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PETITIONER: COMHISSIONER OF INCOHE-TAX, BOMBAY

       Vs.

RESPONDENT: VANAZ ENGINEERING (P) LTD., BOMBAY

DATE OF JUDGMENT02/05/1986

BENCH: PATHAK, R.S. BENCH: PATHAK, R.S. MISRA, R.B. (J) OZA, G.L. (J)

CITATION:  1987 AIR 1143            1986 SCR  (2) 951  1986 SCC  Supl.  266     JT 1986   325  1986 SCALE  (1)978

ACT:      Income Tax Act, 1961, Sections 22, 29 and 40A(7)(b)(ii) - Gratuity  - Scheme  introduced for  first time in assessee firm in  1970 - On basis of Actuarial Report total liability as on  December 31,  1970 debited to Profit and Loss Account Assessment proceedings  -  Income  Tax  Officer  disallowing burden of  liability -  Appellate Assistant Commissioner and Tribunal allowing  that liability  - Appeal  by  Revenue  to Supreme Court  Whether assessee  entitled  to  deduction  of entire amount  - Held  question arises  - Matter remanded to High Court for fresh consideration.

HEADNOTE:      The respondent-firm  (assessee) had  no gratuity scheme for the  years preceding  the calendar year 1970, but such a scheme was  formulated for  the first  time in the middle of 1970 and put into operation with effect from July 1, 1970.      The respondent  debited to the Profit and Loss Account, a sum  of Rs. 2,11,305 as a charge against the profits being the total  liability as  on December  31, 1970 on account of the gratuity  scheme. This  amount was provided on the basis of an actuarial report prepared by a Consulting Actuary.      In assessment proceedings for the assessment year 1971- 72, the  Income-Tax Officer  was not  prepared to  allow the entire amount  claimed by the respondent as the provision on account  of  gratuity.  The  burden  of  the  liability  was ascertained as  Rs. 1,84,056  on the  basis of a certificate obtained by  the assessee  from the  consulting actuary. The Income Tax  Officer therefore  allowed the liability only to the extent  of Rs.27,249 the difference between Rs. 2,11,305 and Rs. 1,84,056.      On appeal,  the Appellate  Assistant Commissioner  held that the  entire amount  was allowable  and gave a relief of Rs.1,84,056. H 952      The  appeal   of  the  Department  to  the  Income  Tax Appellate Tribunal  having been  dismissed,  the  Department sought for  a reference of the question whether the assessee was entitled to deduction of the entire amount.      On the  basis that  the Appellant Tribunal and the High

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Court  had   rejected  the   Departments  application,   the Department came in appeal to this Court under Article 136.      In the  Appeal, it  was  contented  on  behalf  of  the Department that  as the provisions of s.40A(7)(b)(ii) of the Income Tax  Act 1961 have not been satisfied, the respondent was not entitled to the deduction of the gratuity amount.      Allowing the appeal, ^      HELD: It  is  necessary  that  the  High  Court  should examine whether the provisions of s.40A(7)(b)(ii) of the Act have been  complied with  in the instant case, having regard to what  has been  laid down  in Sh.  Sajan  Mills  Ltd.  v. Commissioner of  Income Tax  M.P. and  another,  [1985]  156 I.T.R. 585. [955 F]      There is  no dispute between the parties that the first condition in  the said  provision has  been satisfied by the respondent. What  remain is  to determine whether the second and third conditions are also satisfied. [955 F-G]      Judgment under  appeal set aside. Case remanded to High Court for fresh consideration. [955 G-H]      D.V. Baput  I.T.O. Companies Circle Bombay v. Tata Iron Steel Co.  Ltd., C.A. No. 1247 of 1980 decided on January 8, 1986 followed.

JUDGMENT:      CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4253 of 1983.      From the  Judgment and  order dated  9th March, 1979 of the Bombay High Court in I.T. Ref. No. 485 of 1976.      S.C. Manchanda and Ms. A. Subhashini for the appellant.      Mrs. A.K. Verma and Joel Peres for the Respondent. 953      The Judgment of the Court was delivered by      PAIHAK, J.  This appeal  by special  leave is concerned with a question of some importance.      The respondent,  which maintains  its accounts  on  the mercantile  system,   follows  the   calendar  year  as  its accounting period.  It had  no gratuity scheme for the years preceeding the  calendar year  1970, but  such a  scheme was formulated for  the first time in the middle of 1970 and was put into  operation with effect from July 1, 1970. me scheme provided that  in the  case of the retirement or resignation of any employee he would be eligible to gratuity provided he had put  in 15  years of  continuous service. In the case of death  or  permanent  physical  or  mental  disablement,  an employee  was  eligible  for  gratuity  at  different  rates depending upon whether he had put in ten years of continuous service or  more. In  the case  of termination of service or retrenchment, no  gratuity was  payable upto  five years  of continuous service,  and was  payable  at  rates  thereafter depending upon  whether the continuous service was from five years to  ten years,  ten to  fifteen  years  or  more  than fifteen years.  No gratuity  was payable  if an employee was dismissed for  misconduct, for  causing laws to the company, for violant  action and  similar reasons. The respondent had debited to the Profit and Loss account a sum of Rs. 2,11,305 as a charge against the profits, being total liability as on December 31,  1970 on  account of the gratuity scheme. There is no dispute that this amount was provided for on the basis of an actuarial report prepared by a consulting actuary.      In assessment proceedings for the assessment year 1971- 72 (the  relevant accounting  period being the calendar year 1970), the  Income Tax Officer was not prepared to allow the

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entire amount claimed by the respondent as a provision on of gratuity. At  his instance  a certificate  was obtained from the  consulting   actuary  regarding  the  liability  as  on December 31, 1969 and as on December 31, 1970. The burden of the liability  as on December 31, 1969 was Rs. 1,84,056. The Income Tax  Officer, therefore, allowed the libility only to the extent  of the  difference between  Rs. 2,11,305 and Rs. 1,84,056 that is to say he allowed Rs. 27,249. 954      On appeal  by the  respondent, the  Appellate Assistant Commissioner of  Income Tax,  following the decision of this Court in  the case  of Metal  Box Company  of India  Ltd. v. Their Workmen,  [1969? 73  I.T.R. 53  held that  the  entire amount was  allowable. Accordingly,  he gave a relief of Rs. 1,84,056.      The Revenue  proceeded in  second appeal  to the Income Tax  Appellate   Tribunal,  and   the  Appellate   Tribunal, following an earlier decision rendered by it in a case where the decision  of this  Court in  Metal Box  Company of India Ltd. (supra), of the Allahabad High Court in Madho Maheah Sugar Mills  (P) Ltd.  v. Commissioner of Income tax, [1973] 92 I.T.R.  503 and  of the  Delhi High  Court in Delhi Flour Mills Co.  Ltd. v.  Commissioner of  Income Tax,  [1974]  95 I.T.R. 151  had been considered, came to the conclusion that the Appellate  Assistant  Commissioner  was  right  and  the entire amount  had to  be allowed  as a  charge against  the profits. The appeal filed by the Revenue was dismissed.      A similar  question was  considered at  length  by  the Bombay High  Court subsequently  in Tata  Iron &  Steel  Co. Ltd.v. D.V. Bapat, Income-Tax Officer, Companies Circle 1(2) Bombay,  and   Anr.,  [1975]  l01  I.T.R.  292  in  which  a corresponding view was taken by the High Court.      At the  instance of the Revenue, a reference was sought from the  Appellate Tribunal  for the  opinion of  the  High Court on the following question of law :           "Whether on  the facts and in the circumstances of           the case,  the assessee  is entitled in law to the           deduction of  the entire  provision  for  gratuity           amounting to  Rs. 2,11,305 either under section 28           read with section 29 or under section 37(1) of the           Income Tax Act, 1961?"      It is  not clear  whether the Appellate Tribunal made a reference or  declined it. What purports to be a copy of the order dated  23.4.1980 of  the Appellate  Tribunal before us appears to  indicate that  the Appellate Tribunal had indeed referred the  question to  the High  Court. But  the special leave petition  filed in this Court under Article 136 of the Constitution "against the order dated 9.3.79 of the Bombay 955 High Court  in I.T.  Ref. No.  485 of  1976 in the matter of C.I.T. versus Vanaz Engineering Pvt. Ltd. for the assessment year 1971-72",  states that  the Appellate Tribunal rejected the reference  application, and  thereafter  an  application made to the High Court was rejected on April 23, 1980. It is unfortunate that  this  discrepancy  exists  in  the  record before us.  It demonstrates  a want  of sufficient  care  in preparing the petition. It makes no difference, however, for even if  we  take  it  that  the  High  Court  rejected  the reference application made by the Revenue, we are of opinion that a question of law does arise in the terms sought by the Revenue. We  are further  of opinion that instead of sending the case back to the High Court and directing it to call for a statement  of  the  case  and  thereafter  to  answer  the question of  law, it  would be appropriate to dispose of the case on  the merits  itself inasmuch  as the question is one

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which has engaged the attention of this Court in a number of cases already.  Learned counsel  for the  parties  are  also agreed that the case should be disposed of in the same terms as D.V.  Bapat, I.T.O. Companies Circle, Bombay v. Tata Iron & Steel  Co. Ltd., (C.A.No. 1247 of 1980) decided on January 8, 1986.      It is  urged by  learned counsel for the appellant that the provisions  of s.40A(7)(b)(ii)  of the  Income Tax  Act, 1961 have  not been satisfied and, therefore, the respondent was not  entitled to  the deduction  of the gratuity amount. The  provisions   of  s.40A(7)(b)(ii)   have  been  recently construed by  this  Court  in  Shree  Sajan  Mills  Ltd.  v. Commissioner of  Income Tax,  M.P. & Anr., [1985] 156 I.T.R. 585, and it seems to us necessary that the High Court should examine whether  those provisions have been complied with in the present case having regard to what has been laid down in that case.  There is no dispute between the parties that the first condition  in that provision has been satisfied by the respondent. What  remains is to determine whether the second and third conditions are also satisfied.      In the  circumstances, we  think it  appropriate to set aside the  judgment under  appeal and remand the case to the High Court  for a  fresh consideration  of the  case in  the light of the observations made by us in this judgment. 956      The appeal  is allowed,  the judgment of the High Court is set  aside and the case is remanded to the High Court for disposal in  accordance with  the observations  made by  us. There is no order as to costs. N.V.K.                                       Appeal allowed. 957