Gratuity deduction under section 40A(7)(b)(ii) required fresh scrutiny on statutory conditions and earlier interpretation.

Section 40A(7)(b)(ii) governed the deductibility of gratuity liability claimed on an actuarial basis, and the Court noted that the relevant second and third statutory conditions had not been examined in the light of its earlier interpretation. Because the allowance previously granted had been displaced after a later circular, the deduction question required fresh scrutiny on whether the statutory conditions were in fact met. The matter was therefore remitted to the High Court for reconsideration of gratuity deduction under the correct legal standard.

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Issues: Whether the claim for deduction of gratuity liability required reconsideration in the light of section 40A(7)(b)(ii) of the Income-tax Act, 1961, as construed earlier by the Court.

Analysis: The respondent had claimed deduction of gratuity liability on an actuarial basis. The earlier allowance had been displaced after the later circular, and the High Court had directed allowance of the deduction. The Court noted that compliance with the second and third conditions in section 40A(7)(b)(ii) had not been examined in the light of the governing interpretation and that the matter required fresh scrutiny on those conditions.

Conclusion: The matter was sent back to the High Court for fresh consideration of whether the statutory conditions for deduction of gratuity liability were satisfied.

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