Gratuity provision deduction allowed on actuarial valuation where statutory conditions were met and the full admissible amount was within limit.

A gratuity provision made on actuarial valuation was deductible under section 40A(7)(b)(ii) because it satisfied the statutory conditions and did not exceed the admissible limit. The provision was allowable in the year it was created, as Explanation 2 permits deduction on provision basis without awaiting actual payment. The distinction between initial liability and incremental liability was held irrelevant once the provision fell within the saving clause. Accordingly, the full admissible gratuity provision was treated as deductible in computing business income.

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Issues: Whether the gratuity provision made by the assessee for the relevant previous year was deductible under section 40A(7)(b)(ii) of the Income-tax Act, 1961, and whether the allowance was confined to incremental liability or extended to the full admissible provision.

Analysis: The provision was made on actuarial valuation and did not exceed the admissible amount. The statutory scheme of section 40A(7) disallows gratuity provisions generally but saves provisions satisfying the prescribed conditions, and those saved provisions remain deductible in computing business income. Explanation 2 also shows that the deduction is available in the year in which the provision is made, without waiting for actual payment. The distinction between initial liability and incremental liability was held to be irrelevant once the statutory conditions were fulfilled.

Conclusion: The gratuity provision was allowable as a deduction in the relevant assessment year in full, and the Revenue's appeal failed.

Ratio Decidendi: A gratuity provision made on actuarial valuation and within the admissible limit is deductible in the year of provision if it satisfies section 40A(7)(b)(ii), and no distinction is to be drawn between initial and incremental liability for that purpose.

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