Gratuity expense claim where liability is transferred to a related concern treated as discharge, permitting deduction on that basis.

Treatment of gratuity expense where employer transfers the gratuity liability to a related concern: the transfer of the obligation by journal entry was treated as discharge of the employer's liability arising from services rendered, and accordingly the gratuity amount was claimed as an allowable expenditure under the tax provisions referenced. The analysis contrasts actual payment to an employee with transfer of liability to another entity, concluding that transferring the obligation to a related concern extinguishes the transferring employer's payment obligation and permits deduction for the transferred gratuity amount.

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Issues: Whether the assessee is entitled to deduction of gratuity amounting to Rs.6,51,894/- (transferred to another concern by journal entry) under section 40A(7) read with section 43B of the Income-tax Act, 1961.

Analysis: Relevant provisions concern the allowability of gratuity provisions and the meaning of 'paid' for the purposes of section 43B. The allowance under section 40A(7) requires either payment to an approved fund or actual payment/ discharge of the liability. The facts show that gratuity in respect of the transferred employee was not paid directly to that employee but the employer transferred the gratuity liability to another related concern by passing an accounting transfer entry, thereby effecting discharge of the employer's liability in the books of account. The transfer of liability was recorded with appropriate debit/credit entries and the employee continued in service under the transferee, with the gratuity obligation transferred accordingly. On these facts the liability stood discharged by transfer to the other concern and the expenditure was claimed in profit and loss account as such discharge.

Conclusion: The claim for deduction of the transferred gratuity amount is allowed; the addition disallowing Rs.6,51,894/- is deleted and the appeal is allowed in favour of the assessee.

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