JUDGMENT
R.K. Gulati, J.
1. This is a reference under Section 256(1) of the Income-tax Act, 1961. The following five questions have been referred for the opinion of this court:
“1. Whether, on the facts and in the circumstances of the case, there was material on record justifying the Tribunal’s finding that the assessee-company was maintaining the cash system of accounting ?
2. Whether; on the facts and in the circumstances of the case, the method of accounting employed by the assessee is such that the income for the assessment year 1973-74 could be properly deduced therefrom without adding to the assessee’s total income a sum of Rs. 2,40,380 being excess of closing balance of bills receivable over the opening balance of the same ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the method of accounting followed by
the assessee was cash having regard to the fact that expenses for gratuity which had not been actually paid were claimed as deductible in the account books ?
4. Having held that the system of accounting regularly followed by the assessee was the cash basis, whether the Tribunal was right in law in holding that the statutory liability incurred by the assessee for gratuity was deductible but the contractual liability incurred by others in favour of the assessee was not includible in the receipts ?
5. Whether the Tribunal was right in directing the Income-tax Officer to accept the result as disclosed by the account books on the ground that the assessee has followed a method of accounting from which profits are correctly deducible ?”
2. It is agreed between counsel for the parties that the first two questions are to be answered in favour of the assessee in view of an earlier decision of this court between the same parties in I. T. R. No. 765 of 1975 connected with I. T. R. No. 432 of 1976 decided on September 17, 1982 (ITAT v. Jananmandal Ltd. [19831 143 ITR 228). Accordingly, the first two questions are answered in the affirmative, in favour of the assessee and against the Department.
3. The third question is about the allowance of gratuity paid to the employees. The assessee claimed that it was following the cash system of accounting and, therefore, the gratuity paid during the previous year relevant to the assessment year in dispute was a permissible deduction. This claim was denied by the Income-tax Officer on the finding that the disputed amount related to gratuity of the immediately preceding year and that the system of accounting followed by the assessee was not cash but hybrid, and so far as gratuity was concerned, the system was mercantile. On appeal filed by the assessee, the view taken by the Income-tax Officer was not upheld. The Income-tax Appellate Tribunal has found that even in the past, the assessee had always claimed the expenditure relating to gratuity as and when paid, i.e., on cash basis. On this finding, the amount of gratuity claimed by the assessee was allowed by the Tribunal.
4. The tenor of the question referred to us is not happily worded. It assumes that some expenses relating to gratuity had not actually been paid, but yet were claimed as deductible, meaning thereby that the assessee was not following the cash system of accounting. From a perusal of the Tribunal’s order and the orders passed by other authorities, we do not find that any such stand was taken by the Revenue before those authorities. There is no discussion in any of the said orders about the controversy now raised in the question referred. On the contrary, the clear finding of the first appellate authority, which has been endorsed by the Tribunal, is that the amount
of gratuity was paid daring the year and further that the system of accounting was cash. Learned standing counsel was unable to point out any material on which the findings recorded by the Income-tax Appellate Tribunal about the system of accounting and expenditure relating to gratuity could successfully be assailed.
5. In view of the findings of fact recorded by the Income-tax Appellate Tribunal, namely, that the system of accounting followed by the assessee was the cash system in respect of the payment of gratuity, question No. 3 must be answered in favour of the assessee and against the Department. We do so accordingly.
6. So far as questions Nos. 4 and 5 are combined, they do not arise out of the order passed by the Income-tax Appellate Tribunal and, therefore, need not be answered. Accordingly, we return questions Nos. 4 and 5 unanswered.
7. The reference is answered accordingly. There shall be no order as to costs.
