Gratuity liability on business transfer deductible as provision when it became payable during the year.

Gratuity liability that became presently payable on transfer of part of a business was deductible where the seller accepted a reduction in sale consideration for the ascertained liability. Section 40A(7) governed the claim and had overriding effect for gratuity deductions, so the amount was not allowable under section 37(1). The facts did not require the actuarial valuation and approved fund conditions under section 40A(7)(b)(ii); instead, the liability fell within section 40A(7)(b)(i) as a provision for gratuity that had become payable during the previous year. The deduction was therefore allowed in favour of the assessee.

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Issues: Whether the gratuity liability of employees taken over in a partial sale of business was deductible, and whether the deduction fell under section 37(1) of the Income-tax Act, 1961 or was governed by section 40A(7)(b)(i) of the Income-tax Act, 1961.

Analysis: The assessee sold a part of its tea business and, under the sale arrangement, accepted a reduction in the sale consideration representing ascertained gratuity liability of the transferred employees. The liability for gratuity had arisen on termination of employment consequent on the transfer, and the purchaser undertook to discharge that liability when it became payable. Section 40A(7) has overriding effect in relation to gratuity, and the expression "provision" in that section is to be understood in its ordinary sense. The facts did not attract the actuarial valuation and approved fund requirements of section 40A(7)(b)(ii), but the case fell within the second limb of section 40A(7)(b)(i) because the amount was provided for payment of gratuity that had become payable during the previous year.

Conclusion: The deduction was allowable under section 40A(7)(b)(i) and not under section 37(1); the claim was rightly allowed in favour of the assessee.

Ratio Decidendi: Where gratuity liability becomes presently payable on transfer of a part of business and is discharged by adjustment against the sale consideration, the amount is deductible under section 40A(7)(b)(i) as a provision for gratuity that has become payable during the previous year.

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