Pathak, J. - (1.) This appeal by special leave is concerned with a question of some importance.
(2.) 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 preceding 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. 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 or mental disablement, an employee was eligible for gratuity at different rates depending upon whether he had put in 10 years of continuous service or more. In the case of termination of service or retrenchment, no gratuity was payable up to 5 years of continuous service, and was payable at rates thereafter depending upon whether the continuous service was from 5 years to 10 years, 10 to 15 years or more than 15 years. No gratuity was payable if an employee was dismissed for misconduct, for causing loss to the company, for violent 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 the 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.
(3.) 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 entire amount claimed by the respondent as a provision on account 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 liability 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/-.;