Gratuity accrues after retirement under service rules and is taxable in the assessment year of actual accrual.

Gratuity under Rule 11(ii) of the Canara Bank Employees Gratuity Fund accrued only from 1 April 1980, because retirement on 31 March 1980 took effect at the end of that day and the employee was treated as in service until then. The timing of handing over charge on the retirement date did not alter the accrual position. As a result, the gratuity was taxable in assessment year 1981-82 and not in assessment year 1980-81, and the earlier year's addition was unsustainable.

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Issues: Whether gratuity received after retirement on 31 March 1980 became taxable in the assessment year 1980-81 or in the assessment year 1981-82 under Rule 11(ii) of the Canara Bank Employees Gratuity Fund.

Analysis: Rule 11(ii) provided that gratuity due to an employee was payable during the twelve months next following death, disability, resignation, or termination of service. On that basis, the employee continued to be treated as in service till the close of 31 March 1980, and the gratuity became due only from 1 April 1980. The timing of handing over charge on the retirement date did not alter the legal position, because retirement took effect at the end of that day.

Conclusion: The gratuity was taxable in assessment year 1981-82 and not in assessment year 1980-81, and the addition made in the earlier year was unsustainable.

Ratio Decidendi: Where a service rule makes gratuity payable during the period following retirement, the amount accrues only from the day after retirement and is taxable in the assessment year corresponding to that accrual.

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