1994 TAX. L. R. 1061 ::(1994) 76 Taxman 309 ::(1994) 122 CurTaxRep 196 ::(1994) 210 ITR 933 ::(1994) 123 Taxation 219

Delhi High Court

Hon'ble Judge(s): K. Shivashankar Bhat, D. K. Jain , JJ

Business expenditure - Provision for gratuity - Scheme for gratuity formulated for first time - Provision for gratuity payable relating to past assessment years - Deduction in Asstt. Year relevant to year in which scheme was formulated, is permissible - Fact that assessee was adopting mercantile system of accounting is immaterial. Income-tax Act (43 of 1961) , S.37, S.145— When a gratuity scheme is introduced for the first time, the gratuity payable to the existing employees who have already rendered some years of service and are still in service, shall have to be considered to make a provision, because, the gratuity payable depends on the entire length of service of an employee. An employee may retire later on, while the scheme is brought into force earlier. By that time he would have rendered, say, 5 years service. The provision for gratuity has to value the liability with reference to 15 years of service, but this is distributed for the entire 15 years, out of which, when the scheme comes into force, a part of the total liability dependent upon the completed 5 years service of the employee has arisen. Though this liability, in turn is referable to each of the previous five years, the legal liability arises only when the gratuity scheme is brought into force. Therefore, to that extent, the liability attributable to those five years, could be stated as havi....