Karnataka State Beverages Corporation: provision for ex gratia to employees is allowable as business expenditure

5-Second Takeaway

A provision for ex gratia payment to employees was an allowable business deduction under section 37(1) and was not merely contingent because government approval was pending. The alternative view that the deduction could be allowed only in the year of payment was rejected.

The assessee, a mercantile-basis taxpayer, had its board approve an ex gratia payment to employees and recorded a corresponding provision in its books for the year. The Government of Karnataka later approved the payment, after which most of the amount was actually disbursed almost immediately.

The issue was whether the provision was a proper accrued expenditure or a contingent liability. The Revenue had not shown that the provision lacked a basis, and the need for government approval did not by itself make the liability uncertain.

The tribunal held that the amount was an expenditure incurred wholly and exclusively for business purposes and was in substance remuneration paid to employees. It therefore fell within section 37(1).

The appellate view that the deduction should instead be allowed only in the year of payment was rejected, since this was not a statutory liability or an item deductible only on actual payment. The lower authorities’ orders were not sustained.