Commissioner of Income Tax vs Small Tools Manufacturing Co. of India Ltd.

Ajit K. Sengupta, J.—At the instance of the Commissioner of Income Tax, the following question of law has been referred to this court u/s 256(1) of the Income Tax Act, 1961, for the assessment year 1972-73 :

"Whether, on the facts and in the circumstances of the case and on a correct interpretation of law, the Tribunal was justified in holding that provision for gratuity based on actuarial valuation was an allowable deduction in computing the total income of the assessee ?"

The facts are that the Income Tax Officer found that an amount of Rs. 5,32,518 has been charged to the account in respect of provision for gratuity. A certificate from the actuary was filed in support of the claim. The Income Tax Officer, however, did not accept the claim on the ground that the Gratuity Act came into force only in 1972, i.e., after the assessee''s accounting year had ended and there was no statutory liability to make any provision during this year. The Income Tax Officer further held that the decision of the Supreme Court in the case of Bombay Dyeing and Manufacturing Co. Ltd. Vs. Commissioner of Wealth Tax, Bombay, laid down that the provision for gratuity is a contingent liability. The assessee''s claim was, therefore, not allowed. When the matter came before the Appellate Assistant Commissioner, he found that the West Bengal Employees'' Payment of Compulsory Gratuity Ordinance, 1971, came into force on June 14, 1971, which was before the close of the accounting year of the assessee. The Appellate Assistant Commissioner, therefore, held that the liability for payment of gratuity arose in this year. The Appellate Assistant Commissioner referred to the decision of the Bombay High Court in the case of Tata Iron and Steel Co. Ltd. Vs. D.V. Bapat, Income Tax Officer, Companies Circle I(2), Bombay and Another, and the unreported decision of the Calcutta High Court in the case of CIT v. Budge Budge Amalgamated Mills Ltd. He further found that the actuarial valuation regarding the provision for gratuity came to Rs. 3,70,035. He, therefore, held that the claim of the assessee was allowable to that extent and he maintained the disallowance of the balance of Rs. 1,61,483.

When the matter came before the Tribunal, it was contended on behalf of the Department that the gratuity was merely a provision and there was no present liability which could be allowed as a deduction for making the assessment for the assessment year 1972-73. It was further submitted that even if the liability was to be allowed, it should be only in respect of Incremental liability related to this particular year and not for all the earlier years. The Tribunal, after considering the facts of the case, upheld the order of the Appellate Assistant Commissioner, following the decision relied upon by him. It was further held by the Tribunal that the liability was for the whole of the amount arrived at as per actuarial valuation and not only for the incremental value, as the Ordinance had come into force in this year itself,

It appears to us that the question in this reference is concluded by the decision of this court in the case of Commissioner of Income Tax Vs. Steel Rolling Mills of Bengal Ltd., . Mr. Moitra, however, appearing for the Revenue, has contended that the decision of the Supreme Court in Commissioner of Income Tax, Bombay Vs. Vanaz Engineering (P) Ltd., Bombay, has resolved the issue in favour of the Revenue. The matter was sent back by the Supreme Court for reconsideration and, accordingly, he submitted that the same procedure should be adopted by us.

We are, however, not impressed by this submission. It appears that in Commissioner of Income Tax Vs. Steel Rolling Mills of Bengal Ltd., , the Division Bench of this court considered the judgment of the Supreme Court in Commissioner of Income Tax, Bombay Vs. Vanaz Engineering (P) Ltd., Bombay, as well as the other decisions of the Supreme Court on this point and thereafter held as follows (at p. 439) :

"The decision of the Supreme Court in Commissioner of Income Tax, Bombay Vs. Vanaz Engineering (P) Ltd., Bombay, , in our view, does not advance the case of the Revenue as in that case the matter was remanded to the High Court on a concession. It was not held by the Supreme Court that the law laid down by its earlier decision in Shree Sajjan Mills Ltd. Vs. Commissioner of Income Tax, M.P., Bhopal and Another, was being reconsidered nor was it laid down that Section 40A(7)(b)(ii) which came into effect from April 1, 1973, would apply in the assessment years covering periods prior thereto."

We are, therefore, unable to accept the contention raised on behalf of the Revenue that the matter should be remanded to the Tribunal.

We, therefore, answer this question in the affirmative and in favour of the assessee.

There will be no order as to costs.

Bagabati Prasad Banerjee, J.

I agree.