Full Judgment Text
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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