JUDGMENT
M.B. Shah, J.
1. For the assessment years 1974-75 and 1975-76, at the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following two questions for our opinion under section 256(1) of the Income-tax Act, 1961 :
“(1) Whether, on the facts and in the circumstances of the case, the admissible amount would be the amount not exceeding 8-1/3 per cent. of the salary of the employees for each year of service including the current year and the previous year ?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal rightly reversed the order of the Commissioner of Income-tax and restored the order of the Income-tax Officer ?”
2. This reference arises out of the order passed on October 25, 1980, by the Income-tax Appellate Tribunal directing the Commissioner of Income-tax to work out on the basis of actuarial valuation the amount of gratuity for deduction as per Explanation 1 to section 40A(7)(b). The aforesaid Explanation 1 reads as under :
“Explanation 1. – For the purpose of sub-clause (ii) of clause (b) of this sub-section, ‘admissible amount’ means the amount of the provision made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason, to the extent that such amount does not exceed an amount calculated at the rate of eight and one-third per cent. of the salary (as defined in clause (h) of rule 2 of Part A of the Fourth Schedule) of each employee entitled to the payment of such gratuity for each year of his service in respect of which such provision is made.”
3. From the aforesaid Explanation, it can be said that “admissible amount” (for the purpose of deduction on the head of gratuity) means the amount of the provision made by the assessee for the payment of gratuity to its employees on their retirement or on termination of their employment to the extent that such amount does not exceed an amount calculated at the rate of eight and one-third per cent. of the salary of each employee entitled to the payment of such gratuity for each year of his service in respect of which such provision is made. So this outer limit of eight and one-third per cent. is for each employee and is in respect of each year of his service for which provision is made by the assessee after satisfying the other conditions laid down in sub-section (7) (b) of section 40A. Take for illustration that in respect of an employee who is in service for three years provision for gratuity is made by the employer. In that case, the employer has to take into account salary for the relevant three years and on the basis of the Explanation he can make provision to the extent that such amount does not exceed an amount calculated at the rate of eight and one-third per cent. of the salary for each year of his service in respect of which such provision is made. Therefore, the outer limit of eight and one-third per cent. would be with regard to each year and for three years the admissible amount can be up to the extent of 25 per cent. (8 1/3 x 3). No doubt this would be subject to Explanation 2 and also other conditions provided in section 40A(7)(b)(ii) such as that the provision is to be made in accordance with the actuarial valuation and the ascertainable liability. This question arises mainly because of condition No. (3) which, inter alia, provides that a sum equal to at least fifty per cent of the admissible amount is paid by the assessee by way of contribution to the approved gratuity fund before the 1st day of April, 1976, and the balance is paid before the 1st day of April, 1977.
4. Hence, it cannot be said that the direction given by the Tribunal is in any way erroneous.
5. In the result, both the questions are answered in the affirmative, i.e., in favour of the assessee and against the Revenue.
6. Reference stands disposed of accordingly with no order as to costs.