Gratuity insurance premium treated as allowable business expenditure where payment was an actual outgo, not a mere provision.

Premium paid to LIC for insurance cover against liabilities under the Payment of Gratuity Act, 1972 was treated as an actual business outgo, not a mere provision for gratuity. Section 40A(7) disallows provisions for gratuity, but its bar does not extend to actual payments covered by the statutory exception in section 40A(7)(b)(i). On that basis, the premium was held allowable as business expenditure under section 37(1), and the disallowance was unsustainable.

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Issues: Whether the premium paid to the Life Insurance Corporation for covering liabilities under the Payment of Gratuity Act, 1972 was disallowable under section 40A(7) of the Income-tax Act, 1961 or was deductible as business expenditure under section 37(1).

Analysis: The premium was paid as an actual outgo for insurance cover against possible gratuity-related liabilities and not as a mere provision for gratuity. Section 40A(7) applies to provisions made for gratuity, but its prohibition does not extend to actual payments falling within the statutory exception. The expenditure was, therefore, treated as allowable business expenditure and the assessee's case was held to be covered by the exception under section 40A(7)(b)(i).

Conclusion: The disallowance was unsustainable, the premium was allowable under section 37(1), and the assessee succeeded on the issue.

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