C.S.P.Singh, J. - (1.) The Income-tax Appellate Tribunal, Delhi Bench, has referred the following question for the opinion of this court : "Whether, on the facts and in the circumstances of ,the case, the assessee is entitled to the deduction of Rs. 8,02,402 or any other sum as a deduction in the computation of its business income on the ground that a liability had accrued on the part of the assessee to provide for the payment of gratuity to its employees under the Sugar Industry Workmen Gratuity Scheme ?"
(2.) The assessment year involved in the present reference is 1962-63, for which the previous year ended on 30th September, 1961. In the relevant period, the company owned two sugar mills, one at Pilibhit and the other at Kashipur. It claimed deduction of a sum of Rs. 25,000 in the Kashipur unit, and a sum of Rs. 45,000 for the Pilibhit unit under the head " Gratuity ". The ITO, on the view that the amounts claimed were unascertained liabilities, allowed an amount of only Rs. 8,550 which has been actually paid, and disallowed the balance. An appeal was preferred before the AAC. In the appeal, the assessee enlarged its claim to Rs. 8,02,402. The reason for the enlargement of the claim was that the Government of India had appointed a Central Wage Board for the sugar industry in December, 1957, for the purpose of working out a wage structure and the principles governing the grant of bonus/gratuity. The report of the Board was accepted by the Government of India, and the State Governments were advised to take various steps to enforce the recommendation. The State Government accepted the recommendation after considering it at a tripartite conference, which included the representatives of the sugar mills and workers. Thereafter, a notification under Section 3 of the U. P. Industrial Disputes Act, 1947, was issued for giving effect to the recommendations of the Wage Board. The recommendations included a scheme of gratuity, the terms of which were set out in Appendix V to the notification. The scheme was to come into force with effect from November 1, 1960. The assessee calculated its liability for gratuity on the basis of this scheme, and made a claim for Rs. 4,25,520 and Rs. 3,06,000 for the earlier years relating to Pilibhit and Kashipur factories, respectively, and an amount of Rs. 50,995 and Rs. 29,750 as gratuity for the relevant year. As some amount of gratuity had already been allowed by the ITO, the claim in appeal was put at Rs. 8,02,402. While arriving at this figure the assessee had taken into account the number of permanent and seasonal workmen working in the two units, and multiplied the average length of service by 20 half-month's pay in the case of permanent workmen, and 10 quarterly month's basic pay in the case of seasonal workmen. This claim was rejected by the AAC on the ground that the claim for gratuity for the earlier years must be taken to have arisen in those years under the mercantile system of accounting, and could not be allowed in the relevant year, and, secondly, that no such claim has been made before the ITO, and a new claim could not be set up in appeal. As respects gratuity for the previous year the AAC took the view that it was only a. contingent liability, and as such the entire claim for the gratuity of the previous year as calculated by the assessee was rejected. The appeal was dismissed. The assessee then appealed to the Tribunal. Before the Tribunal it was claimed that the entire amount should be allowed as a liability, for it was created in the year of account by virtue of a notification, and further that the amount could be calculated on the actual value for which the assessee had already taken steps. The Tribunal held that the liability of the assessee could not be allowed on the actuarial value as the actuarial value had not been placed before it by the assessee. It then considered the gratuity scheme, and found that different criteria had been applied for fixing the quantum of gratuity to be paid in the event of death, voluntary retirement, resignation or on termination of service of the employees, and, as such, as the matter stood, it was not possible to indicate as to when those eventualities could arise. It then went on to criticise the method by which the assessee had calculated the amount at Rs. 8,02,402 and found that the calculation had been made on the basis of salary as payable and paid to each employee during the particular year of account. This method had not taken into account the possibility of the death of workmen or his dismissal for misconduct. The method of calculation was found defective also on the score that it did not take into account the salary which an employee may earn at the time when the gratuity would become payable to him. On considering all these factors it found the method adopted by the assessee for calculation of the gratuity to be defective and disallowed the claim on this ground, and also on the view that the liability for gratuity was at best a contingent liability and could not be allowed.
(3.) On the reference coming up before this court on the 16th March, 1968, counsel for the assessee made a statement that the actuarial valuation of the gratuity had been obtained by the assessee, and on this, the court directed the Tribunal to submit a statement of the case, and to annex with it the report of the actuarial valuation supplied by the assessee. The Tribunal in response to this order has now submitted the supplementary statement of the case. In the supplementary statement of the case the Tribunal has stated that according to the actuarial report filed by the assessee, liability for payment of gratuity stood at Rs. 7,59,423 for the relevant accounting year ending on 30th September, 1961.;