allowable deduction because the liability had crystallised after Board approval, was recorded in the accounts and was actually paid to employees. On those facts, it could not be treated as a contingent liability liable to disallowance under the Income-tax Act. The Tribunal also relied on the fact that the same claim had been accepted in the assessee's own earlier and later assessment years, and it declined to give weight to an out-of-jurisdiction decision cited by the Revenue. The disallowance was therefore unsustainable.

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Issues: Whether the provision/payment towards ex gratia expenses was an allowable deduction or a contingent liability liable to disallowance.

Analysis: The liability towards ex gratia was considered and recommended by the Board, credited in the accounts, and thereafter actually paid to employees. On these facts, the amount had crystallised and could not be treated as a contingent liability. The Tribunal also noted that the same claim had been accepted in the assessee's own case in earlier and later assessment years, and the Revenue's reliance on an out-of-jurisdiction decision did not displace the binding local precedent.

Conclusion: The ex gratia amount was an allowable deduction and the disallowance was unsustainable, in favour of the assessee.

Ratio Decidendi: A liability that has crystallised pursuant to board approval and has been actually paid cannot be characterised as a contingent liability for disallowance under the Income-tax Act.

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