COMMISSIONER OF INCOME -TAX, BOMBAY versus VANAZ ENGINEERING (P) LTD., BOMBAY

Citation: [1986] 2 S.C.R. 951 · Decided: 02-05-1986 · Supreme Court of India · Bench: R.S. PATHAK · Disposal: Appeal(s) allowed

Judgment (excerpt)

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 
\a

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