JAGADISAN J.

The assessee in this reference application under section 66 of the Indian Income-tax Act is a registered firm of four partners carrying on business as manufacturers of stainless steel-ware, brass-sheets and circles. It maintains its books of accounts on the mercantile system. In the year of account ended April 12, 1956, the relevant " previous year " for the assessment year 1956-57, it credited a sum of Rs. 5, 600 to a separate account called " gratuity reserve account ". This amount represented approximately fifteen days' wages of all its employees or workmen, who were in its service during the year of account. The stated object of the assessee in carrying this amount of Rs. 5, 600 from and out of the profits of the year to the " gratuity reserve account " is to meet an eventual liability in case some of the workers happen to be retrenched at some point of time in the future According to the assessee, this was a statutory obligation or burden imposed upon it under section 25F of the Industrial Disputes Act. We shall refer to the provisions of this Act and to the nature of the assessee's liability a little later

In the year of assessment 1956-57, the assessee claimed this amount of Rs. 5, 600 as a permissible deduction in the computation of its profits chargeable to tax. The claim for deduction was apparently based on section 10(2)(xv) of the Indian Income-tax Act, and presumably also on the principle of computation of the true profits of the business, allowing all legitimate costs incurred in earning the income. The Income-tax Officer, City Circle III, Madras, disallowed the claim, holding that the assessee would not be entitled to make a revenue charge on the income of the year of account against prospective liabilities of a contingent nature. The assessee went up on appeal to the Appellate Assistant Commissioner of Income-tax, B-Range, Madras. The appellate authority affirmed the view taken by the Income-tax Officer. He held that the provision made for payment in respect of a statutory obligation would not amount to an " expenditure ", as the amounts had not been credited to the accounts of the respective employees, but were only placed under an account, the assessee still having dominion and control over the fund. There was a further appeal by the assessee to the Income-tax Appellate Tribunal. This time it was successful. The Tribunal took the view that the assessee being under a statutory liability under section 25F of the Industrial Disputes Act to pay the employees " gratuity " at the rate of fifteen days' wages for every completed year of service, there was nothing wrong for the assessee to make provision in each of the years, as the liability is an ascertained one. In the view of the Tribunal, it is an ascertained liability of the assessee, in respect of which it made a provision in the year of account, and that, therefore, the claim for deduction on the basis of that provision would be permissible in law. The Tribunal failed to consider the question whether the assessee had really incurred the expenditure. Be it noted that what all the assessee did was to credit the general reserve account with this sum of Rs. 5, 600 and, though the assessee now asserts that this reserve is also intended for the purposes of meeting a future statutory liability in case of retrenchment, there is nothing on record to show that the segregation of this amount from the profit and loss account was made with the specific purpose and object of meeting that liability. The assessee having succeeded in establishing its claim for deduction, the department applied for a reference under section 66(1) of the Act to the Tribunal and the Tribunal has referred the following question

" Whether the aforesaid sum of Rs. 5, 600 or any part thereof can be said to be an ascertained liability in respect of gratuity to the assessee's employees due under the provisions of the Industrial Disputes Act, as at the end of the aforesaid 'previou