Long Term Service award taxability in hands of company

Save Share

This query is : Resolved

shivam hy (Querist)
Follow

27 June 2026 Hi Everyone,

A company is creating a provision at year-end for long-term service awards based on actuarial valuation (future employee payment liability).

For tax purposes, we are currently:

* Disallowing the provision by adding it back to book profits, and
* Claiming deduction only when actual payment is made to employees.

However, the Statutory Auditor is suggesting that the provision should not be added back to net profit.

What is the correct tax treatment in this case?
Also, which section of the Income Tax Act, rule, or judicial precedent supports the treatment?

Aashok Kumar Sharma

Aashok Kumar Sharma

(Expert)
Follow

28 June 2026 In the context here, the provision for long-term service awards, when based on a scientific actuarial valuation, is generally treated as an ascertained liability and is deductible under the Income Tax Act under Section 37(1). Judicial precedents, such as the Delhi High Court's ruling in CIT v. Insilco Limited, support the view that such provisions should not be disallowed as contingent liabilities. The company should maintain a certified actuarial report to substantiate the deduction during assessments.

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now