Gratuity provision as application of income under section 11 upheld for charitable trusts; amendment treated as prospective.

A gratuity provision made by a charitable trust on actuarial valuation was treated as a crystallized liability, not a contingent claim, and therefore as application of income under section 11 even though payment was made later. The Tribunal noted that income computation for charitable institutions under section 11 proceeds on receipt and application, so the expenditure charged to the income and expenditure account could be regarded as incurred on accrual basis for earlier years. It also read the Finance Act, 2022 amendment to section 11(7) as prospective from assessment year 2023-24, leaving prior years governed by the earlier position. The disallowance was accordingly reversed.

---

---

Issues: Whether provision for gratuity created on actuarial valuation by a charitable institution is allowable as application of income under section 11 of the Income-tax Act, 1961 for the relevant assessment years, and whether the amendment inserted by Finance Act, 2022 to section 11(7) alters the position only prospectively from assessment year 2023-24.

Analysis: The provision for gratuity was held to be a crystallized and quantified liability, not a contingent claim. In the case of a charitable trust, income is computed under section 11 on the basis of receipt and application, and the expenses charged to the income and expenditure account on actuarial valuation were treated as having been incurred and accounted for, even though payable in a later year. The subsequent amendment inserting the explanation to section 11(7) was read as changing the position prospectively from assessment year 2023-24, indicating that for earlier years such expenditure could still be treated as application of income on accrual basis. The Tribunal also relied on its coordinate bench decisions taking the same view on gratuity provision as application of income.

Conclusion: The provision for gratuity was allowable as application of income for the years under appeal, and the disallowance was set aside.

Final Conclusion: The assessee succeeded in both appeals, and the orders disallowing the gratuity provision as application of income were reversed.

Ratio Decidendi: For assessment years prior to the prospective amendment to section 11(7), a gratuity provision created on actuarial valuation and representing a crystallized liability of a charitable trust can be treated as application of income under section 11 even though payment is made in a later year.

---