RAMANUJAM J.


The assessee, in this case, is a registered firm. During the accounting period ending with March 31, 1972, the assessee did business in the name of Sarada Binding Works as also in the name of Chandamama Publications. By an agreement entered into between the assessee, represented by its managing partner, B. Viswanatha Reddy, and another partnership called Chandamama Publications, represented by its managing partner, B. Nagi Reddi, the assessee gave up possession of all the assets and liabilities, as detailed in the schedule to the agreement, in Chandamama Publications. On a settlement of the assets and liabilities as described in the schedule to the agreement, the excess of liabilities over assets came to Rs. 67, 687 and the assessee paid the said sum to the transferee who succeeded to the business of Chandamama Publications. One of the clauses in the agreement was that all the employees in that business would become employees of the transferee on terms no less favourable to them with continuity of service. The liabilities as worked out in the schedule included an amount of Rs. 80, 309, which was a provision for gratuity due to the employees of the business taken over by the transferee. The assessee claimed as deduction provision for gratuity of Rs. 68, 380 relating to Sarada Binding Works as also Rs. 80, 309 relating to Chandamama Publications Both these amounts were disallowed by the ITO on the ground that they were not admissible as a deduction. The assessee appealed to the AAC, contending that, in view of the decision in Tata Iron & Steel Company Limited v. Bapat the provision for gratuity made on an actuarial basis would be an admissible deduction. The AAC found on the basis of the certificates produced by the assessee and on the basis of the actuarial valuation, that the liability to gratuity as on March 31, 1971, was Rs. 63, 923 and as on March 31, 1972, was Rs. 1, 54, 178, the difference being Rs. 90, 255. The AAC, therefore, felt that the sum of Rs. 90, 255 represented the incremental gratuity liability relating to the year in question and that it should be allowed as a deductionThe assessee filed an appeal before the Tribunal contending that the full claim of gratuity, as provided in the accounts, of Rs. 1, 48, 689 should be allowed as a deduction or the entire gratuity payable on March 31, 1972, as determined actuarially of Rs. 1, 54, 178 should be allowed as a deduction against Rs. 90, 255 allowed by the AAC. The Revenue also filed an appeal against the decision of the AAC allowing the deduction towards the incremental liability of Rs. 90, 255, contending that the incremental liability was only a contingent liability and that, therefore, nothing should be allowed as a deduction. Thus, the Revenue sought for restoration of the amount of Rs. 90, 255, allowed as a deduction by the AAC


The Tribunal after considering the rival contentions came to the conclusion that to the extent of the incremental gratuity liability, a deduction had to be allowed and this would be applicable to the gratuity payable to the employees of Sarada Binding Works subject to the verification of the quantum. The Tribunal also held that so far as the gratuity liability amount paid by the assessee to Chandamama Publications towards the gratuity liability in respect of employees transferred as per the agreement is concerned, which has to be paid to them as and when the actual liability arose, it should be allowed as a deduction.


The Revenue feeling aggrieved by the Tribunal's decision has obtained a reference on the following two questions.


"(1) Whether, on the facts and in circumstances of the case, the Tribunal was right in holding that the incremental gratuity liability payable to the employees was an admissible deduction for the assessment year 1972-73 ?


(2) Whether the Tribunal was right, on the facts and in the circumstances of the case, in directing the deduction of gratuity liability of Rs. 80, 309 (subject to verification of the figures) as stated in paragraph 7 of the Tribunal's order ?" *


So far as question No. 1 is concerned, it does not present any difficulty. It has been held by the Bombay High Court in Tata Iron & Steel Company Limited v. Bapat that the provision for gratuity made on an actuarial basis would be an admissible deduction. The same view has been taken by a Bench of this court in CIT v. Andhra Prabha P. Ltd. In that case, this court has taken the view that the liability to pay gratuity is not a contingent one and if the gratuity liability stood calculated on a scientific and actuarial method each year, the gratuity liability could be taken to be an accrued liability accrued each year. The same view has also been taken by the Supreme Court in Vazir Sultan's case Having regard to the said decisions, the first question has to be answered in the affirmative and against the Revenue


Then we come to the second question which relates to the allowability of the deduction claimed by the assessee in a sum of Rs. 80, 309 which is found to have been paid by the assessee to the purchaser as per the terms of the settlement for the purpose of enabling the purchaser to discharge the assessee's gratuity liability for the period during which the employees who had been transferred to the services of the purchaser, were working under the assessee. In this case, under the terms of the agreement, the buyer has taken over the employees of the assessee's business, Chandamama Publications, with continuity of service and all accrued monetary benefits. So the purchaser, as part of the arrangement for sale of the business, has taken over the gratuity liability so far accrued. The purchaser has taken over that liability of the assessee on the assessee paying a sum of Rs. 80, 309. As regards the actual amount of liability, whether it is Rs. 80, 309 or not, an enquiry has been directed by the Tribunal. Thus, the question for consideration at this stage is whether the amount paid by the assessee to the purchaser for his taking over the gratuity liability, which the former has to bear, can be allowed as deductionIt is contended by the assessee that the payment made to the purchaser for the purpose of discharging the assessee's liability to its former employees should be taken to be a payment towards his accrued gratuity liability and, therefore, it should be allowed as deduction. The Revenue, on the other hand, contends that the amount paid by the assessee to the purchaser as a consideration for the purchaser undertaking to discharge the gratuity liability to the employees, can never be said to be an actual discharge of the liability, that the payment cannot be said to be payment directly made to the employees and that, as a matter of fact, the assessee's liability to pay gratuity will only arise on a future date, when an employee's services stood terminated by death or otherwise.


It must be noted, in this connection, that the transferor of a business as in this case has normally got three options.


(1) to allow the employees to continue in service in his other business, if any;


(2) to discharge the employees on payment of retrenchment compensation, gratuity and notice-pay, etc., or ;


(3) to transfer their service along with the gratuity liability to the purchaser on his undertaking to discharge the entire gratuity liability as and when the occasion for its payment arises.


In this case, as per the terms of the agreement referred to above., the assessee as a transferor, has bargained with the transferee for transfer of the employees with continuity of service and with all pecuniary benefits. Since the transferee has undertaken to pay the pecuniary benefits such as gratuity payable by the assessee to the employees during the period when they were serving under it, the transferee has been paid the sum of Rs. 80, 309 being the gratuity amount so far accrued. Under the terms of the agreement, the services of the employees are not terminated and the liability to pay gratuity had not actually arisen on transfer. But for the said agreement, the assessee would have been liable to pay gratuity to the employees on their transfer, as the transfer of their services would amount to termination of their services under it. Though the said payment is not made directly to the employees as such, the amount is admittedly paid for discharging the assessee's liability to pay gratuity to its employees for the period ending with the date of transfer. We are of the view that such payment should be taken to be a payment made to discharge the assessee's liability for gratuity and as such it has to be deductedThe learned counsel for the Revenue, however, relies on a decision of the Bombay High Court in CIT v. W. T. Suren & Co. Ltd. wherein the court has held that the payment made by the transferor towards the gratuity liability in such circumstances, as in this case, where the employees are taken over by the transferee with continuity of service, is not the payment of gratuity to employees and, hence, it is not allowable as business expenditure under s. 10(2)(xv) of the Indian I.T. Act, 1922. The court has taken the view therein that unless a payment is made to the employees direct in accordance with a gratuity scheme, the payment cannot properly be described as a payment of gratuity, that by virtue of the employees being taken over with continuity of employment by the transferee-company, no claim could have been made by the employees against the assessee-company, that no liability for payment of gratuity as such to the employees thus having accrued against the assessee, the payment made by the assessee to the transferee could not be treated on the same footing as a discharge of the liability for gratuity payable to the employees and that, therefore, the amount was not deductible under s. 10(2)(xv) of the Act. While taking that view, the Bombay High Court has followed the decisions of this court in Stanes Motors (South India) Limited v. CIT CIT v. Pathinen Grama Arya Vysya Bank and CIT v. Salem Bank Ltd. Reliance was placed by the assessee in that case on the decision of this court in CIT v. Sri Venkateswara Bank Ltd. and also the Full Bench decision of the Kerala High Court in CIT v. Standard Furniture Co. Ltd. But the Bombay High Court dissented from the view taken by the Full Bench of the Kerala High Court in CIT v. Standard Furniture Co. Ltd. and distinguished the decision rendered by this court in CIT v. Sri Venkateswara Bank Limited With respect we are not in a position to agree with the view taken by the Bombay High Court in CIT v. Suren & Co. Limited that the liability of the assessee in that case to pay gratuity to its employees was merely a contingent liability which will arise only when the employment of the employee was determined by death, retirement or resignation and that the liability did not exist in praesenti on the date of the transfer of the business, is no longer legally tenable in view of the decision in CIT v. Andhra Prabha P. Ltd. which has categorically ruled that if the gratuity liability has been calculated on the basis of scientific and actuarial data, then such liability could not be taken as mere contingent liability, but should be taken as accrued liability. The decision of the Bombay High Court proceeds on the basis that the assessee's liability to pay gratuity is only contingent and is not a liability in praesenti. Admittedly, the payment made to the purchaser was for the discharge of an obligation incurred already while the business was carried on by the assessee and it was not a payment made in respect of liability arising after the transfer or on the closure of business, as was the case in CIT v. Gemini Cashew Sales Corporation In CIT v. Mysore Spinning & Manufacturing Co. Ltd. the Supreme Court has dealt with a case relating to a transfer of accumulated balance to the Employees' Provident Fund under the Employees' Provident Funds Act, 1952. In that case, the assessee had been maintaining two unrecognised provident funds and from time to time the assessee and its employees made contributions to the two funds. After the Employees' Provident Funds Act, 1952, came into force, the assessee was required to transfer all the accumulations in the fund to the Employees' Provident Fund and the assessee accordingly transferred. The amount so transferred included sum of Rs. 3, 01, 772 representing the assessee's contribution to the two funds up to the date of transfer and the interest accrued thereon. The assessee claimed deduction of that amount in computing its profits. The Revenue disallowed the deduction on the ground that since there was transfer of the fund to trustees which came within the scope of s. 58K of the Act, the amount has to be treated as capital expenditure and it was not a deduction allowable under s. 10(1) or under s. 10(2)(xv). On a reference, the High Court held that the transfer was not to trustees and that the amount was deductible under s. 10(2)(xv). On appeal, the Supreme Court took the view that since the amount in question has been spent and paid out in the relevant accounting period, it could be allowed as expenditure incurred for the purpose of the business of the assessee under s. 10(2)(xv) and that the amount cannot be deemed to be capital expenditure under s. 58K. The said decision of the Supreme Court, apart from supporting the assessee's stand, lays down the proposition that though the amount paid to the transferee by the assessee in this case, represents the gratuity liability payable by the assessee in all the earlier years, it can be claimed as deduction in the year in which the actual transfer of funds or payment was made. In CIT v. Andhra Prabha P. Ltd. and in CIT v. Sri Ranilakshmi Ginning; Spinning & Weaving Mills (P.) Ltd. this court has clearly laid down that the deduction under s. 37 of the Act cannot be disallowed merely because the amount paid was referable to the previous assessment years and that whether the amount paid in respect of which deduction is claimed under s. 37 related to the current year or to the earlier years, the same has to be allowed as deduction. As a matter of fact, in CIT v. Sri Ranilakshmi Ginning, Spinning & Weaving Mills (P.) Ltd. this court allowed deduction in one year in respect of, the estimated gratuity payable to the employees for all the earlier years arrived at scientifically or actuarially under an agreement entered into by the assessee with the labourThe decision in J.P. Hancock (Surveyor of Taxes) v. General Reversionary and Investment Company Limited [1918] 7 TC 358 (KB) is also applicable to the facts of the case. In that case, the assessee made a lump sum payment to purchase annuity equal in amount to pension payable for a former employee. The question that arose was whether the assessee could claim deduction in respect of the said lump sum payment as business expenditure. In that case, the annuities granted by the company, which were paid under deduction of income-tax, were payable generally out of the company's assets and were not charged specifically upon any particular fund or property belonging to the company and, therefore, the lump sum paid to purchase the annuity was held to be an expense incurred in the business and not in the nature of capital expenditure and as such it was an admissible expense in computing the company's profit assessable to income-tax. In Green (HM. Inspector of Taxes) v. Cravens Railway Carriage and Wagon Company Ltd. [1951] 32 TC 359, the assessee introduced in 1944 a staff assurance scheme, based upon a single assurance policy, the annual premiums on which were paid wholly by the company. In order that a number of employees of long service should benefit fully, the company undertook to pay certain additional annual premiums. In 1946, the company paid lump sum in commutation of these additional premiums. The question that arose was whether the said lump sum payment could be deducted in computing the profits of the company. The court held that the payment was a proper deduction in computing the profits and that the payment was not a capital expenditure but only a revenue expenditure admissible as deduction.


In the case before us, the object of paying the amount to the transferee was to get rid of the assessee's accrued liability to pay the gratuity to the employees referable to the period when they were in the assessee's services and such payment made to discharge the assessee's liability should be taken as business expenditure. The facts of the present case will fall within the principle laid down in the decision in CIT v. Sri Venkateswara Bank Limited. In that case, a bank entered into an agreement with another bank to transfer a substantial part of its business to the latter bank. Under the agreement, the transferee-bank did not undertake any gratuity liability arising out of the past services rendered by the employees of the transferor-bank and any such liability had to be discharged by the transferor-bank itself. The transferor-bank, therefore, paid a total amount of Rs. 26, 032 to its employees as and by way of gratuity. The assessee claimed allowance of this amount either under s. 37(1) or under s. 36(1)(ii) of the Act. This court held that the amount in question, whether as a retrenchment compensation or gratuity, cannot be a sum referred to in s. 36(1)(ii) and cannot be allowed under that provision. However, the court held that since a part of the business of the assessee had been closed down, the payment made in the course of the business as gratuity cannot be treated as a terminal payment on the closure of the business so as to be disallowed. The payment cannot also be treated as one made at the time of the transfer of the undertaking of the ass

essee and, therefore, it should be taken as payment allowable under s. 37(1). This view has found favour with the Full Bench of the Kerala High Court in CIT v. Standard Furniture Co. Ltd. The facts in CIT v. Salem Bank Limitedon which strong reliance is placed by the Revenue, are, on the other hand, entirely different. In that case, there was a transfer of the entire banking business from one bank to another bank. As per the terms of the agreement, the transferee-bank agreed to pay gratuity in respect of certain employees on the basis of the gratuity scheme applicable to them. The transferor-bank paid to the transferee-bank certain amounts to be kept as deposit so that the payment could be made as and when the occasion to pay gratuity arose. The assessee's claim for deduction of the said amount paid to the transferee-bank as an expenditure under s. 36(1)(ii) or under s. 37 of the Act was negatived by the lower authorities but was allowed by the Tribunal. However, when the matter came up before this court, this court held that since the liability arose in the course of carrying on banking business and as the banking business having been completely transferred, the assessee cannot claim deduction of this amount as business expenditure, after it ceased to carry on the banking business either under s. 37 or under s. 36(1)(ii). In taking that view, this court has followed the decision of the Supreme Court in CIT v. Gemini Cashew Sales Corporation and the decision of this court in Stanes Motors (South India) Ltd. v. CIT which are also cases of closure of business and the payment being claimed as business expenditure after the closure of the business. Therefore, after a due consideration of the matter, we are answering the second question in the affirmative and against the Revenue. The direction given by the Tribunal to verify the figures regarding the actual gratuity liability will stand. The assessees will get costs from the Revenue. Counsel's fee Rs. 500.