Actuarial gratuity provision deductible when statutory conditions are met; incremental liability limitation under section 40A(7) rejected.

Actuarial provision for gratuity was deductible where it was made for the relevant previous year, reflected ascertainable liability, did not exceed the admissible amount, and an approved gratuity fund had been created with the required contribution conditions satisfied. Section 40A(7) generally disallows gratuity provisions, but preserves qualifying provisions, and Explanation 2 makes such deduction available in the year of provision without waiting for actual payment. The distinction between initial liability and incremental liability was treated as irrelevant after section 40A(7), so the departmental restriction on deduction failed.

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Issues: Whether the assessee's provision for gratuity, made on actuarial valuation for the previous year relevant to assessment year 1975-76, was deductible under section 40A(7)(b)(ii) of the Income-tax Act, 1961, and whether the allowance was confined only to incremental liability.

Analysis: Section 40A(7) disallows gratuity provisions generally, but preserves certain provisions where the amount does not exceed the admissible amount, the provision is based on actuarial valuation of ascertainable liability, an approved gratuity fund is created, and the required contribution conditions are satisfied. The provision in question was made for the relevant previous year, was based on actuarial valuation, did not exceed the admissible amount, and the fund was created and approved. Explanation 2 shows that the saved provision is deductible in the year in which it is made, without waiting for actual payment. The distinction sought to be drawn between initial liability and incremental liability was held to be irrelevant after the enactment of section 40A(7).

Conclusion: The gratuity provision was deductible in assessment year 1975-76 under section 40A(7)(b)(ii), and the departmental contention limiting deduction to incremental liability failed.

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