The Judgment of the Court was delivered by

Balasubrahmanyan, J.:— Two questions have been referred by the Income-tax Appellate Tribunal for our opinion in this case. They are:

“1. Whether, on the facts and in the circumstances of the case, and in view of the provisions contained in section 36(1)(v) of the Income-tax Act, 1961, the Appellate Tribunal was right in holding that the claim of the assessee for allowance of provision for gratuity was liable to be deducted subject to the verification mentioned in its order for the year 1972-73?

2. Whether, on the facts and in the circumstances of the case, the mahimai collection of Rs. 17,610 is not taxable in the assessment year 1972-73?”

2. The assessee in this case runs a textile mill, employing many workmen. In earlier years, the assessee was in the habit of paying gratuity to the workmen who retired from service or got discharged from employment. Whenever gratuity was actually paid, the assessee claimed the payment as a deduction or outgoing of the business in the computation of the assessable profits. In the accounting year relevant to the year 1971-72, the assessee wanted to introduce a scientific system to provide for the payment of gratuity to its workmen. Part of that scheme was to make a provision every year out of the net profits as and towards probable gratuity liability worked out on the basis of actuarial valuation. Any provision of this kind would be a charge against the profits of the year. In the assessment year 1972-73 relevant to the previous year ended with December 31, 1971, the assessee claimed deduction towards provision made for gratuity in the sum of Rs. 1,46,356. In that account year the assessee also happened to make an actual payment out of Rs. 80,282 towards gratuity payable to certain retired employees who retired during that year. The ITO allowed the actual payment of gratuity in the sum of Rs. 80,282 as an admissible deduction but refused to deduct Rs. 1,46,356 being the provision made by the assessee as regards the existing employees and as and towards their possible gratuity liability as and when it may arise in future.

3. The assessee objected to the disallowance of the provision for gratuity in the sum Rs. 1,46,356 and appealed against the ITO's order. The Appellate Tribunal considered the claim from two aspects, firstly, whether there Was any change in the method of accounting when the assessee introduced the system of making provision for gratuity as distinct from the earlier practice of claiming as an expenditure the actual gratuity paid out to the retiring employees. The second aspect, which the Tribunal considered was whether the amount of provision made for possible gratuity liability calculated on scientific basis can at all be regarded as a proper charge against revenue and whether it will come in for deduction in the computation of the assessable business profits. On the latter point, the Tribunal had no difficulty in deciding that the provision for gratuity must be regarded as a charge against revenue. On the former question, however, the Tribunal did not have full materials to show whether any part of the provision for gratuity made during the year in the aggregate sum of Rs. 1,46,356 did not also take into account the liability for payment towards the employees who actually retired during the accounting year and got paid Rs. 80,282 as gratuity. Since the relevant materials were not available, the Tribunal remanded the matter to the ITO for ascertaining the correct position subject to the working out of the details. However, the Tribunal held that the assessee was entitled to deduct an appropriate provision for gratuity as a charge against the profits. They also held that the assessee was entitled to introduce this system of making a provision for gratuity even thuogh it might involve a change in the method of accounting.

4. The learned standing counsel for the I.T Dept. could not contest the legal position that a provision for gratuity made by an assessee on the basis of scientific or actuarial valuation is a proper deduction in the computation of the assessee's annual business profits, in view of the long line of decision of courts, the latest of which is the decision of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT, [1981] 132 ITR 559. The learned standing counsel for the Department, however, submitted that the Tribunal was not justified in upholding the claim of the assessee for the deduction of Rs. 1,46,356 as a provision for gratuity while the assessee had obtained deduction for the actual payment of gratuity for a sum of Rs. 80,282. Learned counsel has submitted that the switch over by the assessee to the system of making provision for gratuity really created a change in the method of accounting. In any case, according to the learned counsel, the claim of the assessee both for allowance of the payment of the gratuity to its retiring employees and the deduction towards provision for gratuity cannot be granted in one and the same year of account. The contention put forward by the standing counsel for the Department does not seem to us to be quite in point, parily in view of the remand by the Tribunal for the specific purpose of ascertaining whether any part of the actual payment of gratuity to the retiring employees during the year had been duplicated in the provision for gratuity claimed by the assessee in the sum of Rs. 1,46,356. We do not also think that there is any change in the method of accounting by reason of the assessee having shifted to the system of making a provision for gratuity. All along, and even before introducing this new system the assessee was employing the mercantile method of accounting only. The assessee had not been following the practice of making appropriate provision for possible gratuity liability on the basis of actuarial valuation claiming the provision every year as a legitimate charge against the Revenue. When the legal position became clear that such a provision was certainly deductible as a Revenue item in the computation of the profits, the assessee lost no time in introducing the scientific system in the manner aforesaid. This does not, however, make for any change in the method of accounting as such. The accounting method is the same as ever before. All that happened was that a provision was made in the relevant account year, while similar provision had not been made in the earlier years, not because of any difference in the method of accounting but because it did not occur to the assessee to make such a provision and make a claim for deduction. We must, therefore, reject as untenable the criticism levelled by the learned counsel for the Department on the determination of the Tribunal. As we earlier indicated, the learned counsel did not contest the position that an actuarial provision for gratuity is a legitimate deduction having regard to a catena of decisions culminating in Vazir Sultan Tobacco Co. Ltd. v. CIT, [1981] 132 ITR 559 (SC). We, therefore, answer the first question in the affirmative and against the Department.

5. As for the second question of law referred in this case, it would appear from the order of assessment that the assessee had collected mahimai during the relevant period, from its customers on its yarn sales, and such collections amounted in all to Rs. 17,610. The assessee claimed a deduction of these collections on the ground that they do not form part of its trading receipts. The ITO rejected the assessee's contentions in a cryptic observation to the effect “that there is no separate collection”. The ITO accordingly added back this sum of Rs. 17,610 to the income of the assessee. The ground of rejection apparently was that the collections made by the assessee towards mahimai were not by way of separate hundial collections or under some other indication that they had nothing to do with the assessee's trade, but were effected on the occasion of the sale of yarn to the purchasers. Whatever might have been the real basis which operated in the mind of the officer for the disallowance of this item, the Appellate Tribunal upheld the claim of the assessee on appeal. At the time of hearing the appeal it was brought to the notice of the Tribunal that in the case of another mill in Coimbatore, the Commissioner had passed an order allowing deduction of similar mahimai collections. Referring to that order of the Commissioner, the Tribunal observed thus:

“In a sister company which is also running a textile mills in Coimbatore, the Commissioner of Income-tax u/s. 264 had deleted the mahimi collections as not taxable. When the Commissioner of Income-tax himself has no case that it is taxable, we fail to see why this point should be taken as the ground against the Appellate Assistant Commissioner's order. We see no merit in the department's contention.”

6. The argument of the learned standing counsel for the Department before us was that the Tribunal did not think fit to go into the question of the allowability or disallowability of the mahimai collections on its merits but merely disposed of the controversy by forcing the Department to take a consistent stand in all the cases of Coimbatore mills presenting similar claims for deductions of mahimai collections, We see the force of the criticism voiced by the department's counsel. The question before the Tribunal was whether the mahimai collections were to be dealt with as part of the trading receipts of the assessee or dealt with as something else. This question is not properly dealt with by the Tribunal by reference to how the Department itself had treated, considered and disposed of by reference to some other cases. As the learned counsel for the Department pointed out, the Commissioner while granting relief in the other case had taken care to point out that all the collections made by the assessee in that case had been utilised only for the purpose of charity. The learned standing counsel for the Department said that the Tribunal did not even go into the question whether similar circumstances were present in the instant case.

7. Mr. S.V Subramaniam, learned counsel for the assessee, while accepting the unsatisfactory way in which the Tribunal made short shrift to the real question at issue, namely, the point relating to the allowability of mahimai collections, nevertheless, submitted that on that account, this court need not desist from going into the merits of the assessee's claim for excluding the sum of Rs. 17,610 from the assessable income. Learned counsel pointed out that the question of law before this court is broad enough in scope to enable it to examine the basis of the assessee's claim for deduction. Learned counsel also further submitted that the principles to be followed for allowance of mahimai collections may be gathered from a parallel decision rendered by the Supreme Court as respects a claim for collection of dharmada by an assessee in upper India. He referred us to the decision of the Supreme Court in CIT v. Bijli Co/ton Mills (P.) Ltd., [1979] 116 ITR 60.

8. The case before the Supreme Court was that of a cotton mills, as in the present case, which was in the habit of collecting certain amounts on account of charity from its customers called dharmada. This exaction was collected by the assessee-mills in that case on every sale of yarn and cotton, at the rate of 1 anna per bundle of 10 lbs of yarn and 2 annas per bale of cotton. In the bills issued to the customers, these amounts were shown in a separate column. It was found that separate accounts were found maintained by the assessee for the dharmada account, in which realisations on account of dharmada collections were credited and payments made thereout were debited. It was also found that no part of the collection of dharmada was ever credited to the trading account of the assessee nor were they carried to the P. & L. A/c of the mills. On these facts, the Supreme Court held that the dharmada collections made by the assessee in that case cannot be regarded as part of the assessee's trading receipts taxable under the head “Business”. In the course of their judgment, the Supreme Court observed that while dharmada was stated to have been collected towards charity, it was undoubtedly a payment, which the customers were required to pay in addition to the price of the goods. Nevertheless, it was held that the purchase of goods by the customers only provides the occasion for the collection and it does not provide the consideration for the dharmada amount taken from the customer. The Supreme Court also observed that when once it is found that collections of dharmada were kept separate and they were not carried over to the trading account or trading and profit and loss account but kept separate, it is a matter of indifference whether the assessee had retained to himself any wide discretion in regard to the manner in which and the time at which the dharmada collections would be spent for charitable purposes. On the facts found in that case, the Supreme Court accordingly agreed with the decision of the High Court that the collections towards dharmada could not be treated as part of the assessable trading receipts of the assessee.

9. Before the Supreme Court certain decisions arising under the sales tax laws were cited for the proposition that the dharmada collections and mahimai collections by dealers nevetheless formed part of the sales turn over within the meaning of the appropriate definition of turnover in the sales tax cases. The Supreme Court, however, was apparently inclined to regard these decisions as turning on the peculiar definition of the terms “turnover” or “price” defined in the sales tax enactments concerned: Without expressing any opinion of the correctness of those decisions, on a consideration of broader principles, the Supreme Court, however, laid down that any realisation which cannot be regarded as part of the price or a surcharge on the price but payment for the specific purpose being spent on charitable purposes can by no means be regarded as part of the trading receipts.

10. Following the tests applied by the Supreme Court and adopting the reasons in their judgment, we must hold that mahimai collections effected by the assessee in this case cannot be regarded as taxable business income of the assessee or, for that matter, as the assessee's taxable income under any head of income whatever under the Act. As we earlier mentioned, the-one and only ground on which the ITO had disallowed the claim of the assessee and added back the amount of collection was that there were no separate method of collections towards mahimai and all collections were made only on the occasion of the sales of yarn. If separate collections had been made by the assessee towards dharmada or mahimai de hors the sales, transactions, it would be an easy case for decision. Such collections would have nothing to do with the trade apart from having been impressed with the character of a trust. The difficulty only arises in cases where the mahimai is requested for and obtained as an addition to the sale price. It is such kinds of cases which have come before courts, one of which is to be found in the reported decision of the Supreme Court. Even in such cases, case law in the books has now clearly laid down that where the intention of the parties is that mahimai or dharmada is taken and given not as a part of the purchase price but towards charity, such amounts cannot be regarded as trading receipts. There is no material put forward by the Department in this case in support of the proposition that mahimai collections in this case were really intended by the assessee-mills as well as by the yarn traders concerned as part of the trading receipts or sales turnover of the assessee. We are, therefore, of the opinion that the second question must be answered in favour of the assessee and against the Department. The learned standing counsel for the Department made a reference to a Bench decision of this court in CIT v. N.S Pandaria Pillai, [1969] 73 ITR 457. The assessee in that case who was engaged in the manufacture and sale of washing soaps, collected from his customers half a per cent of the sale price. This half a per cent was separately shown in the relative bills as for Mummoorthy Vinayagar Charity. The total of the collections in that case for a given year amounted to Rs. 2,270 and this was charged to P. & L. A/c. It appears from the records in that case that the amount collected was not actually spent by the assessee towards charity. In the events, the Tribunal held that the amount so collected did not form part of the assessee's income for the years. The case came up before this court on a reference. This court did not think it necessary to give a final opinion on the question whether the amount was or was not a part of the revenue receipts of the assessee in that case. They indicated that it would be necessary for the Tribunal to go into the facts in detail to find out whether there was really a trust in favour of Mummoorthy Vinayagar Charity or whether the collections were part of the trading receipts of the assessee. In the course of their judgment, however, the learned judges made a few observations which in our view and with great respect are hard to reconcile with the trend of the decisions generally and the ruling of the Supreme Court in particular in CIT v. Bijli Cotton Mills (P.) Ltd., [1979] 116 ITR 60. In CIT v. N.S Pandaria Pillai, [1969] 73 ITR 457 (Mad), the court observed that if the payment made by the customer was not voluntary and not intended as a gift to charity, the collection would form part of the income of the person who received the same, notwithstanding that the same was shown separately in the bills as part of the bargain. The implication of this observation is that even in cases, where the charity collections are shown separately and not brought into the trading account or P. & L. A/c, the receipts can well be regarded as part of the trading receipts of the assessee concerned. We doubt the correctness of this enunciation of the principle. In the Supreme Court case, the assessee had kept separate accounts and did not bring the dharmada receipts into the trading and profit and loss account. The Supreme Court treated this aspect of accounting as a significant factor in arriving at the-conclusion whether or not dharmada collections are part of the trading receipts. In view of the basis of the decision of the Supreme Court in CIT v. Bijli Cotton Mills (P.) Ltd., [1979] 116 ITR 60, the importance of the decision in CIT v. N.S Pandaria Pillai, [1969] 73 ITR 457, as a precedent seems to us to be little or none.

11. For the reasons we have stated above, we answer the second question also in the affirmative and against the Department. Having regard to the results of this reference as a whole, the Department will pay the costs of the assessee. Counsel's fee Rs. 500.