Provision for Gratuity--Nine is the Number

Hi Lalita,

A company gets covered under the Payment of Gratuity Act for all time to come the moment the number of employees on its rolls crosses 9. Do check that your company has never had a double-digit staff strength ever since its inception. If nine is the maximum number that your company has ever employed, then there's no question of making a provision for gratuity under the Payment of Gratuity Act 1972 read with Section 2(m) of the Factories Act 1948.I think the auditors suspect that since you're just one employee shy of getting hit by the Gratuity Act, it's just a matter of time before a liability to pay gratuity under that Act arises. But as far as I understand, in determining the liability for gratuity, once you're covered, you don't take into account the period served by the employees prior to the date when the company got covered under the Act. The 5-year count down will start from the day of coverage. Also may be the auditors think the company may voluntarily pay up gratuity to a long-serving employee. Accrual basis accounting will demand that a provision be created from year to year in that event. What you should do is give an undertaking to the auditors—in the Management Representation Letter to be issued in pursuance of AAS 11---that the company has never been covered by the Gratuity Act as it didn't have the required number of employees on its rolls; also that it does not intend to make a voluntary gratuitous payment to any employee at present or in future that would necessitate a provision in the books of accounts. This ought to pacify them auditors!Thanks,CA Sanjeev Bedi--- In http://us.mc508.mail.yahoo.com/mc/compose?to=ICAI_CIRC_MEERUT_CA%40yahoogroups.com, lalita arora wrote:>> Hi,>  > If the Gratuity Act is not applicable to the company, Is it still require to provide "Provision for Gratuity" in its books of accounts?>  > Actually our company has only 9 employees. So Gratuity Act is not applicable to our company. But our auditors want to provide for gratuity in the books of accounts assuming that the number of employees might increase in the next year.>  >  > Pls send ur replies with reference to some case laws/ section/ circular/ notification to support your reply.>  >  > > Regards,> CA Lalita Arora