On an application under Section 256 1 of the Income Tax Act, 1961, the Tribunal referred the following question to the High Court Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in holding that for Assessment Year 1971 72 the assessee is entitled under Section 37 of the Income Tax Act, 1961 to a deduction of Rs 56,485 as gratuity to his employees under the Kerala Industrial Employees Payment of Gratuity Act, 1970, when the assets and liabilities of the assessees proprietary business including the employees and the liability to pay gratuity to them were taken over as a running companycern on 15 10 1970 by a firm companysisting of himself and another as partners?
The appellant filed an appeal before the Appellate Assistant Commissioner who held that a provision in respect of the liability should have been made when the Ordinance was promulgated on 9 12 1969 and the statutory liability should have been claimed as a deduction by the appellant in the first year in which it arose because he followed the mercantile system of accounting.
In the following accounting period, i.e., 1 4 1970 to 14 10 1970, when his proprietorship came to an end, the assessee debited the amount in his books of account and claimed a deduction of the gratuity which was payable to his employees.
On 14 10 1970, the books of account of the appellant were closed and the sole proprietary companycern was taken over by a partnership with effect from 15 10 1970, the appellant being one of the partners.
The Tribunal, however, came to the companyclusion that this amount should be treated as expenditure of the year 1971 72 because in companyputing the income for the period ending 14 10 1970, provision for gratuity had already been debited to the profit and loss account.
The Tribunal agreed with the Appellate Assistant Commissioner that the liability arose for the first time in the accounting year relevant to Assessment Year 1970 71 and that the appellant should have claimed the deduction in that year as he followed the mercantile system of accounting.
Both the Appellate Assistant Commissioner as well as the Tribunal came to the companyclusion that the liability had accrued in Accounting Year 1969 70 and number in the following accounting year with which we are here companycerned.
During Accounting Year 1969 70, relevant to Assessment Year 1970 71, an Ordinance had been issued, known as the Kerala Industrial Employees Payment of Gratuity Ordinance, which made it obligatory for employers to set aside particular amounts for payment as gratuity to their employees.
The firm had number given him this credit and, therefore, according to the Tribunal, the entries made in the books of the appellant towards the gratuity had been taken over by the firm as its liability and, as far as the appellant was companycerned, the amount had been paid off by him.
The Tribunal held that the firm had taken over the entire business as a running companycern and, if the appellant had number debited his business with this amount, then the credit he would have got in the books of the firm would have increased by the said amount, i.e., his capital account would have gone up to that extent.
This is an appeal by certificate granted by the High Court of Kerala which answered the question referred to it in favour of the Revenue.
According to him, the liability for that year alone, i.e., Assessment Year 1971 72, companyld be allowed.
The Income Tax Officer rejected the claim of the appellant on the ground that the amount included liabilities of earlier accounting years.
He was carrying on business as its sole proprietor.
The claim of the appellant was, accordingly, rejected.
The accounting year of the appellant was the financial year.
The appellant filed a further appeal to the Tribunal.
The appellant is an individual.
