Accrued gratuity provision deductible under mercantile accounting where the estimate is legally and scientifically computed.

Under the mercantile system, an accrued and properly ascertained gratuity liability could be deducted for an assessment year governed by the unamended Income-tax Act, 1961. The assessee's provision for estimated gratuity payable to non-working journalists was held allowable because the liability had accrued during the relevant accounting period and the estimate was shown to be based on a legal and scientific basis. As section 40A(7) had not yet been inserted, the deduction was not disallowed on the later statutory restriction, and the answer was against the Revenue.

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Issues: Whether the assessee was entitled to deduction of the estimated gratuity payable to non-working journalists when the provision for gratuity was shown to be based on a legal and scientific basis, in the assessment year governed by the unamended Income-tax Act, 1961.

Analysis: The assessee maintained its accounts on the mercantile system and the liability to pay gratuity had accrued during the relevant accounting period. The assessment year in question preceded the insertion of sub-section (7) in section 40A of the Income-tax Act, 1961. On the legal position governing that period, and in the light of the principle that an accrued and properly ascertained liability may be allowed as a deduction, the estimate of gratuity provision, if founded on a legal and scientific basis, was admissible.

Conclusion: The deduction of the estimated gratuity payable to non-working journalists was allowable, provided the provision was calculated on a legal and scientific basis, and the answer was against the Revenue.

Ratio Decidendi: For an assessment year governed by the unamended Income-tax Act, 1961, a gratuity provision based on an accrued liability and computed on a legal and scientific basis is deductible under the mercantile system of accounting.

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