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Provision for estimated service gratuity payable to its employees -Deduction under section 37(1) and section 40A(7) after its insertion by the Finance Act, 1975, with effect from 1-4-1973

1. Attention is invited to the Board’s Circular No. 47 [F.  No. 9/100/69-IT(A-II), dated September 21, 1970] [Clarification 3] on the above subject.  In this circular, the Board had considered the question as to whether provision made by an assessee in its accounts for estimated service gratuity payable to its employees could be allowed as a deduction even though no approved gratuity fund under the provisions of the Income-tax Act had been set up.  At the relevant time when this circular was issued, the Supreme Court’s decision in the case of Metal Box Co. of India Ltd v. Their Workmen [1969] 73 ITR 53 was available and taking note of certain observations in this particular decision of the Supreme Court, it was felt that provision of gratuity on a scientific basis (in the form of actuarial valuation carried out every year) could be considered to represent a real liability of the employer to the employees.  Accordingly, the Board decided that such provision would not be a contingent liability and may be treated as admissible deduction under section 37(1).

2. The decision of the Board has been re-examined in the light of the unreported judgment of the Supreme Court in the case of Bombay Dyeing & Manufacturing Co. Ltd. v. CWT [since reported in [1974] 93 ITR 603].  In this judgment, their Lordships have confirmed their own views in Standard Mills Co.  Ltd. v. CWT [1967] 63 ITR 470 and have observed that the decision in Metal Box Co.’s case (supra) was rendered under a different Act and in a different context.

3. In view of the later pronouncement of the Supreme Court in the case of  Bombay Dyeing and Manufacturing Co. Ltd. (supra) and on the clear provisions of law contained in section 36(1)(v) under which any sum paid by an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of its employees under an irrevocable trust alone was admissible, any allowance of such liability towards an unapproved gratuity fund under section 37(1) does not arise.  In view of this, the earlier instructions of the Board referred to above, stand withdrawn with immediate effect.

4. All pending assessments may be completed in the light of the present instructions.

Circular : No. 146 [F. No. 228/2/73-IT(A-II)], dated 26-9-1974


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July 2024