COMMISSIONER OF INCOME -TAX, BOMBAYversusVANAZ ENGINEERING (P) LTD., BOMBAY

                                                                  951
                                                                         A
                     <XllUSSIONER OF INCCME-TAX, BCMBAY
                                     Vo
                     VANAZ ENGINEERING (P) LTD., BCMBAY

                                MAY 2, 1986
                                                                         B
                  (R.S. PATHAK, R.B. MISRA AND G.L. OZA, JJ.]

    ~         Income Tax Act, 1961, Sections 22, 29 and 40A(7)(b)(ii)
        - Gratuity - Scheme introduced for first time in assessee firm


-   y
        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
                                                                         c


    )   question arises - Matter remanded to High Court for fresh
        consideration.
                                                                         D
              The respondent-firm (assessee) had no gratuity scheme
        for the years preceding the calendar year 1970, but such a
        scheme was fornnlated 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   E



-
        sum of Rs. 2,11,305 as a charge against the profits being the
        total liabilitv 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              F
        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       G
        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                    SUPREME COURT REPORTS     [1986] 2 s.c.R.

A
               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
B        Court had rejected the Departments application, the Department
         came in appeal to this Court under Article 136.
                                                                            ~
               In the Appeal, it was contended on behalf of the


c
         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,
                                                                                -
                                                                            ~
                 HILD: It is necessary that the High Court should examine
         whether the provisions of s.40A(7)(b)(ii) of the Act have been
D        complied with in the instant case, having regard to what has
         been laid down in Sh. Sajan Ml.Us Ltd; v. ei-1.ssiooer of
         Tnrlll!IP Tax K.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
E        respondent. What remain is to determine whether the second and




F
         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. Bapat I.T.O, Companies Circle Bombay v. Tata Iron &
                                                                                -
         Steel Co. Ltd., C.A. No. 1247 of 1980 decided on January 8,
         1986 followed.                                                     f--
                 CIVIL APPELLATE JURISDICTION   Civil Appeal No. 4253 of
         1983.
G
               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.
    .!
H                Mrs. A.K. Verma and Joel Peres for the Respondent.
                 c.1.r. BOMBAY v. VANAZ ENGINEERING [PATHAK, J,]    953

                                                                           A
               The Judgment of the Court was delivered by

                PA'l'BAK, J. This appeal by special leave is concerned
          with a question of some importance.

                The respondent, which maintains its accounts on the        B
         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 fo!'lll.llated for the
         first time in the middle of 1970 and was put into operation

.        with effect from July 1, 1970. The 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
                                                                           c
      r  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 termi -
         nation of service or retrenchment, no gratulty was payable
         upto five years of continuous service, and was payable at         D
         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       E



-
         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           F
         1971-72 (the relevant accounting period being the calendar
    ---\ year 1970), the Income Tax Officer was not prepared to allow
         the 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
                                                                           G
         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.

                                                                           H
    954                 SUPREME COURT REPORTS     [1986] 2 S.C.R.


A
          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. lbeir
    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
B
    Appellate Tribunal, and the Appellate Tribunal, follcuing 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 Mahesh Sugar Mills (P) Ltd.
    v. ec-Issioner of Iru:ome-tax, [1973] 92 I.T.R. 503 and of the   .-
    Delhi High Court in Delhi Flour Mills Co. Ltd. v. Comnissioner
c   of Ine<l.e 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.
D
          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] 101 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 J..
              the case, the assessee is entitled in law to the
F
              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
                                                                    t-
              Income Tax Act, 1961?"

          It is not clear whether the Appellate Tribunal made a
G
    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
H
             C. I. T. BOMBAY v. VANAZ ENGINEERING [PATHAK, J.]   955

                                                                       A
      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    B
      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   c
 y    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 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.           D
      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
                                                                       E

      provisions of s.40A(7)(b)(ii) have been recently construed by
      this Court in Shree Sajjan Mills Ltd. v. Coumissioner 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     F

--+ - 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.
                                                                       G
           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.

                                                                       H
    956                 SUPREME COURT REPORTS   (1986] 2 S.C.R.

A
          The appeal is allowed, the judgment of the High Court is
    set aside and the case is remanded to the High Court for J.-
    disposal in accordance with the observations made by us. There
    ls .no order as to costs.


B
    N.V.K.                                      Appeal allowed.




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