Crystallised gratuity liability paid to transferee company qualifies as revenue expenditure and business deduction

Gratuity liability that had crystallised under the assessee's gratuity scheme on termination of employees' services was treated as an existing business obligation, not a contingent liability. Payment made to the transferee company, with employees' consent, for a closed division while the assessee continued as a going concern was held to be revenue expenditure laid out wholly and exclusively for business and not capital in nature; the payment was therefore an allowable deduction in computing business income.

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Issues: Whether the gratuity amount paid by the assessee to the transferee company for employees whose services were terminated on closure of a division and who were taken over with continuity of service was an allowable deduction in computing business income.

Analysis: The gratuity liability had accrued under the assessee's gratuity scheme on termination of the employees' services. The payment was made in discharge of an existing obligation and not as a contingent liability arising from a mere transfer of business. The earlier retrenchment-compensation ruling was distinguished because gratuity accrues under a different legal scheme and, on the facts, only a part of the assessee's business was closed while the assessee continued as a going concern. The amount paid to the transferee company was held to be an expenditure laid out wholly and exclusively for the business and not capital in nature.

Conclusion: The gratuity payment was an allowable deduction and the question was answered in the affirmative in favour of the assessee.

Ratio Decidendi: Where employees' services are terminated under the assessee's gratuity scheme and the gratuity liability has crystallised, payment made to a transferee company on behalf of those employees with their consent is revenue expenditure incurred wholly and exclusively for the purpose of business.

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