# D.V. Bapat I.T.O, Companies Circle Bombay v. Tata Iron &

- **Citation:** [1986] 2 S.C.R. 951
- **Court:** Supreme Court of India
- **Decided:** 1986-05-02
- **Case number:** Civil Appeal No. 4253 of 1983
- **Bench:** R.S. Pathak, R.B. Misra, G.L. Oza
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/d-v-bapat-i-t-o-companies-circle-bombay-v-tata-iron-9343
- **Pages:** 6

## Headnote

~
Income Tax Act, 1961, Sections 22, 29 and 40A(7)(b)(ii)
- Gratuity - Scheme introduced for first time in assessee firm
in 1970 - On basis of Actuarial Report total liability as on
December 31,
1970 debited to Profit and Loss Account -
Assessment proceedings - Income Tax Officer disallowing burden
-
-
y
)
---+
of liability - Appellate Assistant Commissioner and Tribunal
allowing that liability - Appeal by Revenue to Supreme Court -
Whether assessee entitled to deduction of entire amount - Held
question arises -
Matter remanded to High Court for fresh
consideration.
The respondent-firm (assessee) had no gratuity scheme
for the years preceding the calendar year 1970, but such a
scheme was fornnlated for the first time in the middle of 1970
and put into operation with effect from July 1, 1970.
The respondent debited to the Profit and Loss Account, a
sum of Rs. 2,11,305 as a charge against the profits being the
total liabilitv as on December 31, 1970 on account of the
gratuity scheme. This amount was provided on the basis of an
actuarial report prepared by a Consulting Actuary.
In assessment
proceedings
for the assessment year
1971-72, the Income-Tax Officer was not prepared to allow the
entire amount claimed by the respondent as the provision on
account
of
gratuity.
The
burden of the liability was
ascertained as Rs. 1,84,056 on the basis of a certificate
obtained by the assessee from the consulting actuary. The
Income Tax Officer therefore allowed the liability only to the
extent of Rs.27 ,249 the difference between Rs. 2, 11,305 and
Rs. 1,84,056.
On appeal, the Appellate Assistant Commissioner held
that the entire amount was allowable and gave a relief of
Rs.1,84,056.
A
B
c
D
E
F
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A
952
SUPREME COURT REPORTS
[1986] 2 s.c.R.
The appeal of the Department to the Income Tax Appellate
Tribunal having been dismissed, the Department sought for a
reference of the question whether the assessee was entitled to
deduction of the entire amount.
On the basis that the Appellant Tribunal and the High
B
Court had rejected the Departments application, the Department
came in appeal to this Court under Article 136.
c
In the Appeal, it was contended on behalf of the
Department that as the provisions of s. 40A( 7 )(b )(ii) of the
Income Tax Act 1961 have not been satisfied, the respondent
was not entitled to the deduction of the gratuity amount.
Allowing the appeal,
~
~
HILD: It is necessary that the High Court should examine
whether the provisions of s.40A(7)(b)(ii) of the Act have been
D
complied with in the instant case, having regard to what has
been laid down in Sh. Sajan Ml.Us Ltd; v. ei-1.ssiooer of
Tnrlll!IP Tax K.P. and another, [1985) 156 I.T.R. 585, [955 F)
E
There is no dispute between the parties that the first
condition in the said provision has been satisfied by the
respondent. What remain is to determine whether the second and
third conditions are also satisfied. [955 F-G)
Judgment under appeal set aside. Case remanded to High
Court for fresh consideration. (955 G-H]
F
D.V. Bapat I.T.O, Companies Circle Bombay v. Tata Iron &
-
-
Steel Co. Ltd., C.A. No. 1247 of 1980 decided on January 8,
1986 followed.
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## Text

951
<XllUSSIONER OF INCCME-TAX, BCMBAY
Vo
VANAZ ENGINEERING (P) LTD., BCMBAY
MAY 2, 1986
(R.S. PATHAK, R.B. MISRA AND G.L. OZA, JJ.]
~
Income Tax Act, 1961, Sections 22, 29 and 40A(7)(b)(ii)
- Gratuity - Scheme introduced for first time in assessee firm
in 1970 - On basis of Actuarial Report total liability as on
December 31,
1970 debited to Profit and Loss Account -
Assessment proceedings - Income Tax Officer disallowing burden
-
-
y
)
---+
of liability - Appellate Assistant Commissioner and Tribunal
allowing that liability - Appeal by Revenue to Supreme Court -
Whether assessee entitled to deduction of entire amount - Held
question arises -
Matter remanded to High Court for fresh
consideration.
The respondent-firm (assessee) had no gratuity scheme
for the years preceding the calendar year 1970, but such a
scheme was fornnlated for the first time in the middle of 1970
and put into operation with effect from July 1, 1970.
The respondent debited to the Profit and Loss Account, a
sum of Rs. 2,11,305 as a charge against the profits being the
total liabilitv as on December 31, 1970 on account of the
gratuity scheme. This amount was provided on the basis of an
actuarial report prepared by a Consulting Actuary.
In assessment
proceedings
for the assessment year
1971-72, the Income-Tax Officer was not prepared to allow the
entire amount claimed by the respondent as the provision on
account
of
gratuity.
The
burden of the liability was
ascertained as Rs. 1,84,056 on the basis of a certificate
obtained by the assessee from the consulting actuary. The
Income Tax Officer therefore allowed the liability only to the
extent of Rs.27 ,249 the difference between Rs. 2, 11,305 and
Rs. 1,84,056.
On appeal, the Appellate Assistant Commissioner held
that the entire amount was allowable and gave a relief of
Rs.1,84,056.
A
B
c
D
E
F
G
H
A
952
SUPREME COURT REPORTS
[1986] 2 s.c.R.
The appeal of the Department to the Income Tax Appellate
Tribunal having been dismissed, the Department sought for a
reference of the question whether the assessee was entitled to
deduction of the entire amount.
On the basis that the Appellant Tribunal and the High
B
Court had rejected the Departments application, the Department
came in appeal to this Court under Article 136.
c
In the Appeal, it was contended on behalf of the
Department that as the provisions of s. 40A( 7 )(b )(ii) of the
Income Tax Act 1961 have not been satisfied, the respondent
was not entitled to the deduction of the gratuity amount.
Allowing the appeal,
~
~
HILD: It is necessary that the High Court should examine
whether the provisions of s.40A(7)(b)(ii) of the Act have been
D
complied with in the instant case, having regard to what has
been laid down in Sh. Sajan Ml.Us Ltd; v. ei-1.ssiooer of
Tnrlll!IP Tax K.P. and another, [1985) 156 I.T.R. 585, [955 F)
E
There is no dispute between the parties that the first
condition in the said provision has been satisfied by the
respondent. What remain is to determine whether the second and
third conditions are also satisfied. [955 F-G)
Judgment under appeal set aside. Case remanded to High
Court for fresh consideration. (955 G-H]
F
D.V. Bapat I.T.O, Companies Circle Bombay v. Tata Iron &
-
-
Steel Co. Ltd., C.A. No. 1247 of 1980 decided on January 8,
1986 followed.
f--
G
,
.!
H
CIVIL APPELLATE JURISDICTION
Civil Appeal No. 4253 of
1983.
From the Judgment and order dated 9th March, 1979 of the
Bombay High Court in I.T. Ref. No. 485 of 1976.
S.C. Manchanda and Ms. A. Subhashini for the appellant.
Mrs. A.K. Verma and Joel Peres for the Respondent.
c.1.r. BOMBAY v. VANAZ ENGINEERING [PATHAK, J,]
953
The Judgment of the Court was delivered by
PA'l'BAK, J. This appeal by special leave is concerned
with a question of some importance.
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 preceeding the
..
~calendar year 1970, but such a scheme was fo!'lll.llated 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
r or mental disablement' an employee was eligible for gratuity
\at different rates depending upon whether he had put in ten
•years of continuous service or more. In the case of termi -
nation of service or retrenchment, no gratulty was payable
upto five years of continuous service, and was payable at
rates thereafter depending upon whether the continuous service
was from five years to ten years, ten to fifteen years or more
than fifteen years. No gratuity was payable if an employee was
dismissed for misconduct, for causing laws to the company, for
violant 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 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 •
.
~
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
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 libility 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.
A
B
c
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954
SUPREME COURT REPORTS
[1986] 2 S.C.R.
On appeal by the respondent, the Appellate Assistant !---
Commissioner of Income Tax, following the decision of this
Court in the case of Metal Box Company of India Ltd. v. lbeir
Workmen, [1969] 73 I.T.R. 53 held that the entire amount was
allowable. Accordingly, he gave a relief of Rs. 1,84,056.
The Revenue proceeded in second appeal to the Income Tax
Appellate Tribunal, and the Appellate Tribunal, follcuing an
earlier decision rendered by it in a case where the decision~
of this Court in Metal Box Company of India Ltd. (supra), of
the Allahabad High Court in Madho Mahesh Sugar Mills (P) Ltd.
v. ec-Issioner of Iru:ome-tax, [1973] 92 I.T.R. 503 and of the
.-
Delhi High Court in Delhi Flour Mills Co. Ltd. v. Comnissioner
of Ine<l.e Tax, [1974] 95 I.T.R. 151 had been considered, came"(
to the conclusion that the Appellate Assistant Commissioner '
was right and the entire amount had to be allowed as a
charge;
against the profits. The appeal filed by the Revenue was
dismissed.
A similar question was considered at length by the
Bombay High Court subsequently in Tata Iron & Steel Co. Ltd.
v. D.V.
Bapat, Income-Tax Officer, Companies Circle 1(2)
Bombay,
and
Anr.,
[1975]
101
I.T.R.
292
in
which
a
corresponding view was taken by the High Court.
At the instance of the Revenue, a reference was sought
from the Appellate Tribunal for the opinion of the High Court
on the following question of law :
"Whether on the facts and in the circumstances of J..
the case, the assessee is entitled in law to the
deduction of
the entire provision for gratuity ,
amounting to Rs. 2,11,305 either under section 28 tread with section 29 or under section 37(1) of the
Income Tax Act, 1961?"
It is not clear whether the Appellate Tribunal made a
reference or declined it. What purports to be a copy of the
order dated 23.4.1980 of the Appellate Tribunal before us
appears to indicate that the Appellate Tribunal had indeed \.-
referred the question to the High Court. But the special leave
petition filed in this Court under Article
136 of the
Constitution "against the order dated 9. 3. 79 of the Bombay
C. I. T. BOMBAY v. VANAZ ENGINEERING [PATHAK, J.]
955
High Court in, I.T. Ref. No. 485 of 1976 in the matter of
-{ C. I. T. versus Vanaz Engineering Pvt. Ltd. for the assessment
year 1971-72", states that the Appellate Tribunal rejected the
reference application, and thereafter an application made to
the High Court was
rejected on April 23,
1980.
It is
unfortunate that this discrepancy exists in the record before
us. It demonstrates a want of sufficient care in preparing the
petition. It makes no difference, however, for even if we take
,..( it that the High Court rejected the reference application made
by the Revenue, we are of opinion that a question of law does
arise in the terms sought by the Revenue. We are further of
opinion that instead of sending the case back to the High
Court and directing it to call for a statement of the case and
y
\
""
thereafter to answer the question of law, it would be
appropriate to dispose of the case on the merits itself
inasmuch as
the question is one which has engaged the
attention of this Court in a number of cases already. Learned
counsel for the parties are also agreed that the case should
be disposed of in the same terms as D.V.
Bapat, I.T.O.
Companies Circle, Bombay v. Tata Iron & Steel Co. Ltd., (C.A.
No. 1247 of 1980) decided on January 8, 1986.
It is urged by learned counsel for the appellant that the
provisions of s.40A(7)(b)(ii) of the Income Tax Act, 1961 have
not been satisfied and, therefore, the respondent was not
entitled to the deduction of
the gratuity amount.
The
provisions of s.40A(7)(b)(ii) have been recently construed by
this Court in Shree Sajjan Mills Ltd. v. Coumissioner of
Income Tax, M.P. & Anr., (1985] 156 I.T.R. 585, and it seems
to us necessary that the High Court should examine whether
those provisions have been complied with in the present case
having regard to what has been laid down in that case. There
--+ -is no dispute between the parties that the first condition in
that provision has been satisfied by the respondent. What
remains
is to determine whether the second
and third
conditions are also satisfied.
In the circumstances, we think it appropriate to set
aside the judgment under appeal and remand the case to the
High Court for a fresh consideration of the case in the light
of the observations made by us in this judgment.
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956
SUPREME COURT REPORTS
(1986] 2 S.C.R.
The appeal is allowed, the judgment of the High Court is
set aside and the case is remanded to the High Court for J.-
disposal in accordance with the observations made by us. There
ls .no order as to costs.
N.V.K.
Appeal allowed.
+--