Deductibility of gratuity liability turns on actual payment or book debit, not a mere contractual obligation in the year claimed.

Gratuity liability created only by agreement was not deductible for the assessment year where it had neither been paid nor debited in the books during the relevant previous year. Applying section 10(2)(x) and section 10(2)(xv) of the Indian Income-tax Act, 1922, together with the regular method of accounting, the Delhi HC held that deduction required an actual outlay or an incurred liability reflected by payment or a corresponding book debit in the year claimed. A merely deferred, unquantified, and unbooked obligation was insufficient, so the deduction was disallowed and the reference was answered against the assessee.

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Issues: Whether gratuity liability created by an agreement but neither paid nor debited in the relevant previous year could be deducted in computing taxable income for that assessment year.

Analysis: The claim was examined under clause (x) and clause (xv) of section 10(2) of the Indian Income-tax Act, 1922, read with the provisions requiring computation according to the regular method of accounting. The Court held that a deduction under clause (x) required the sum to be actually paid or incurred by debit in the books, and that expenditure under clause (xv) likewise had to be a real outlay laid out or expended in the relevant year. Mere creation of a liability by agreement was held insufficient where the amount had not been quantified, paid, or entered as a debit in the year claimed. The authorities relied upon by the assessee were distinguished on the basis that they did not cover a case where the amount had remained neither paid nor properly accounted for in the relevant year.

Conclusion: The deduction was not allowable in the assessment year in question, and the answer to the reference was in the negative, against the assessee.

Ratio Decidendi: For deduction under the 1922 Act, a liability must be actual, quantified, and reflected by payment or a corresponding debit in the relevant accounting year; a merely deferred and unbooked obligation is not deductible.

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