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section 37(1) of the income-tax act, 1961-business expenditure-whether provision for gratuity based on actuarial valuation is an admissible deduction under section 37(1)-held, no-whether, nevertheless, such provision was allowable on commercial principles since there was no express prohibition in statute-held, yes Facts The assessee-company had a gratuity scheme for its employees. In its accounts, it made necessary provisions towards gratuity liability on the basis of actuarial valuation. The provisions so made were held as admissible deductions under section 37(1) by the Tribunal. On reference: Held The Tribunal was right in its conclusion to the extent of holding that the impugned provision was an admissible deduction, but erred in holding that the deduction was admissible under section 37(1). This section deals with an expenditure 'incurred' or 'laid out' by the assessee, whereas a provision for gratuity, although it has to be charged against current profits, is not an item of expenditure strictly so called nor is it laid out or incurred by the assessee, in the sense that money goes out. Nevertheless, where there is no specific statutory provision for a deduction in the computation of taxable business profits, it does not mean that the item goes without any deduction at all, but the question will have to be resolved on the basis of commercial accounting principles provided they do not go against the grain of the income-tax statute or the fiscal concept of business income. Consequently, deduction of provision for gratuity has to be made on commercial principles of accounting, because the income-tax law has not set its face against these principles', it only modifies them, in some respects, to cater to the peculiar needs and the exigencies of taxation. Case referred to Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 (SC). JUDGMENT BALASUBRAHMANYAN, J. - The assessees who figure in these tax cases are different. But the issue for our decision in each case is the same, and we dispose of it in this common judgment. 2. The issue arises this way. In the industrial establishment of each of the assessees before us, there is a gratuity scheme for the workers…

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