SEN, J. - (1.) THE Tribunal has referred the following questions of law under s. 256(1) of the IT Act, 1961 ('the Act') to this Court : "1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deleting the sum of Rs. 2,91,134 being the provision for gratuity liability ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting the addition of Rs. 3,50,846 representing gratuity liability allowed earlier by holding that it was outside the purview of s. 41(1) of the IT Act, 1961 ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that Government subsidy received by the assessee could not form a part of the sale price of the commodities and, hence, the same should not be added to the value of the closing stock ?
(2.) IN this proceeding the assessment year involved is 1978-79 for which the relevant year of account is the year ended on 31st March, 1978. The first two questions are relating to the assessee's liability to pay gratuity. So far as the first question is concerned, eleborate argument has been made on behalf of the Revenue. Having regard to the facts found by the Tribunal and the direction given by the Tribunal, we find no difficulty in upholding the order of the Tribunal.
(3.) THE facts found by the Tribunal are as under : The assessee is a limited company deriving income from business of tea and shipping. The assessee sold one of its tea estates during the previous year under consideration as a going concern for a net consideration of Rs. 16 lakhs. In addition, the purchaser took over the assessee's liability to pay gratuity to the extent of Rs. 6,43,500. Taking these two amounts together, the sale proceeds can be said to be Rs. 22,43,500. During the year under consideration the assessee claimed the balance of the sum of Rs. 2,91,134 (being the balance of the sum of Rs. 6,43,500 after considering the amount of Rs. 3,50,846 already allowed) as liability accrued against the assessee up to the date of sale. The case of the assessee was that it was liable to pay the amounts in respect of the services rendered to it up to the date of sale and so, it claimed the deduction as stated above before the ITO. The ITO disallowed the claim of Rs, 2,91,134 on the ground that cl. 8 of the deed of sale dt. 5th Aug., 1977 stated that the gratuity due to the staff in respect of the services up to the date of sale became the liability of the purchaser. According to the ITO the purchaser agreed to pay the said liability of the assessee without any reference to the sale proceeds. In addition to the above disallowance the ITO added back the sum of Rs. 3,50,846 which had been allowed in the earlier years on the ground that the liability in respect of the said amount ceased to exist and so became taxable under s. 41(1) of the Act. The assessee appealed to the CIT (A), who held that this was not a case of cessation of liability and even deleted the addition of Rs. 3,50,846. However, he agreed with the ITO that the sum of Rs. 2,91,134 is not admissible as deduction as the purchaser had taken over to discharge that liability. The assessee appealed to the Tribunal against the disallowance of Rs. 2,91,134. On the other hand, the Department appealed to the Tribunal against the deletion of Rs. 3,50,846 by the CIT(A) from the total income of the assessee. The Tribunal considered both the grounds together and held as below : "8. We have considered the contentions of both the parties as well as the facts on record. In our opinion, the CIT(A) has intended fallen into an error of reasoning inasmuch as he has been inconsistent. On going through the agreement for sale dt. 5th Aug., 1977 as a whole, we are convinced that the assessee agreed to sell the assets enumerated therein in consideration of not only the net cash payment of Rs. 16 lakhs but also the agreement of the purchaser to discharge the gratuity liability to the employees in respect of the services rendered to the assessee. If that be so, there was no cessation of liabilities; nor was there any take over of the liabilities of the assessee. The assessee's liability to pay remained intact. The purchaser merely undertook to pass on the amount that was received from the assessee by way of constructive payment to the creditors of the assessee when the occasion would arise in future. Clause 8 of the said agreement which has been taken by the ITO as spelling out the cessation of liability of the assessee, actually makes the purchaser a conduit pipe to receive the money in one hand and hold it till payment to the assessee's creditors when the occasion would arise in future. Hence, the CIT(A) was quite correct in his decision that the sum of Rs. 3,50,845 was outside the purview of s. 41(1) as the assessee never got back that amount. We uphold the decision of the CIT(A) on this point. On the same reasoning the liability of the assessee for the balance sum of Rs. 2,91,134 also arose to the assessee and was not passed on to the purchaser in the sense in which the ITO and the CIT(A) have understood it. Even for that balance amount, the purchaser has merely acted as an agent to the assessee. According to the finding of the CIT(A) that the entire sum of Rs. 6,43,500 was constructively paid by the assessee to the purchaser with which we agree, the balance sum of Rs. 2,91,134 also becomes a deductible expense subject to the provisions of s. 40A(7). We find force in the argument raised for the assessee that as far as it was concerned the amount became payable during the previous year by virtue of the aforesaid agreement dt. 5th Aug., 1977 and, consequently, it came within the exception of s. 40A(7)(b)(i) of the Act. For the above reasons we delete the sum of Rs. 2,91,134. However, we direct that the sale-proceeds be taken at Rs. 22,43,500 as offered by the assessee and any amount that becomes assessable under the law on the said date should be brought to tax by the ITO." ;