D.P.WADHWA. J.: - (1.) THIS is assessee's appeal against judgment dated 29/04/1981 of the Division bench of the Bombay High court on a reference under Section 66(1 of the Income-tax Act, 1922 Act, for short) on the following question: "Whether on the facts and in the circumstances of the case, the payment of gratuity in the sum of Rs. 4,08,622.00 which the assessee made to M/s. Rallies India Ltd., was an allowable deduction?"
(2.) THE High court answered the question in favour of the revenue and against the assessee. As to how the reference arose, we may notice 2 a few facts. The assessee, a private limited company, was wholly owned subsidiary of Rallis India Ltd. One of its activities was the distribution of the products of M/s. Taddington Chemical Factory Private Ltd. which was also another wholly owned subsidiary of the Rallis India Ltd. With effect from May 1, 1959 the assessee closed its unit for distribution of the products of Taddington Chemical Factory Private Ltd. which business was taken over by Rallis India Ltd. On 22/04/1959, the assessee wrote letters to employees working in the unit dealing with distribution staling that arrangements had been made for the business conducted by the assessee to be taken over by Rallis India Ltd. and that the transfer would take effect from 1/05/1959. By this letter the employees were further informed that arrangements had also been made whereby all the employees of the assessee of the distribution unit would be offered similar employment with Rallis India Ltd. on and from 1/05/1959. The employees were, therefore, informed that their employment was to cease on and from 30/04/1959. The employees were further told as under: "A) If, for any reason, any member of the staff does not wish to accept employment with Rallis India Ltd. retiring gratuity on the normal scale will be paid to him on the close of his service with us as also one month's salary in lieu of notice. (B) ... (C) ... D) You will see that, in their offer of employment, Rallis India Ltd. undertake that, if you accept service with them from 1/05/1959, it shall be assumed that there has been no break or interruption in your employment and they undertake to assume liability to pay on that basis any 77 retrenchment compensation that may become payable in the event of any subsequent retrenchment." By separate letter of the same date Rallis India Private Ltd. also informed the employees of the assessee offering employment with that company from 1/05/1959 on the following terms and conditions: "1. The General terms and conditions, grades and rates of pay are set out in the terms of services of which a copy is attached. 2. Your actual work and position in the office will remain as it has been here before. 3. ... 4. ... 5. As mentioned by W.T. Suren and Co. Private Ltd. in their separate letter to you of today's date, we confirm that your past service with W.T. Suren and Co. Private Ltd. shall count as continuous with future service with Rallis India Limited and that the change of employment on 1/05/1959 shall not constitute a break in or interruption of employment and we hereby assume liability to pay on that basis any retrenchment compensation that may become payable in the event of any subsequent retrenchment. If you accept this offer of employment, will you please sign and return to us immediately the letter of acceptance which is attached."
(3.) SOME of the employees of the assessee did accept the offer given by Rallis India Ltd. and some did not. On 1/05/1959 Rallis India Ltd. issued a circular No. 1/59/60 to all the members of the staff. A part of the circular concerned payment of gratuity to the employees who had come from the assessee and this was to the following effect: "Re: Gratuity. In order to dispel any doubt which might have arisen from our letter of appointment dated 22/04/1959, we wish to make it clear that continuity of service will operate in all respect, including the computation of gratuity. In this respect, as there may be certain cases in which there will be difference between the gratuity accrued in the service of W.T. Suren and Co. Private Ltd. and the gratuity as calculated under our gratuity scheme, it is understood that any members of the staff so affected will, on leaving the company be paid the gratuity accrued to them in the service of W.T. Suren and Co. Pvt. Ltd. as at 30/04/1959, if it is higher than the gratuity as calculated under our scheme." The assessee had announced a gratuity scheme for its employees on 31/08/1953. It is as under: "The Management have pleasure in announcing a gratuity scheme for the members of the staff as under:- JUDGEMENT_74_JT2_1998Html1.htm 78 Gratuity will not be payable to those staff members who have been dismissed for misconduct, etc. The above Scheme is being introduced as from 1/9/1953." ;