An assessee can deduct the estimated liability for gratuity in computing its profits for the year in question, as it is a permissible deduction under Section 37 of the Income Tax Act, 1961, where the liability is created for the first time by a statute and is in respect of a large number of employees and the circumstances under which it could be defeated are remotely contingent and so insignificant in reality in view of the number of employees concerned.

( 1 ) IN this reference under Section 256 (1) of the I. T. Act, 1961, the following question has been referred to this court:"whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the provision for gratuity amounting to Rs. 8,87,863 was allowable in its entirety as a revenue deduction for the assessment year 1972-73 ?"

( 2 ) AS is apparent from the question, the assessment year involved is the assessment year 1972-73. The ITO had noticed that the assessee had created a provision for gratuity to the extent of Rs. 8,57,863. The ITO was of the opinion that the allowable amount pertaining to the year of account was only Rs. 1,79,595. In that view of the matter he disallowed the sum of Rs. 6,78,267. He held that the amount represented excess provision. The assessee preferred an appeal before the AAC.

( 3 ) IT was argued before the AAC that the entire provision of Rs. 8,57,8. 63 was made on actuarial basis and was in consonance with the statutory provisions of the West Bengal Employees' Payment of Compulsory Gratuity Act, 1971 (hereinafter referred to as "the said Act" ). It was submitted that in view of the decision of the Allahabad High Court, which we shall presently note, the disputed amount has been wrongly disallowed. The AAC accepted the assessee's contention. He, therefore, deleted the addition made by the ITO on this score.

( 4 ) BEING aggrieved by the decision of the AAC, there was a further appeal to the Tribunal and reliance was placed on several decisions to which we shall presently refer and after discussing the contentions of the parties the Tribunal was of the opinion that the AAC was right in allowing this appeal of the assessee. Accordingly, the appeal by the revenue was dismissed by the Income-tax Appellate Tribunal. In these circumstances, the question as indicated before has been referred to this court.

( 5 ) THE fundamental question involved in this reference is how to compute the profit for the purpose of income-tax for the relevant accounting year. In the facts and circumstances of the case, it is important in this connection to bear in mind the provisions of the West Bengal Employees' Payment of Compulsory Gratuity Act, 1971. This Act came into effect during the year in question with which we are concerned.The relevant provision of this Act which is material for our present purpose is Section 4 which makes payment of certain gratuity compulsory for certain companies and the petitioner is one of those companies. The said section reads as follows :"payment of gratuity.-- (1) Gratuity shall be payable to an employee :-- (a) on his superannuation, (b) on his retirement or resignation, (c) on his death or total disablement due to accident or disease, after completion of not less than five years of continuous service : provided that the completion of continuous service of five years shall not be necessary where the termination of the employment of any employee is due to death or disablement. Explanation.--For the purposes of this section, total disablement means such disablement as permanently incapacitates an employee for all work which he was capable of performing before the accident or disease resulting in such disablement. (2) Notwithstanding anything contained in Sub-section (1), no gratuity shall be payable to an employee whose employment has been terminated for his gross misconduct. Explanation.--For the purpose of Sub-section (2), 'gross misconduct' means: (a) any act or wilful omission on the part of the employee resulting in loss or damage to, or destruction of, property belonging to or owned by the employer; or (b) any serious act of violence on the part of the employee; or (c) any act on the part of the employee which constitutes an offence involving moral turpitude punishable under the Indian Penal Code (45 of 1860 ). (3) In the case of death of an employee, the gratuity shall be payable to the nominee of the employee