Liability for payment of gratuity is not a contingent liability and can be allowed as a deduction if it is sufficiently certain and capable of valuation.

C. S. P. SINGH, J.

( 1 ) THE Income-tax Appellate Tribunal, Delhi Bench, has referred the following question for the opinion of this court :

"whether, on the facts and in the circumstances of ,the case, the assessee is entitled to the deduction of Rs. 8,02,402 or any other sum as a deduction in the computation of its business income on the ground that a liability had accrued on the part of the assessee to provide for the payment of gratuity to its employees under the Sugar Industry Workmen Gratuity Scheme ?"

( 2 ) THE assessment year involved in the present reference is 1962-63, for which the previous year ended on 30th September, 1961. In the relevant period, the company owned two sugar mills, one at Pilibhit and the other at Kashipur. It claimed deduction of a sum of Rs. 25,000 in the Kashipur unit, and a sum of Rs. 45,000 for the Pilibhit unit under the head " Gratuity ". The ITO, on the view that the amounts claimed were unascertained liabilities, allowed an amount of only Rs. 8,550 which has been actually paid, and disallowed the balance. An appeal was preferred before the AAC. In the appeal, the assessee enlarged its claim to Rs. 8,02,402. The reason for the enlargement of the claim was that the Government of India had appointed a Central Wage Board for the sugar industry in December, 1957, for the purpose of working out a wage structure and the principles governing the grant of bonus/gratuity. The report of the Board was accepted by the government of India, and the State Governments were advised to take various steps to enforce the recommendation. The State Government accepted the recommendation after considering it at a tripartite conference, which included the representatives of the sugar mills and workers. Thereafter, a notification under Section 3 of the U. P. Industrial Disputes Act, 1947, was issued for giving effect to the recommendations of the Wage Board. The recommendations included a scheme of gratuity, the terms of which were set out in Appendix V to the notification. The scheme was to come into force with effect from November 1, 1960. The assessee calculated its liability for gratuity on the basis of this scheme, and made a claim for Rs. 4,25,520 and Rs. 3,06,000 for the earlier years relating to Pilibhit and Kashipur factories, respectively, and an amount of Rs. 50,995 and Rs. 29,750 as gratuity for the relevant year. As some amount of gratuity had already been allowed by the ITO, the claim in appeal was put at Rs. 8,02,402. While arriving at this figure the assessee had taken into account the number of permanent and seasonal workmen working in the two units, and multiplied the average length of service by 20 half-months pay in the case of permanent workmen, and 10 quarterly months basic pay in the case of seasonal workmen. This claim was rejected by the AAC on the ground that the claim for gratuity for the earlier years must be taken to have arisen in those years under the mercantile system of accounting, and could not be allowed in the relevant year, and, secondly, that no such claim has been made before the ITO, and a new claim could not be set up in appeal. As respects gratuity for the previous year the AAC took the view that it was only a. contingent liability, and as such the entire claim for the gratuity of the previous year as calculated by the assessee was rejected. The appeal was dismissed. The assessee then appealed to the Tribunal. Before the tribunal it was claimed that the entire amount should be allowed as a liability, for it was created in the year of account by virtue of a notification, and further that the amount could be calculated on the actual value for which the assessee had already taken steps. The Tribunal held that the liability of the assessee could not be allowed on the actuarial value as the actuarial value had not been placed before it by the assessee. It then considered the gratuity scheme, and found that different criteria had been applied for fixing the quantum of gratuity to

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