Provision for Gratuity not to be added to calculate book pro

SUMMARY OF CASE LAW

The provision of gratuity is an ascertained liability and the same falls outside scope of the provisions of clause (c) of the Explanation 1 to section 115JB of the Income-tax Act, 1961 warranting no addition to the `book profits'

18. We have heard both the parties and have gone through the orders, decisions and judgments and provisions of the Income-tax Act. From the facts, it is noticed that the objection of the revenue is with regard to the assessee's failure to follow the AS-15 and the 'actuarial method' referred therein and not disputed the quantification of the 'provision of gratuity. In other words, the incorrect quantification of the provision makes the provisions as an unascertainable liability and therefore, such provisions should be dealt with as per the provisions of section 115JB read with Explanation1( c) and accordingly, the book provisions should be increased. On the other hand, the case of the assessee is that it is an ascertained liability as evident from the books and method of quantification does not decide the issue of ascertainment or otherwise of the liability and therefore, the provision for gratuity is required to be excluded for the purpose of determining the book profits. Considering the rival positions, it is noticed that the said provision of section 115JB are code by itself and determination of the book profits has to be done only as per the provisions of section 115JB, which unambiguously provides for exclusion of provisions of ascertained liabilities for the purpose of 'book profits'. In this regard, we have perused the apex court judgment in the case of Bharat Earth Movers (425 ITR 428) and the relevant portions of the same reads as under.

"Business liability arising in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with the reasonable certainty without actual quantification. Till these requirements are satisfied the liability is not a contingent one. The liability is one present/' though it will be discharged at a future date. It does not make any difference if the date of liability has to be discharged it is not certain.

19. Thus, although the provision are not allowable as deduction, certain provisions which are capable of estimation with reasonable certain without quantification are allowable as they are ascertainable. On finding that the actual quantification is not a legal necessary in matters of ascertainment of the gratuity', we are of the opinion that the provision of gratuity in the assessee's case is capable of being estimated with reasonable certainty and therefore, it is not a contingent or unascertained liability. Thus, it is an ascertained liability and the same falls outside scope of the provisions of clause (c) of the Explanation 1 to section 115JB warranting no addition to the `book profits'. Accordingly, the ground 4 of the assessee is allowed.