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
A question has arisen whether the provision made by an assessee in its accounts on account of the estimated service gratuity payable to the employees can be allowed as a deduction when no gratuity fund has been set up under Part C of the Fourth Schedule to the Income-tax Act.
The Board have decided that following the decision of the Supreme Court in the case of Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53, the provision of gratuity on a scientific basis (in the form of an actuarial valuation carried out every year) can be considered to represent a real liability of the employer to the employees. The Supreme Court, in the case of Garment Cleaning Works v. Workmen AIR 1962 SC 673, decided that the employer would be required to pay gratuity even to an employee who has been dismissed on account of misconduct. The Board have, therefore, come to the conclusion that the liability so ascertained cannot be considered as a contingent liability. Such provision of gratuity may be treated as an admissible deduction under section 37(1).
Circular : No. 47 [F. No. 9/100/69-IT(A-II)], dated 21-9-1970.
