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1. The petitioner before us is the Tata Iron & Steel Co. Ltd. and the petitioner will hereinafter be referred to as "the company" for the sake of brevity. The 1st respondent is the Income-tax Officer, Companies Circle I(2), Bombay, concerned with the 'assessment of the company and will hereinafter be referred to as "the Income-tax Officer" for the sake of brevity. The 2nd respondent is the Union of India.

2. Before adverting to the respective contentions it will be necessary to set out briefly the facts which are not in dispute. The company has its registered office in Bombay and has in its employment about 56,000 employees. It is the agreed position that the company keeps its accounts on the mercantile system of accounting. The accounting year of the company is the financial year. Up to and including the assessment year 1971-72, the company had claimed and was granted deduction in respect of its liability for gratuity to its employees on the basis of actual payments made during each relevant accounting year. For the next assessment year, however, the company claimed a deduction of a sum of Rs. 1,28,09,135 on the footing that the said amount represented its gratuity liability on an actuarial valuation, and the contention of the company was accepted by the Income-tax Officer. It may be mentioned that this allowance was in accordance with a circular dated September 21, 1970, issued by the Central Board of Direct Taxes, Government of India, New Delhi; this circular will hereinafter be referred be referred to as the "first circular". We shall refer in detail to this first circular subsequently. We are concerned with the assessment year 1973-74. The company obtained an actuarial valuation of its gratuity liability for the accounting year ending March 31, 1973. According to the company, an amount of Rs. 2,77,52,991 was the amount ascertained as a result of the said actuarial valuation. We are really not concerned with the reason why the provision of the actuarial calculation increased from slightly over one core to this large amount of over Rs. 2,70,00,000 within the short span. The company, however, claims that this was on account of the increased liability imposed by the Payment of Gratuity Act, 1972, which Act came into force on September 16, 1972.

15. It may be clarified at this juncture that the claim of the company pertains to what may be indicated as the incremental increase in its liability towards the accrued gratuity liability which arose in the year ended March 31, 1973. This would be indicated by a perusal of the actuarial valuation report, exhibit B to the petition. According to this report, the total accrued gratuity liability for the company as on Match 31, 1972, was in the amount of Rs. 11,37,80,345. Similarly, according to the actuary's report, the total accrued gratuity liability of the company as at March 31, 1973, was Rs. 14,15,33,336. Thus, by a simple process of subtraction the total accrual of gratuity liability for the year 1972-73 would be put at Rs. 2,77,52,991, which is the amount claimed by the company as a deduction.

32. It is clear, therefore, that even in this case the Supreme Court appears to have confirmed the principle enunciated by the House of Lords.

33. We now turn to Metal Box Company of India Ltd. v. Their Workmen which decision is expressly mentioned by the Central Board of Direct Taxes in the first circular and which decision, therefore, merits close scrutiny and attention. In that case the Supreme Court was primarily concerned with the calculation of bonus payable to the workmen of Metal Box Company under the Payment of Bonus Act, 1965; and, broadly speaking, under the provisions of the said Act the available surplus for any employer in respect of any accounting year has to be the gross profits for that year after deducting therefrom the sums referred to in section 6 of the said Act. Section 4 indicates the manner in which gross profits derived by an employer from an establishment are to be calculated. In the case of a banking company the gross profits are to be calculated in the manner specified in the First Schedule to the said Act, and in all other cases they are to be calculated in the manner specified in the Second Schedule to that Act. We are really not concerned with the detailed provisions in the Act or in the Schedules, and what has been mentioned above is only as a background for appreciating the rival contentions which came up for decision before the Supreme Court in Metal Box Company's case. In the profit and loss account of the said company a sum of Rs. 18.38 lakhs, being the estimated liability under two gratuity schemes framed by the company, was deducted from the gross receipts. Under one of the schemes, which was first introduced in 1960, gratuity was payable on the termination of an employee's service either due to retirement, death or termination of service, the amount of gratuity payable being dependent on his wages at that time and the number of years of service put in by him. The company had worked out on an actuarial valuation its estimated liability and made provision for such liability not all at once but spread over a number of years. In 1964-65, the second gratuity scheme was introduced by the company which was available to its officers. In this case also the estimated liability under the scheme was worked out. But, instead of providing the whole of it during the year, the provision was spread over a number of years. In the year under consideration, i.e., 1964-65, the company had made provision against its liability under the two schemes for Rs. 18.38 lakhs, whereas the actual payment as gratuity to the workmen and officers who retired was Rs. 1,31,585 and Rs. 87,295, respectively. The Union contended that the company could deduct from the gross receipts only the sums actually paid during the year. The company, on the other hand, maintained that what it had done was legitimate and was warranted by the principles of accountancy and, therefore, the hole amount of Rs. 18.38 lakhs was deductible in arriving at its net profits. The question which the Supreme Court was called upon to consider was whether it was legitimate in such a scheme of gratuity to estimate the liability on an actuarial valuation and deduct such estimated liability in the profit and loss account while working out the net profits of the company. It was observed by Shelat J., speaking for the Supreme Court (at pages 62-63 of the report), as under :

46. In Madho Mahesh Sugar Mill's case the assessee-company was maintaining its accounts on the mercantile system. In 1961 the U.P. Government issued a notification with regard to the sugar industry imposing a liability on persons running sugar mills to provide gratuity to their workmen in accordance with the scale provided in the said notification. In pursuance of this notification the assessee-company set apart the sum of Rs. 1,37,811, representing the sum that the assessee-company would be required to pay to its workmen as gratuity and made an appropriate entry in its book of accounts, crediting the gratuity account and debiting the profit and loss account for the assessment year 1962-63. This sum was claimed by the assessee-company as business expenditure, but the claim was disallowed by the Income-tax Officer, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. On a reference to the Allahabad High Court it was contended for the revenue that at best the assessee-company could claim only such gratuity relevant to the previous year. The discounted value of the assessee-company's liability to pay gratuity based on an actuarial valuation was determined at the instance of the High Court at Rs. 1,05,200. Before the High Court the Calcutta Company's case. Indian Molasses Company's case. Standard Mills' case were referred to, and finally the Metal Box Company's case according to Mr. Joshi, makes only casual observations regarding the position under the Income-tax Act, was considered and applied. It was held that the Government order provided that the gratuity would be payable to an employee not only in respect of his future services but also for his past services. Thus, on order to ascertain the quantum of liability as on the date the order came into effect, the past services of the employees had also to be taken into account. In the circumstances every businessman would make provision every year for his liability under the notification. According to the Allahabad High Court, the liability for payment of gratuity ascertained on actuarial calculations, in which all contingencies are taken into consideration, is a liability in present and is capable of ascertainment, and, therefore, the sum of Rs. 1,05,200 was a permissible business expenditure in the assessment year concerned. According to the High Court, prior to the decision of the Supreme Court in Metal Box Company's case there appeared to be some doubt as to whether such a liability was capable of ascertainment and whether it could be called a liability in present.