http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 4

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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 4

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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 4

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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 4

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