Gratuity provision deductible on accrual basis, but year-end liability must be discounted to present value.

A provision for gratuity under the Kerala Industrial Employees Payment of Gratuity Act, 1970 is treated as a statutory liability accruing year to year, so deduction cannot be refused merely because employees have not yet completed five years of service. However, the year-end provision must be measured at present value, and a proper discounted valuation, preferably on actuarial principles, is required to quantify the deductible amount accurately. The basic deductibility in principle is sustained, but the liability must be reworked on a fresh discounted basis.

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Issues: Whether a provision made for gratuity under the Kerala Industrial Employees Payment of Gratuity Act, 1970 was deductible even though the employees had not completed five years of service, and whether the liability required a discounted actuarial valuation.

Analysis: The statutory obligation to pay gratuity creates a liability that accrues from year to year and does not depend, for deduction purposes, on each employee having already completed five years of uninterrupted service. However, the amount claimed as a year-end provision must reflect the present value of the future liability, since payment would arise only in the distant future. A proper discounting of the liability, preferably on actuarial principles, is therefore necessary before the deduction can be correctly quantified.

Conclusion: The deduction could not be denied merely because five years of service had not yet been completed, but the matter had to be remitted for revised valuation after applying an appropriate discount.

Final Conclusion: The appeal succeeded only to the limited extent of requiring a fresh discounted valuation of the gratuity liability, while the basic deductibility of the provision in principle was sustained.

Ratio Decidendi: A provision for gratuity is deductible on a year-to-year accrual basis as a statutory liability, but its amount must be computed on a properly discounted present-value basis.

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