The Judgment of the Court was delivered by

Kochu Thommen, J.:— These two referred cases arise from a common order of the Income-tax Appellate Tribunal, Cochin Bench. The questions referred to us are the following:

“1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in holding that the assessee is entitled to the deduction in respect of gratuity for the earlier years under the Kerala Industrial Employees' Payment of Gratuity Act?

2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in holding that the assessee can claim the deduction of the gratuity in respect of the earlier years in the assessment year 1971-72 although they had made no such claim in the accounting year relevant for the assessment year 1970-71 during which period the same liability arose by the Gratuity Ordinance No. 7 of 1969?”

2. The assessee is a registered firm engaged in the business of manufacturing and selling cashew kernels. The accounting year is the year ended on 31st December, 1970, and the assessment year is 1971-72. It is admitted on both sides that the assessee's method of accounting was the mercantile system. A sum of Rs. 56,173 was debited by the assessee to its profit and loss account and the same amount was credited to the gratuity and retrenchment compensation payable account in respect of the accounting year relevant to the assessment year 1971-72. The assessee also claimed to deduct a sum of Rs. 12,21,750 as arrears of gratuity for the earlier years. The assessee claimed that in computing its profits and gains for the purpose of assessment under the Income-tax Act, it was entitled to make the deductions in respect of the relevant accounting year as well as the earlier years for payment of gratuity in terms of the Kerala Industrial Employees' Payment of Gratuity Act, 1970. The Income-tax Officer disallowed the claim on the ground “that the provision made of a contingent liability like gratuity has not been made on a scientific or actuarial basis”. On appeal by the assessee, the Appellate Assistant Commissioner allowed the claim for gratuity in respect of the relevant accounting year, subject to a deduction of 10%. As regards the liability for the earlier years he held as follows:

“On this point I do not think that the appellant has a case. I have stated above that all the liabilities of a particular year's trading, whether contingent or immediate, are debitable to that year's accounts. Applying the same principles to the earlier years' accounts we must hold that the trading liabilities of those years must be debited to the accounts of the respective years. A contingent liability of earlier years cannot, in any event, be debited in the books of a later year on ordinary mercantile principles.”

3. He, therefore, rejected the claim in regard to the arrears for the earlier years. Both the assessee and the department appealed to the Tribunal which, by its order dated October 30, 1973, upheld the claim for deduction of the amounts in respect of the relevant accounting year as well as the earlier years. The Tribunal held that the 10% reduction adopted by the Appellate Assistant Commissioner in regard to the relevant accounting year was only a rough estimate. The matter was referred to the Income-tax Officer for finding out the actual amount that the assessee was entitled to claim in respect of gratuity for the relevant accounting year. The Tribunal further held that the assessee was also entitled to claim the deduction in respect of arrears of gratuity for the earlier years. The two questions have been, therefore, referred to us at the instance of the department. In Commissioner of Income-tax v. High Land Produce Co. Ltd., [1976] 102 ITR 803 (Ker), this court held that deductions were permissible in respect of liability for gratuity arising during the relevant accounting year. This court said that the liability should be valued for a particular accounting year by ascertaining the present value of the contingent liability which arose during the accounting period on actuarial principles. In L.J Patel & Company v. Commissioner Of Income-Tax, Kerala., [1974] 97 ITR 152 (Ker), this court held that the liability that had accrued in an earlier year could not be taken into account for computing the income of a subsequent year.

4. Applying this principle, the arrears of the earlier years towards gratuity cannot be taken into account in computing the income of the subsequent accounting period. The assessee having adopted the mercantile system of accounting, it “is entitled to deduct from the profits and gains of the business such liability which had accrued during the period for which the profits and gains were being computed”: [Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income-tax, [1971] 82 ITR 363 (SC)]. The assessee can take into account only such liability as it had incurred during the relevant accounting year, which in the instant case is the year ended on December 31, 1970.

5. According to the Tribunal the liability to pay gratuity arose only in 1970, and not earlier, as the Kerala Industrial Employees' Payment of Gratuity Act, 1970, came into force on February 18, 1970. The reasoning of the Tribunal is that the Kerala Industrial Employees' Payment of Gratuity Ordinance, 1969, which preceded the Act was a temporary enactment, and, therefore, with the expiry of the Ordinance, all rights and obligations which arose under it also expired. This is what the Tribunal says in paragraph 19 of its order:

“The next question is whether it can be said, as claimed by the revenue, that such liability arose only in 1969 and not in 1970. No doubt, under the Ordinance, the liability was imposed on the employers to pay gratuity for the total service put in by the worker, but that liability lasted only till the Ordinance was in force. The Ordinance having been repealed, the liability arising under the Ordinance ceased, and a new liability came to be enforced by the Act. However, according to the saving provision under section 13, had the assessee provided for the liability in 1969, that action taken would have been deemed to have been done or taken under the Act of 1970 as if the Act had come into force on 10-12-1969. It has not been shown to us that anything was done or any action was taken either by the assessee or by the Government under the Ordinance. That being the position, and the Ordinance having been repealed, there was a clear liability in 1970 on the assessee to pay gratuity to the workers depending upon the circumstances in each case. What the assessees are claiming is not a liability under the Ordinance but under the Act. The answer to the question is, according to us, clear and unequivocal. The liability for gratuity for the total service including the service in the accounting year arose for the first time in 1970 and accordingly has to be allowed to the assessee.”

6. On the basis of the above reasoning, counsel for the assessee submits that the sum of Rs. 12,21,750 claimed by the assessee as the amount payable towards gratuity in respect of the earlier years actually became payable only after the Act came into force on February 18, 1970, and this was a liability which arose during the relevant accounting year. It is, therefore, admissible as an expenditure in computing the income of that year. He says that any liability which might have been incurred under the Ordinance had expired along with the Ordinance.

7. The Ordinance which came into force on December 10, 1969, was a temporary enactment as it was expected to expire on June 9, 1970. However, it was prematurely extinguished on February 18, 1970, by section 13 of the Act which reads as follows:

“13. Repeal and Saving.—(1) The Kerala Industrial Employees' Payment of Gratuity Ordinance, 1969 (7 of 1969), is hereby repealed.

(2) Notwithstanding such repeal, anything done or any action taken under the said Ordinance shall be deemed to have been done or taken under this Act as if this Act had come into force on the 10th day of December, 1969.”

8. The question really is whether a liability which had been incurred under the Ordinance had endured beyond the life of the Ordinance. In Stevenson v. Oliver, [1841] 151 ER 1024 (Exch D), the court, in examining the question whether a privilege to practise which had accrued in favour of a surgeon under a temporary Act outlived the life of the Act, had occasion to discuss the difference between a temporary statute and a repealed statute from the point of view of rights and obligations. Parker B. says:

“Then comes the question, whether the privilege of practising given by the Stat. 6 Geo. 4,……… is one which continues notwithstanding the expiration of that statute. That depends on the construction of the temporary enactment. There is a difference between temporary statutes and statutes which are repealed; the latter (except so far as they relate to transactions already completed under them) become as if they had never existed; but with respect to the former, the extent of the restrictions imposed, and the duration of the provisions, are matters of construction. We must therefore look at this Act, and see whether the restriction in the 11th clause, that the provisions of the statute are only to last for a limited time, is applicable to this privilege.”

9. Concurring with this view, Alderson B. says:

“Those parts of 6th Geo. 4, which explain the provisions of the 55 Geo. 3, are in their own nature permanent and effectual, notwithstanding the final clause, which makes the Act temporary…………. It seems to me that those persons who, during the year for which the last Act was to continue in force, or previous to that period, had obtained rights under it, had obtained rights which were not to cease by the determination of the Act, any more than where a person commits an offence against an Act of a temporary nature, the party who disobeyed the Act during its existence as a law is to become dispunishable on its ceasing to exist.”

10. In the, same case Lord Abinger C.B expressed himself as follows:

“It is by no means a consequence of an Act of Parliament's expiring, that rights acquired under it should likewise expire. Take the case of a penalty imposed by an Act of Parliament. Would not a person who had been guilty of the offence upon which the legislature had imposed the penalty while the Act was in force, be liable to pay it after its expiration? The case of a right acquired under the Act is stronger.”

11. About the enduring character of the rights acquired under a temporary enactment, Rolfe B. says:

“I think that although in one sense this Act is not in force, yet it is still permanent as to the rights acquired under it.”

12. Based on the above views, the court came to the conclusion that persons who had acquired the right to practise as apothecaries under a temporary enactment were not deprived of that right by the expiration of the Act. In State of Orissa v. Bhupendra Kumar Bose, AIR 1962 SC 945, the Supreme Court refers to the nature of rights and obligations under a temporary Act and says (pages 953, 954):

“In our opinion, what the effect of the expiration of a temporary Act would be must depend upon the nature of the right or obligation resulting from the provisions of the temporary Act and upon their character whether the said right and liability are enduring or not………… If the right created by the statute is of an enduring character and has vested in the person, that right cannot be taken away because the statute by which it was created has expired. If a penalty had been incurred under the statute and had been imposed upon a person, the imposition of the penalty would survive the expiration of the statute.”

13. The position in England at the time of the judgment in Steavenson v. Oliver, [1841] 151 ER 1024 (Exch D) was that, upon the repeal of a statute, rights acquired or liabilities incurred under the repealed enactment (except in so far as they related to completed transactions) were obliterated as if they had never existed. To avoid this contingency, a saving clause was generally inserted in a repealing statute to preserve such rights and liabilities. On the other hand, the duration of the rights or privileges or obligations which arose under a temporary statute (unlike a repealed enactment) depended upon the construction of the relevant provisions of that statute. The position regarding repealed statutes changed in England with the passing of the Interpretation Act, 1889. Section 38 of that Act provides that, “unless the contrary intention appears, the repeal shall not………… affect any right, privilege, obligation or liability acquired, accrued or incurred under any enactment so repealed;……… “This provision dispensed with the necessity of having to insert a saving clause in every repealing statute. Section 38 corresponds to section 6 of the General Clauses Act, 1897 (Central Act 10 of 1897), and section 4 of the Kerala Interpretation and General Clauses Act, 1125. After referring to the history and effect of the Interpretation Act, the Supreme Court in State Of Punjab v. Mohar Singh, Son Of Pratap Singh, AIR 1955 SC 84, 87, 88 says:

“Of course, the consequences laid down in section 6 of the Act will apply only when a statute or regulation having the force of a statute is actually repealed. It has no application when a statute, which is of a temporary nature, automatically expires by efflux of time. The Ordinance in the present case was undoubtedly a temporary statute but it is admitted that the period during which it was to continue had not expired when the Repealing Act was passed. The repeal, therefore, was an effective one which would normally attract the operation of section 6 of the General Clauses Act …………Whenever there is a repeal of an enactment, the consequences laid down in section 6 of the General Clauses Act will follow unless, as the section itself says, a different intention appears. In the case of a simple repeal there is scarcely any room for expression of a contrary opinion. But when the repeal is followed by fresh legislation on the same subject we would undoubtedly have to look to the provisions of the new Act, but only for the purpose of determining whether they indicate a different intention.

The line of inquiry would be, not whether the new Act expressly keeps alive old rights and liabilities but whether it manifests an intention to destroy them. We cannot, therefore, subscribe to the broad proposition that section 6 of the General Clauses Act is ruled out when there is repeal of an enactment followed by a fresh legislation. Section 6 would be applicable in such cases also unless the new legislation manifests an intention incompatible with or contrary to the provisions of the section. Such incompatibility would have to be ascertained from a consideration of all the relevant provisions of the new law and the mere absence of a saving clause is by itself not material.”

14. These principles have been followed by the Supreme Court in a number of cases: Indira Sohanlal v. Custodian Of Evacuee Property, Delhi & Others, AIR 1956 SC 77, Jayantilal Amratlal v. Union of India, (1972) 4 SCC 174 : AIR 1971 SC 1193, Commissioner of Income-tax v. Godavari Sugar Mills Ltd., [1967] 63 ITR 310 (SC).

15. These principles may be summed up as follows: In the case of a temporary enactment, the extent and duration of the rights, privileges and obligations are matters of construction. A temporary statute is in one sense permanent as to the enduring rights, privileges and obligations created thereunder. In the case of a repealed enactment, unless a different intention appears, the rights, privileges and obligations are kept alive by the General Clauses Act. Wherever a different intention is indicated in the repealing enactment so as to exclude the operation of section 6 of the General Clauses Act (or section 4 of the Kerala Act), the rights and obligations which arose under the repealed statute are, to the extent of their incompatibility with such different intention expressed in the new statute, (except in so far as they related to completed transactions), obliterated as if they had never existed.

16. A close look at the Ordinance and the Act would show that, but for certain minor modifications (such as those contained in section 4 of the Act which, unlike the Ordinance, includes retrenched, discharged or dismissed employees among the class of persons entitled to be paid gratuity, and the “repeal and saving” clause in section 13 of the Act), the provisions on the Act are a verbatim repetition of those in the Ordinance. The rights and liabilities which arose under the Ordinance are as enduring as those under the Act. The Ordinance, like the Act, provided that any person who knowingly made a false statement or representation for the purpose of avoiding payment or contravened, or made default in complying with, the provisions of the Ordinance or the rules made thereunder would be visited with punishment such as imprisonment or fine or both. Any such disobedience of the Ordinance, if the principle in Steavenson v. Oliver, [1841] 151 ER 1024 (Exch D) is applied, would not cease to be punishable after the expiry of the Ordinance. The liability for payment of gratuity which arose under the Ordinance was a permanent liability. It should nevertheless have been, for the purpose of deduction under the Income-tax Act, taken into account in the year in which it arose. It may, however, be asked whether the premature repeal of the Ordinance has made any difference to this position.

17. The Ordinance of 1969, although a temporary enactment, was repealed by the Act of 1970. The question is whether, despite the repeal of the Ordinance, the rights and obligations which arose under it are kept alive by virtue of section 4 of the Kerala General Clauses Act. If such rights and obligations are so saved, the liability for payment of gratuity was incurred by the assessee in 1969 under the Ordinance, and, therefore, it should have been claimed in the relevant accounting year. On the other hand, if as contended by the assessee, a contrary intention is indicated in the Act so as to prevent the application of section 4 of the General Clauses Act, the obligation which arose under the Ordinance was extinguished as if it had never existed. If that was the case, the liability to pay gratuity did not arise until 1970 when the Act came into force, and the assessee would then be well within his right to claim deduction in the assessment year 1971-72.

18. Section 4 of the Kerala Interpretation and General Clauses Act, 1125, reads as follows:

“Where any Act repeals any enactment hitherto made or hereafter to be made, then, unless a different intention appears, the repeal shall not—

(a) revive anything not in force or existing at the time at which the repeal takes effect; or

(b) affect the previous operation of any enactment so repealed or anything duly done or suffered thereunder; or

(c) affect any right, privilege, obligation or liability acquired, accrued or incurred under any enactment so repealed; or

(d) affect any penalty, forfeiture or punishment incurred in respect of any offence committed against any enactment so repealed; or

(e) affect any investigation, legal proceeding or remedy in respect of any such right, privilege, obligation, liability, penalty, forfeiture or punishment as aforesaid; and any such investigation, legal proceeding or remedy may be instituted, continued or enforced and any such penalty, forfeiture or punishment may be imposed as if the repealing Act had not been passed.”

19. The question is whether any different intention appears in the repealing enactment. Counsel for the assessee says that section 13(2) of the Act shows a different intention. According to him, the expression “anything done or any action taken” appearing in sub-section (2) of section 13 indicates that the obligation in respect of gratuity is deemed to have been incurred only under the Act as if the Act came into force on 10th December, 1969. He contends that the Act as such not being retroactive, the liability to pay gratuity for the earlier years was actually incurred only in 1970 after the coming into force of the Act, and the deductions are, therefore, rightly claimed in the relevant year. In answer to this contention, counsel for the revenue relies upon the decision of the Supreme Court in Mohar Singh's case, AIR 1955 SC 84, 88, where the court observed that what the sub-section “contemplates and keeps alive are rules, notifications, or other official acts done in exercise of the powers conferred by or under the Ordinance”. He points out that the expressions “anything done” or “any action taken”, can only mean public acts such as those referred to by the Supreme Court. According to him, no contrary intention is expressed in section 13(2) so as to oust the operation of section 4 of the General Clauses Act. Counsel for the assessee, however, relies on a later decision of the Supreme Court in Indira Sohanlal v. Custodian of Evacuee Property, AIR 1956 SC 77, 85 and says that the expressions “anything done” or “any action taken” are not confined to purely administrative action. He says that in any case the provisions of section 13(2) of the present Act are not identical to those which came up for consideration in Mohar Singh's case, AIR 1955 SC 84 ox Indira Sohanlal's case, AIR 1956 SC 77. While the saving clause in those two cases referred to “anything done or any action taken in the exercise of any power conferred by or under the Ordinance”, sub-section (2) of section 13 of the present Act does not speak of the exercise of any power.

20. It merely says “…anything done or any action taken under the said Ordinance shall be deemed to have been done or taken under this Act as if this Act had come into force on 10th day of December, 1969 He, therefore, contends that anything done under the Ordinance—whether it be an official act or otherwise—would oust the operation of section 4 of the General Clauses Act. This is an interesting aspect with which we are not concerned in this case, as, admittedly, nothing had been done and no action had been taken under the Ordinance. No amount had been paid, no liability had been accepted or enforced, no entry had been made in the books, no penalty or punishment had been included or imposed and no proceedings had been instituted to show that anything had been done or any action had been taken under the Ordinance in respect of gratuity. Even if anything had been done or any action had been taken under the Ordinance, we do not see how any such act would have affected the rights and liabilities which arose under the Ordinance. Section 13(2) only says that anything done or any action taken under the Ordinance would be deemed to have been done or taken under the Act, as if the Act operated retrospectively. The Act is not retrospective in the sense that rights and liabilities arising thereunder operate anteriorly during the period of the Ordinance; what is provided under the saving clause of section 13(2) is that the machinery of the Act is substituted for that of the Ordinance in respect of anything already done or any action already taken under the Ordinance pursuant to and for the enforcement of such rights and liabilities which arose under the Ordinance.

21. In our opinion the saving provision under section 13 of the Act does not affect or hinder the operation of section 4 of the General Clauses Act in regard to rights and liabilities. Consequently, the obligation in respect of gratuity which arose under the Ordinance was of an enduring character and, in the absence of any contrary intention, it continued to be binding upon the assessee even after the repeal of the Ordinance. Counsel for the assessee, however, points out that such rights and obligations cannot in any case endure beyond June 9, 1970, which is the day on which the Ordinance should have, had it not been for the earlier repeal, expired in the normal course. He says that such rights and obligations cannot be projected beyond the normal life of the Ordinance. He calls in aid the observation of the Supreme Court in Qudrat Ullah v. Municipal Board, Bareilly, Bareilly, (1974) 1 SCC 202 : AIR 1974 SC 396, to the effect that the right was “limited in duration to the period beyond which the Act does not exist. In that case the Supreme Court expressed doubt as to whether a procedural disability, imposed upon the plaintiff by a temporary statute which was repealed, created a right in favour of the defendant, and held that, even if it did, such a right was not of a permanent character so as to endure beyond the normal life of the temporary statute. In the instant case, however, the position is different. A contingent liability towards gratuity which could be reckoned for the purpose of the Income-tax Act was imposed on the employer and such liability, being of a permanent nature, endured beyond June 9, 1970. Just as a permanent right or liability endured beyond the life of a temporary statute which gave birth to it, so would it, in the absence of a contrary intention, outlast the premature repeal and the normal span of the repealed statute.

22. Consequently, we are of opinion that the amount payable towards gratuity for the years earlier to the year of account during which the Ordinance came into force and for the year of account should have been claimed in the year in which the liability arose under the Ordinance. In the assessment year in question the assessee is entitled to claim as an expenditure only such amounts in respect of which a liability towards gratuity arose during the relevant accounting year. The amounts for which the liability arose in the earlier years are not deductible in the accounting year relevant to the assessment year 1971-72. In the result, we answer the two questions referred to us in the negative, that is, in favour of the department and against the assessee. We direct the parties to bear their respective costs in these tax referred cases.

23. A copy of this judgment, under the seal of the High Court and the signature of the Registrar, will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.