Satish Chandra, C.J. - (1.) For the assessment year 1964-65, Messrs. Balrampur Raj Electric Supply Co., Gonda, the assessee, claimed deduction of Rs. 2,07,071, being the initial contribution made by it for gratuity under the gratuity fund scheme. The scheme was recognized by the Commissioner on March 4, 1964. Under the scheme, all permanent employees of the assessee-company were to be paid gratuity at the rate of 15 days' wages per year of service at the time of the termination of the contract of service. The ITO estimated the amount of Rs. 50,000 as payable towards the gratuity. He disallowed the balance. On appeal, the AAC held that the initial contribution of Rs. 85,323 alone was allowable. Aggrieved, the assessee as well as the department went up to the Tribunal.
(2.) The Tribunal held that Rule 104 of the I.T. Rules read with Section 37(1) of the Act lays down the limit and does not provide for the exact amount allowable towards payment of gratuity. The salary paid to the employee in the year in which the provision was made would be the relevant factor. The Tribunal further held that in any event if the assessee has made any excess contribution, it is allowable under Section 37(1) or Section 28(1) because the assessee follows the mercantile system of accounting and the payments have been made for business purposes and in the capacity of a trader. The Tribunal observed that under Section 209 of the Companies Act, 1956, the assessee-company was liable to maintain records only for eight years. If the records prepared prior to 1960 were not available, no adverse inference could be drawn against the assessee and hence there was no occasion to make an estimate. The assessee's appeal was allowed while the department's appeal was dismissed. The entire amount claimed by the assessee was held to be allowable.
(3.) At the instance pf the Commissioner, the Tribunal has referred the following question of law for our opinion ; "Whether, on the facts and in the circumstances of the case, a sum of Rs. 2,07,071 (Rupees two lakhs seven thousand seventy-one) should be allowed as deductible expenditure under Rule 104 of the Income-tax Rules, 1962, or under Section 37(1) read with Section 28(i) of the Income-tax Act ?";