Provision for Gratuity can be Deducted while Computing Book Profit: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Bangalore has last week held that the provision for gratuity can be deducted from the book profit under Section 115JB of the Income Tax Act, 1961.

The only remaining issue is whether “Provision for Gratuity” is an ascertained liability eligible to be deducted from the Net profit for the purpose of computing book profit u/s 115JB of the Income Tax Act.

The Tribunal noticed the decision of the Mumbai Tribunal in the case of Dresser Valve India P Ltd wherein it was held that 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.

While concluding the matter in favour of the assessee, the Mumbai Tribunal also held that “Thus, although the provision is not allowable as a 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 necessity 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 the scope of the provisions of clause (c) of the Explanation 1 to section 115JB warranting no addition to the `book profits’,”

Following the above-said decision, the Income Tax Appellate Tribunal allowed the claim of the assessee and held that the Provision for gratuity is an ascertained liability eligible to be deducted from net profit for the purpose of computing book profit under Section 115JB of the Income Tax Act.