T.D. Sugla, J.
1. In this departmental reference relating to the assessee's assessment for the assessment year 1973-74, the Tribunal has referred to this court the following question of law under section 256(1) of the Income-tax Act, 1961 :
'Whether, on the facts and in the circumstances of the case, the liability of the assessee in the matter of payment of gratuity under the Payment of Gratuity Act, 1972, of Rs. 5,34,000 is an allowable revenue expenditure in the assessment of the assessee for the accounting period relevant to the assessment year 1973-74 ?'
2. The assessee is a company. The assessment year involved is 1973-74 for which the previous year ended on December 31, 1972. The Payment of Gratuity Act, 1972, came into force some time in October, 1972. According to the assessee, it became liable to pay gratuity to its employees under the statute for the first time during the previous year. It made a provision of Rs. 8,65,000 in respect of its gratuity liability. The break-up of the amount was Rs. 3,31,000 as the gratuity liability of the previous year and the remaining sum of Rs. 5,34,000 as liability of the past years.
3. The assessee claimed the aforesaid provision as deduction on revenue account. Without giving any reason, the Income-tax Officer allowed the assessee's claim to the extent of Rs. 3,31,000 only and disallowed the claim for the balance amount of Rs. 5,34,000.
4. Following the Allahabad High Court decision in the case of Madho Mahesh Sugar Mills (P.) Ltd. v. CIT [1973] 92 ITR 503, the Appellate Assistant Commissioner accepted the assessee's claim that the entire gratuity liability had accrued during the previous year as the liability had arisen under the Payment of Gratuity Act, 1972, which had come into force during the previous year only. For more or less identical reasons, the Tribunal dismissed the departmental appeal.
5. It is pertinent to mention that section 40A(7) was introduced in the Income-tax Act, 1961, with retrospective effect from April 1, 1973, by the Finance Act, 1975, on May 12, 1975. The assessment year involved herein being assessment year 1973-74, ordinarily the assessee's claim for the year as regards gratuity liability was required to be considered under that sub-section as well. However, the order of assessment and the appellate order of the Appellate Assistant Commissioner were completed long before the insertion of sub-section (7) in section 40A and even the order of the Tribunal was passed on March 24, 1975. Naturally, this provision was not, rather could not have been, considered by any of the authorities below.
6. Besides reiterating that gratuity liability for the past years did not accrue as liability during the previous year, Dr. Balasubramanian, learned counsel for the Department, placed reliance on the Supreme Court decision in the case of Shree Sajjan Mills Ltd. V. CIT : 1986ECR276(SC) , for the proposition that the assessee's claim is also hit by the aforesaid provision of section 40A(7). In the alternative, he contended that the issue not having been examined by the departmental authorities as well as the Tribunal from the point of view of section 40A(7), the matter must go back to the Tribunal for adjudication according to law. Dr. Balasubramanian also contended that, after the insertion of section 40A(7), the gratuity liability, even if it is held to have accrued during the previous year, could not be allowed under section 37.
7. Shri Mistri, learned counsel for the assessee, on the other hand, submitted that it was not open to Dr. Balasubramanian to support the Tribunal's order on the basis of section 40A(7) in reference proceedings before this court. He pointed out that, for considering whether and to what extent the provisions of section 40A(7) inserted with retrospective effect are attracted to the assessee's claim for deduction, so many aspects of the matter will require examination. This, according to him, could not be legally done at the reference state.
8. In support, he placed reliance on the Supreme Court decision in the case of Rajkumar Mills Ltd. v. CIT : [1955]28ITR184(SC) . The High Court in that case had directed the Tribunal to further examine certain aspects of the matter which were not examined by the Tribunal originally. The Supreme Court held that, this, the High Court was not entitled to do. It was observed at pages 188-189 :
'The High Court was, therefore, in error in giving the directions it did to the Tribunal. It, moreover, abjured its advisory function and asked the Tribunal not to submit to it any further statement of the case but to dispose of the matter according to law and in accordance with the directions given by it. This, in our opinion, the High Court was not entitled to do. If the High Court on the statement of the case submitted to it by the Tribunal found it difficult to come to the conclusion that the contracts for sale had been entered into in British India, it should have called upon the Tribunal to submit to it a further statement of the case. The question whether the contracts for sale were entered into in British India or at Indore was not a question of fact to be determined by the Tribunal. It was a question of law to be determined by the High Court on a true construction of the correspondence, documents and the conduct of the parties. The learned Attorney-General frankly conceded that he could not support that part of the order passed by the High Court and agreed that a further statement of the case should have been called for by the High Court in regard to question 1 and 2.'
9. On the basis of the above observations, his submission is that the High Court could, in cases where facts for answering the question of law are not sufficient, direct the Tribunal to draw up and submit a supplementary statement of the case, but it cannot direct the Tribunal to dispose of the matter according to law in accordance with the directions given by it. Shri Mistri then placed reliance on another Supreme Court decision in the case of Keshav Mills Co., Ltd. v. CIT : [1965]56ITR365(SC) . He pointed out that that was a decision delivered by seven judges. Not only was the earlier judgment of the Supreme Court in Rajkumar Mills Ltd.'s case : [1955]28ITR184(SC) approved in that case, it was further held that, even in the matter of directing the drawing up and submitting of a supplementary statement of case, the Tribunal is to have some inherent limitations, The Tribunal cannot travel beyond the facts on record. His submission, thus, is that looked at from any point of view, this court, in reference proceedings, should not, or rather cannot, direct the Tribunal to draw up a supplementary statement of the case on facts to be investigated and could not also direct the Tribunal to dispose of the matter afresh according to law as per its directions.
10. Fairly inviting our attention to the three decisions of the Supreme Court, viz., CIT v. George Henderson and Co., : [1967]66ITR622(SC) , CIT v. Greaves Cotton and Co., Ltd., : [1968]68ITR200(SC) and Sutlej Cotton Mills Ltd. v. CIT : [1979]116ITR1(SC) , he admitted that no doubt there are directions in those decisions which indicate that it is possible for the court, in reference proceedings, to direct the Tribunal to examine a question after making further investigation. However, inviting our attention again to another Supreme Court decision in the case of Union of India v. Raghubir Singh : [1989]178ITR548(SC) , he stated that the decision in Keshav Mills Co., Ltd.'s case : [1965]56ITR365(SC) being a decision by seven judges and that case not having been noticed in the above three decisions, it is only appropriate that this court should follow the law laid down by the Supreme Court in Keshav Mills Co., Ltd.'s case : [1965]56ITR365(SC) .
11. We have considered the rival contentions carefully. It is not in serious dispute that the liability in respect of gratuity has, both in respect of the year under reference as well as for the past years, accrued during the pervious year as the Payment of Gratuity Act, under which the liability arose, itself came on the statute book in October, 1972, i.e., during the previous year.
12. The only question that requires consideration, therefore, is whether the Department can or cannot press into service the provisions of section 40A(7) before this court in reference proceedings in support of its contention that the provision for gratuity is not an allowable deduction. In our judgment, it is not really necessary to go into a larger question in this case. The question of deduction in respect of gratuity liability was, admittedly, considered by the departmental authorities and the Tribunal under section 37. The disallowance was made by the Income-tax Officer on the footing that gratuity liability for past years did not accrue or arise during the previous year. The disallowance was selected by the Appellate Assistant Commissioner and the Tribunal also on the sole ground that such a liability had arisen during the previous year. Having regard to the facts and circumstances of the case and in particular the fact that the provision came on the statute book with retrospective effect after the departmental authorities as well as the Tribunal had passed their respective orders, the question should be reframed to bring out the real controversy before the authorities below and then answered. It will then be for the Tribunal to pass such orders as are necessary to dispose of the case conformably to such judgment. The proper question, in our opinion, is :
'Whether, on the facts in the circumstances of the case, the Tribunal was justified in holding that the amount of Rs. 5,34,000 (being the difference between Rs. 8,65,000 and Rs. 3,31,000) also accord as a liability during the previous year under the Payment of Gratuity Act, 1972 ?'
13. We reframe the question accordingly. As stated by us above, there is not much dispute between the parties that so far as the liability is concerned, the statue having come into force during the previous year itself, it has to be held that the entire liability including the aforesaid amount of Rs. 5,34,000 accrued during the previous year. Accordingly, we answer the reframed question in the affirmative and in favour of the assessee.
14. Needless to mention, in view of our answer to the reframed question in the affirmative and in favour of the assessee, the Tribunal has to pass such orders as are necessary to dispose of the case conformably to such judgment as provided in section 260(1) of the Act. In other words, it does not necessarily follow that the liability must be allowed as a deduction. If, in the meantime, as had happened in this case, certain provisions have come on the statute book which are applicable in the year under reference, the Tribunal will have to consider the assessee's claim in the light of such provisions while giving effects to our order under section 260(1).
15. The Tribunal's passing such an order under section 260(1), in our opinion, will be in conformity with the view taken by the Supreme Court.
16. No order as to costs.