Circular No. 47

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

What this is

Circular No. 47 was issued by the Central Board of Direct Taxes on 21 September 1970. Its subject is 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.

What it does

Allows a provision for estimated service gratuity as a deduction under section 37(1) even where no approved gratuity fund has been set up under Part C of the Fourth Schedule. The Board reasons, following the Supreme Court in Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53, that a provision for gratuity made on a scientific basis, namely an actuarial valuation carried out every year, represents a real liability of the employer to its employees, and notes the Court's decision in Garment Cleaning Works v. Workmen that gratuity is payable even to an employee dismissed for misconduct. A liability so ascertained is not contingent, and the provision is an admissible deduction.

Why it was issued

A question arose whether a provision for estimated service gratuity could be deducted where the employer had not set up a gratuity fund under Part C of the Fourth Schedule.

Who it reaches

Employers carrying a gratuity provision without an approved fund
Employers obtaining annual actuarial valuations
Assessing Officers disallowing gratuity provisions as contingent

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.37	s.34
s.40A	s.29, s.36

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

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 1

What to watch

The deduction depends on the provision being made on a scientific basis, that is on an actuarial valuation carried out every year; an ad hoc provision does not answer this circular.
The subject of the circular as reproduced itself records that section 40A(7) was afterwards inserted by the Finance Act, 1975 with effect from 1 April 1973 to govern the deduction of gratuity provisions, so for years from that date the question is answered by that provision and its conditions rather than by section 37(1) alone.
The reasoning is about whether the liability is contingent, not about payment; actual payment of gratuity stands on its own footing.

Where you meet it

In an assessment where a gratuity provision has been disallowed as a contingent liability, particularly for years before the specific provision came in.

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Notification No. 38/2025 [F. No 370142/11/2025-TPL] / SO 1838(E) — 2 the Gazette of INDIA : Extraordinary [Part Ii—sec. 3(ii)] 23 April 2025
Circular No. 05/2012 — Inadmissibility of expenses incurred in providing freebees to Medical Practitioner by pharmaceutical and allied health s 1 August 2012
Circular No. 727 — 372. Instructions regarding extent of expenditure incurred on food or beverages provided to employees by employers to be 27 October 1995
Circular No. 708 — 372. Instructions regarding extent of expenditure incurred on food or beverages provided to employees by employers to be 18 July 1995
Circular No. 671 — 368. Whether, where deposit made by an assessee for obtaining new telephone connection under ‘Tatkal Telephone Deposit S 27 October 1993
Circular No. 644 — 371. Whether provision of food or beverages in places other than place of work in respect of low-paid employees can be t 15 March 1993

← Circular No. 48 · Circular No. 46 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.