R.L. Gulati, J.

1. Under section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal, Allahabad, has submitted a statement of the case inviting the opinion of this court on the following question of law:

"Whether, on the facts and in the circumstances of the case and on a true construction of the Government notification dated April 27, 1961, it could be held that no liability accrued to the assessee-company for the payment of the gratuity for the assessment year under appeal"

The assessment year involved is 1962-63, the relevant accounting period being the year ending on September 30, 1961. The assessee claimed to deduct a sum of Rs. 1,37,811 in the computation of its net income liable to income-tax. This amount, according to the assessee represented the sum which he would be required to pay to its workmen on account of gratuity. The claim was disallowed by the Income-tax Officer, the Appellate Assistant Commissioner of Income-tax and finally by the Income-tax Appellate Tribunal. The main ground for disallowing the claim, as set out in the order of the Tribunal, is that in the relevant accounting year no ascertained liability arose for payment of gratuity. When the reference came up for hearing before this court, it was felt that in order to effectively dispose of the reference, it was necessary to know the discounted value during the year in which the debit entry was made of the future gratuity payment. As the Tribunal had not applied its mind to this aspect of the question, the case was sent back to it for a supplementary statement of the case stating the discounted value of the liability on account of gratuity during the relevant year. The Income-tax Appellate Tribunal found that the amount claimed by the assessee did not represent the true discounted value of the liability. The Tribunal, accordingly, thought it proper to obtain expert calculations from an actuary. The assessee then produced a certificate from the Zonal Actuary of the Life Insurance Corporation of India, Kanpur. On the basis of that report the Tribunal found that the fair estimate of the discounted present value of the gratuity payment as on September 30, 1961, would be Rs. 1,05,200. Thus, if the answer to the question referred to us is in favour of the assessee, it would be entitled to deduct a sum of Rs. 1,05,200 out of its profit in order to arrive at the net profits liable to tax.

2. The assessee is a private limited company and owns and runs a sugar mills in the district of Basti in Uttar Pradesh. On April 27, 1961, the U.P. Government issued a notification to implement the recommendations of the wage board which had been appointed in December, 1957, for working out the wage structure, etc., of employees in sugar industry. The scheme came into force on November 1, 1960. The relevant clause of the scheme runs as follows:

" Scale of gratuity:

1.Subject to the other provisions of this scheme, gratuity shall be paid according to the following scale and on the occurrence of the following events:

(a) On death while in employment irrespective of the length of service.

One-half of a months pay to a permanent and one-fourth of a months pay to a seasonal worker for every continuous year or seasons of service, as the case may be, subject to a maximum of fifteen months pay.

(b) On attainment of the age of superannuation.

(c) On retirement or resignation due to continued ill-health.

(d) On resignation or on termination of employment for any reason other than for serious misconduct:

(i) For the period prior to the enforcement of this scheme on completion of ten but less than thirty years or seasons continuous service as the case may be, one-third of the months pay to a permanent and one-sixth of the months pay to a seasonal workman for every continuous year or season of service, as the case may be.

(ii) For the period subsequent to the enforcement of this scheme on completion of ten years or seasons service-one-fourth of the monthly pay to a permanent and one-eighth to a seasonal workman for every completed year or season of service, and on completion of 20 years or seasons of service, but less than 30 years, one-third of the monthly pay to a permanent and one-sixth to a seasonal workman for every completed year of service.

(iii) On completion of 30 years or seasons continuous service as the case may be, the amount payable for events mentioned in clauses (a) to (c).

(2) A fraction of a year exceeding six months shall count as one full year and six months or less shall be ignored.

(3) In calculating the amount of gratuity the period of service after the implementation of the wage structure as given in this order shall be taken first and the pay for the pre-implementation period will be the basis for the calculation of gratuity for the rest of the years."

3. It is in pursuance of this notification that the assessee-company set apart a total sum of Rs. 1,37,811 for payment of gratuity and made an appropriate entry in its books of accounts crediting the gratuity account and debiting the profit and loss account. According to the assessee the sum of Rs. 1,37,811, was made up as under:

Rs. 17,06325 for previous year.

Rs. 1,20,747.62 for earlier years.

4. As pointed out earlier, the Income-tax Appellate Tribunal has disallowed the claim on the ground that the liability of the assessee for payment of gratuity in the relevant accounting period was not ascertained and it was only a contingent liability which the assessee had to meet at a future date as and when a particular event took place.

5. Now, it cannot be disputed that every expenditure incurred by an assessee wholly and exclusively for purposes of business is to be allowed as deduction in the computation of the net profit of a business for the purposes of assessment to income-tax. It can also not be disputed that the payment of gratuity to workmen of a business concern would be an expenditure of that nature but the expenditure which is allowable in a particular year must be certain and capable of ascertainment. If the liability is uncertain and contingent, it cannot be allowed as a deduction. Under the notification aforesaid a liability was cast upon the assessee to pay gratuity to its workmen in accordance with the scale provided in that notification. The gratuity is payable when a workman dies, retires, resigns or is removed from service. These events no doubt take place in the future but they cannot be said to be uncertain. The services of every workmen are bound to come to an end on account of one or the other causes nominated above. Under the scheme every employer is bound to pay gratuity to a workman for his past and future services. In the circumstances every businessman would make provision every year for his liability under the notification. Under the mercantile system of accounting an expenditure is admissible not only when it is actually paid but when the liability for the expenditure is incurred. The only question is as to whether such a liability can fairly and accurately be ascertained in a particular year.

6. Previously there appeared to be some doubt as to whether such a liability is capable of ascertainment and it could be called a liability in praesenti. The doubt has, however, now been set at rest by the Supreme Court in Metal Box Company of India Ltd. v. Their Workmen : [1969] 73 ITR 53. [LQ/SC/1968/226 ;] ">[1969] 73 ITR 53. [LQ/SC/1968/226 ;] [LQ/SC/1968/226 ;] The question that arose in that case was as to whether provision for gratuity was an expenditure which could be deducted out of the gross profit of the company for the purpose of working out the available surplus for payment of bonus to its workmen. A similar argument was raised in that case, namely, that the provision for gratuity did not represent any present and ascertainable liability and, as such, was not deductible. It was argued in that case just as in the case before us that the gratuity if and when paid could only be allowed as a deduction and not a provision for its payment made each year. This is what the Supreme Court observed:

"In the case of an assessee maintaining his accounts on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid."

7. With these observations the Supreme Court held that the estimated liability of the assessee-company for payment of gratuity based on actuarial valuation was a permissible deduction. It further held that such a liability was a liability in praesenti though payable in future and it was ascertainable. In our opinion this decision of the Supreme Court provides a complete answer to the contentions raised by the department in the instant case.

8. Mr. Deokinandan Agarwal, learned counsel appearing for the department, relied upon Standard Mills Co. Ltd. v. Commissioner of Wealth-tax : [1967] 63 ITR 470 (SC). In that case the question was whether the liability to pay gratuity was a debt within the meaning of section 2(m) of the Wealth-tax Act. It is in that connection that the Supreme Court observed that such a liability was a contingent liability which did not bring into existence any debt in praesenti. That is not the question in the present case. In its judgment in Metal Box Company of India Ltd. v. Their Workmen : [1969] 73 ITR 53 [LQ/SC/1968/226 ;] ">[1969] 73 ITR 53 [LQ/SC/1968/226 ;] [LQ/SC/1968/226 ;] , the Supreme Court has distinguished that case. After referring to the observations that the liability for payment of gratuity was a contingent liability and would not be deductible in the computation of net wealth, it observed at page 64:

"These observations show that the court was of the view that though such a liability is a contingent liability and, therefore, not a debt under section 2(m) of the Wealth-tax Act, it would be deductible under the Income-tax Act while computing the taxable profits. In the instant case, the question is not whether such estimated liability arising under the gratuity schemes amounts to a debt or not. The question that concerns us is whether, while working out the net profits, a trader can provide from his gross receipts his liability to pay a certain sum for every additional year of service which he receives from his employees. This, in our view, he can do, if such liability is properly ascertainable and it is possible to arrive at a proper discounted present value. Even if the liability is a contingent liability, provided its discounted present value is ascertainable, it can be taken into account. Contingent liabilities discounted and valued as necessary can be taken into account as trading expenses if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into account."

9. The next case relied upon by him was the case of Calcutta Co. Ltd. v. Commissioner of Income-tax : [1959] 37 ITR 1 (SC). It is difficult to understand how that case helps the learned counsel. There the Supreme Court held that an estimated expenditure for the development of land which a person had undertaken to carry out was deductible as an expenditure even though no amount had actually been spent in that case. This case, in fact, supports the assessee.

10. The learned counsel then relied upon another decision of the Supreme Court in Indian Molasses Co. (Private) Ltd. v. Commissioner of Income-tax : [1959] 37 ITR 66. [LQ/SC/1959/89] It was laid down in that case that:

"The income-tax law makes a distinction between an actual liability in praesenti and a liability de future which, for the time being, is only contingent. The former is deductible but not the latter."

11. No one disputes that proposition, but what is contended is that the liability for payment of gratuity ascertained on actuarial calculations is a liability which is a liability in praesenti and is capable of ascertainment. That is what the Supreme Court has held in the case of Metal Box Company of India Ltd. v. Their Workmen : [1969] 73 ITR 53. [LQ/SC/1968/226 ;] ">[1969] 73 ITR 53. [LQ/SC/1968/226 ;] [LQ/SC/1968/226 ;]

12. The learned counsel for the department then contended that the payment of gratuity is provided for in clause (v) of sub-section (1) of section 36 of the Income-tax Act and it can only be allowed in accordance with that provision. That is a question which was not raised before the Tribunal. In any case, the answer to that question is plain. The present case is not governed by section 36(1)(v), which permits deduction out of the gross profits of any contribution made by an employer towards gratuity fund created under a trust. In the present case the amount is deductible in the computation of the gross profit itself.

13. In the case of Metal Box Company of India Ltd. the Supreme Court has dealt with this aspect of the matter in the following words:

"But the contention was that though Schedule VI to the Companies Act may permit a provision for contingent liabilities, the Income-tax Act, 1961, does not, for, under section 36(v), the only deduction from profits and gains permissible is of a sum paid by an assessee as an employer by way of his contribution towards an approved gratuity fund created by him for the exclusive benefits of his employees under an irrevocable trust. This argument is plainly incorrect, because section 36 deals with expenditure deductible from out of the taxable income already assessed and not with deductions which are to be made while making the profit and loss account."

14. Mr. Deokinandan then contended that at best the assessee could be allowed to deduct the gratuity relating to the relevant previous year. It could not be permitted to deduct gratuity relating to the earlier years. He went on to urge that out of the amount claimed by the assessee only a sum of Rs. 17,063.25 related to the previous year and the balance related to the earlier years. This contention is founded upon a misconception. The liability for the payment of gratuity was cast upon the assessee for the first time under the notification aforesaid on November 1, 1960. Before that date, there was no such liability upon it. The notification, however, 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, in order to ascertain the quantum of liability as on November 1, 1960, the past services of the employees had also to be taken into account. That does not mean that any part of the gratuity was payable by the assessee in any of the earlier years. The past services of the employees had to be taken into account merely to arrive at the quantum of the liability which became payable after the notification.

15. The next contention put forward by him was that, under the notification an employee, who was removed from service for serious misconduct, was not entitled to any gratuity and to that extent the liability was contingent and uncertain. Now, such a case would indeed be rare and cannot convert the entire liability into a contingent one. At any rate that circumstance must have been taken into consideration in the actuarial valuation worked out by the actuary. In actuarial valuation all contingencies are taken into consideration before arriving at the discounted value of a liability like the present one. For the reasons stated above, we answer the question in the negative, in favour of the assessee and against the department. The assessee is entitled to the costs of this reference which we assess at Rs. 200.