Mody, J.:— This is a reference under section 66(1) of the Indian Income-tax Act, 1922.
2. This reference relates to three assessment years 1952-53, 1955-56 and 1956-57, the relevant accounting years being the calendar years 1951, 1954 and 1955. The assessee was carrying on business as a manufacturer of textile goods. There was a dispute about payment of gratuity between the assessee and its employees and it was referred for industrial adjudication. In the adjudication an award dated 6th October, 1948, was made and it was published in the Bombay Government Gazette on 28th October, 1948. The assessee became liable to pay gratuity to its employees under that award on the following basis mentioned in the award, viz.:—
“Every employee should be entitled to gratuity at the rate of one month's salary current at the time of retirement, discharge or resignation from service… I therefore, direct that gratuity should be paid to all employees covered by this reference on the scale laid down below:
(1) On the death of an employee while in the service of the company (mill)—one month's salary for each year of service subject to a maximum of 15 months' salary to be paid to his heirs or executors or nominees.
(2) On voluntary retirement or resignation of an employee—after 15 years' continuous service in the company—15 months' salary.
(3) On termination of his service by the company—
(a) after 10 years' continuous service in the company but less than 15 years' of service in the company— ¾ of one month's salary;
(b) after 15 years' continuous service in the company—15 months' salary.
(4) A gratuity will not be paid to any employee who is dismissed for dishonesty or misconduct, but will be paid to the employees who have been discharged between the 1st January, 1948, and the date of the publication of this award in the Official Gazette.
Salary for the purposes of calculating gratuity shall mean substantive salary (exclusive of allowances) of an employee on the date the employee ceases to be in the employment of the mill. The mill may at their discretion grant gratuity in excess of the above.”
3. There is no dispute that the assessee maintained his books of accounts on the mercantile system of accounting. At the end of each of its said three accounting years the assessee made calculations of gratuity which it would become liable to pay under the said award. The calculations were made on the footing as if the employees were eligible to be paid gratuity as at the end of each of the three years. The amounts so calculated were shown in the assessee's books of accounts as a provision for gratuity. The amounts in respect of the said three accounting years so calculated and shown in the books were Rs. 48,784, Rs. 43,805 and Rs. 60,958, respectively. These amounts were estimates made by the assessee as to what provision the assessee should make to meet the assessee's liability to pay the gratuity under that award as and when such liability materialised in future. During each of these three calendar years the assessee had in fact paid gratuity to its employees, but the entries in respect of such actual payments made during each of these three years were made separately, and this reference does not relate to the amounts actually paid for gratuity in the three years. In the assessments for each of the three years the assessee claimed the said relative amount as a permissible deduction under section 10(2)(xv) or, in the alternative, under section 10(1). The assessment proceedings in respect of these three assessment years proceeded on fairly similar lines and the reference to the orders made in respect of any of these three years would equally apply to similar orders made in respect of any of the two other years.
4. In his order, in respect of the accounting year 1954, the Income-tax Officer has observed:
“… It has been seen that the provision for gratuity is on the basis of the present salaries drawn by the workers and employees satisfying the conditions laid down by the industrial court. However, the industrial court's award would cause a liability on the assessee to pay gratuity on the pay last drawn by the workers in question at the time of retirement, death and other type of decisions. Thus what the company has actually to prove for is the present value of a future benefit that accrues to the workers. Inasmuch as there is no foolproof way in evolving the present value of a future benefit such provisions cannot be said to be either adequate or correct. In the circumstances the provision is disallowed and actual payments as and when made allowed to the company.”
5. This passage shows that the Income-tax Officer rejected the assessee's claim because of two reasons: Firstly, that the claim for deduction as made by the assessee was on the basis of “the present salaries”, meaning the salaries as payable in the accounting year 1954, and, secondly, that what the assessee was required in law to prove was the present value, meaning the value in 1954, of a future benefit that would accrue to the employees, but that there was no foolproof way of evaluating such present value. The first reason negatived the method in fact adopted by the assessee in arriving at the amount of the gratuity for which provision was made during that year. The second reason is a more general one and it states that it would not at all be possible to evaluate the present liability in this particular year, i.e, in 1954, of ascertaining the present value of the future liability.
6. The assessee appealed to the Appellate Assistant Commissioner against the order of the Income-tax Officer. The Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. The assessee then appealed to the Income-tax Appellate Tribunal. The assessee contended before the Tribunal that as the said amounts provided for gratuity represented actual calculations based on the terms of the award which created the liability, the amounts provided for gratuity should be allowed as a deduction. In dealing with that contention the Tribunal observed:
“As the terms of the award require calculation of the salary on the date the employee ceases to be in the employment when he is eligible for gratuity, the calculations now made will only be approximations and not accurate figures of the amount of liability. The payment of gratuity is also dependent on the employee not coming within the scope of subparagraph 4 extracted above. In a case of this kind, only the actual payments made each year can be allowed as a deduction. We have, therefore, to hold that the assessee's claim for deduction of a provision made in the accounts is not justifiable. Even in the case of mercantile system of accounting, what is contemplated is payment, actual or constructive, as per the system of accounting. The mere provision in the accounts will not amount to a payment as understood in law. We have, therefore, to hold that the assessee has not made out its claim for deduction of Rs. 48,784.”
7. The Tribunal dismissed the assessee's appeal.
8. The Income-tax Officer had remarked in his judgment: “Thus what the company has actually to prove for is the present value of a future benefit that accrues to the workers.” Nonetheless—and it is not disputed before us—the assessee did not alter the basis of its claim for deduction for gratuity or work out the amount of its claim for deduction on any scientific basis or even appeal or argue as to the calculation of the amount for deduction for each of the three years on any basis other than its original basis either in its appeal to the Appellate Assistant Commissioner or even in its appeal to the Income-tax Appellate Tribunal.
9. The question of law referred is:
“Whether, on the facts and in the circumstances of the case, the sums shown as provision for gratuity in the accounts for the relevant previous years are allowable deductions in computing the business income of the assessee for 1952-53, 1955-56 and 1956-57?”
10. This question is the same which was formulated by the assessee in its application to the Tribunal for this reference.
11. Mr. Dastur, the learned counsel for the assessee, contended that the assessee was entitled in law to a deduction for the provision made by it against its liability to pay to the workers in future amounts by way of gratuity under the said award. In support of this contention he relied upon the two judgments of the Supreme Court in Metal Box Company Of India Ltd. v. Workmen [1969] 73 I.T.R 53 and Commissioner of Income-tax v. Swadeshi Cotton and Flour Mills Pvt. Ltd. [1964] 53 I.T.R 134 Mr. Joshi, the learned counsel for the revenue, on the other hand, contended that the assessee's claims for deduction of the said three amounts provided by the assessee in respect of the said three accounting years were for a future liability, that the liability was a mere contingent liability and that the claim was therefore not sustainable in law. In support of his contention he relied upon the judgment of the House of Lords in Southern Railway of Peru v. Owen [1957] A.C 334, two judgments of the Supreme Court in Indian Molasses Co. v. Commissioner of Income-tax [1959] 37 I.T.R 66 and Standard Mills Co. Ltd. v. Commissioner of Wealth-tax and the judgment of the Madras High Court in Commissioner of Income-tax v. Indian Metal and Metallurgical Corporatian. Mr. Joshi's second contention was that, in any event, even if it be held that the assessee was entitled to make a provision against its future liability for payment of gratuity under and in accordance with the award, the claims for deduction of the said three amounts as expenditure under section 10(2)(xv) were not for any liability which had accrued in any of these three years, whether payable immediately or in future, and as each of these amounts had not been calculated on any scientific basis, if any such basis was at all possible, and that this claim of the assessee should not be allowed.
12. Under the award gratuity is payable to an employee on his death, voluntary retirement or resignation or on termination of his service by the company. In the event of death, the gratuity is to be paid on the basis of one month's salary for each year of service subject to a maximum of fifteen months' salary. In the case of voluntary retirement or resignation, it is payable only after fifteen years' continuous service in the assessee-company, the amount being fifteen months' salary. In the case of termination of service by the assessee-company, the gratuity is payable only after ten years' continuous service at a particular rate, but if it happens after fifteen years' continuous service at a particular larger rate. Moreover, it would not be possible to know whether any of the employees would in future be dismissed for dishonesty or misconduct and thus cease to be entitled to any payment of gratuity as in such eventuality no gratuity is payable. The order of the Income-tax Officer states that the said provision against gratuity made by the assessee is “on the basis of the present salaries drawn by the workers and employees.” Further details as to how the assessee worked out the said amounts are not available on the statement of the case or the documents annexed to it and forming part thereof. But what is clear is that the provision was calculated by the assessee on the basis of the salary as payable and paid to each employee during the particular year of accounting out of the said three accounting years. The basis for this provision by itself suffers from many shortcomings. To illustrate, it does not take into account the possibility of the death of a worker, nor of his being dismissed for dishonesty or misconduct. Moreover, it also does not take into account what would be the amount to be provided for a worker in the accounting year on the basis of his last salary which he may be earning at the time when gratuity may become payable to him which may be after as few as one or two years or as many as fifteen or twenty years, Moreover, what would have to be taken into account would be the present value of a future liability, i.e, by ascertaining the amount of the future liability and setting apart during a particular year an amount which, with interest earned thereon, would equal the amount which would be payable to the worker as gratuity in future. There are many other shortcomings which we need not dilate on. Shortly stated, there are a large number of uncertain factors to be provided for by a proper evaluation. It might, however, have been possible—and on this point we do not express any opinion—for the assessee to arrive at some scientific basis for calculating in each accounting year the amount which it should provide for during that year against its future liability to pay gratuity to its employees by, for example, a method on which actuaries calculate the risk of insurance, whether life or general. The method on which the provisions have been made are very unsatisfactory.
13. The question referred to us refers to the three specific sums provided for by the assessee as mentioned above in respect of the said three accounting years. When this difficulty on facts became clear to us, we informed counsel that in view of this difficulty as to facts it might not even be necessary for us to consider the question of law contended for by Mr. Joshi, viz., that no provision for gratuity can at all be allowed as a deduction because the liability which is sought to be provided for is a contingent liability. We stated that even if this point of law were to be decided in favour of the assessee, the difficulty pointed out by us on facts would come in the way of the assessee. Mr. Dastur, however, contended that we may decide the said point of law and then, if the answer to the question happened to be in favour of the assessee, the Tribunal would, after hearing the parties, decide whether a proper scientific method of calculating the amount to be provided during each year against the assessee's ultimate liability to pay gratuity to all its workers would be found or not and, if it was available, what would be the amount thereof. This approach canvassed for by Mr. Dastur, however, is not permissible on the question as referred to us, and we pointed it out to Mr. Dastur, because the question is raised in respect of the said three specific amounts only. The question is not what is the correct method of assessing liability, which would be a question of an academic nature. Our jurisdiction under section 66 would be to decide, as a question of law, whether a particular method actually followed is correct or not and not to lay down in advance, by way of advice or guidance, what the method to be followed should be. Mr. Dastur, as a matter of fact, contended that under the power available to us we must reformulate proper questions and suggested that we should reformulate the following two questions:
“1. Whether provision for gratuity is permissible for deduction under section 10(2)(xv) or section 10(1) of the Indian Income-tax Act, 1922?
2. If the answer to question No. 1 is in the affirmative, how is the amount of liability to be quantified?”
14. In our opinion, question No. 1 would be a proper question as it does form part of the question as formulated and referred to us and arises on the decision of the Tribunal. Question No. 2, however, would??? opinion, be a proper question as it seeks advice in advance of a decision by the Tribunal. The only question which can properly arise in this behalf, on the facts and in the circumstances of the case, is whether the specific amounts as claimed by the assessee were allowable or not as a deduction by way of expenditure. We can re-formulate the question only to bring out the real disputes between the parties, the disputes being such as existed before the Income-tax Officer or the Appellate Assistant Commissioner or the Income-tax Appellate Tribunal. Before the Income-tax Officer the assessee urged its contention for all the three specific amounts claimed on the basis as mentioned earlier. The Income-tax Officer specifically refers to what he thought was the shortcoming in the basis. Neither in its appeal to the Appellate Assistant Commissioner nor in its appeal to the Tribunal did the assessee canvass for any other basis. It is not possible to say from the record whether any scientific basis for making such calculation was available to the assessee or what the actual amount worked out on that basis would be. The assessee never canvassed for acceptance of any other basis. It had an opportunity to do so on two occasions when it filed its said two appeals. Mr. Dastur, however, contended that all the three authorities, viz., the Income-tax Officer, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal, rejected the assessee's contention on the ground that no provision against gratuity could be allowed as a deduction in this case, and that the assessee filed appeals to have that decision set aside and that therefore till that decision was set aside, there was no opportunity or scope for the assessee to put forward its contentions about any alternative method or basis for calculating the provision to be made for each of the years against its future liability to pay gratuity. In our opinion, this contention cannot be accepted. Undoubtedly, the assessee's primary effort was to get the point decided against it reversed, but it was necessary for the assessee to simultaneously urge what should be the basis on which it would calculate and claim the amount for deduction. The assessee should have been prepared to put all its points forward in case the judgment against the assessee on the other point was reversed either by the Appellate Assistant Commissioner or by the Tribunal. The necessary conclusion which follows is that the assessee wanted to stand or fall on the amount calculated on the basis which it had adopted and omitted to canvass for any other basis. No basis other than as adopted by the assessee was therefore at any stage in dispute between the parties. We, therefore, cannot raise a question on the lines of the second question suggested by Mr. Dastur, because it would be a question relating to something which was never in dispute between the parties till this reference was made. That this was so is also clear from the question which the assessee applied for being referred to this court and was in fact referred. The question, as stated earlier, is confined to the said three amounts. We, therefore, do not think it necessary to reformulate the question, as it is clear that the first question suggested by Mr. Dastur is covered by the question referred and the second question suggested by him cannot, in law, be raised. In this connection it may be stated that the judgments of the House of Lords in Southern Railway of Peru v. Owen and of the Madras High Court in Commissioner of Income-tax v. Indian Metal and Metallurgical Corporation show that it is conceivably possible that a scientific method of calculation may, given the requisite facts, be possible. The said judgment of the House of Lords is a leading case and if a scientific method was available to the assessee on the lines envisaged in that judgment the assessee should have made a timely attempt to base its case on such scientific basis. Under the circumstances, even if the point of law canvassed for by Mr. Joshi were to be decided against the revenue, the assessee must fail before us. We, therefore, do not decide the contention urged by Mr. Joshi and answer the question only on the footing of the said three specific amounts and the basis on which they have been calculated.
15. We, therefore, answer the question in the negative. Before we part with this reference, we may record that during arguments the calculation of the provision made by the assessee in respect of a year other than the three accounting years with which this reference is concerned, was shown to us because the calculations for the three relevant years was not available to the assessee, i.e, to the official liquidator, who now represents the assessee, the assessee having been ordered to be woundup. The assessee is now represented by the official liquidator and if he intends to proceed further, there is one aspect which the official liquidator will have to bear in mind after proper checking up of the facts. It appeared to us, but from only the said material which was not relevant to any of these three years, that the calculation made even on the basis of the current salaries payable to its workmen, but after discounting them, will most probably be an amount not more than Rs. 8,000 or Rs. 10,000 for any of these three years. But, as already stated, the relevant material was not before us and the official liquidator could not produce it at the time of the hearing before us and we want to clarify that we have stated this for the only purpose that the official liquidator, who is a public officer, may bear this point in mind if it ever becomes necessary for him to apply his mind further in this behalf.
16. The assessee to pay the costs of the revenue.