Satish Chandra, C.J.
1. For the assessment year 1964-65, Messrs. Balrampur Raj Electric Supply Co., Gonda, the assessee, claimed deduction of Rs. 2,07,071, being the initial contribution made by it for gratuity under the gratuity fund scheme. The scheme was recognized by the Commissioner on March 4, 1964. Under the scheme, all permanent employees of the assessee-company were to be paid gratuity at the rate of 15 days' wages per year of service at the time of the termination of the contract of service. The ITO estimated the amount of Rs. 50,000 as payable towards the gratuity. He disallowed the balance. On appeal, the AAC held that the initial contribution of Rs. 85,323 alone was allowable. Aggrieved, the assessee as well as the department went up to the Tribunal.
2. The Tribunal held that Rule 104 of the I.T. Rules read with Section 37(1) of the Act lays down the limit and does not provide for the exact amount allowable towards payment of gratuity. The salary paid to the employee in the year in which the provision was made would be the relevant factor. The Tribunal further held that in any event if the assessee has made any excess contribution, it is allowable under Section 37(1) or Section 28(1) because the assessee follows the mercantile system of accounting and the payments have been made for business purposes and in the capacity of a trader. The Tribunal observed that under Section 209 of the Companies Act, 1956, the assessee-company was liable to maintain records only for eight years. If the records prepared prior to 1960 were not available, no adverse inference could be drawn against the assessee and hence there was no occasion to make an estimate. The assessee's appeal was allowed while the department's appeal was dismissed. The entire amount claimed by the assessee was held to be allowable.
3. At the instance pf the Commissioner, the Tribunal has referred the following question of law for our opinion ;
'Whether, on the facts and in the circumstances of the case, a sum of Rs. 2,07,071 (Rupees two lakhs seven thousand seventy-one) should be allowed as deductible expenditure under Rule 104 of the Income-tax Rules, 1962, or under Section 37(1) read with Section 28(i) of the Income-tax Act ?'
4. According to the assessee, the initial contribution which the company was liable to make under the gratuity scheme came to Rs. 2,07,071 and that is the amount that it paid into the fund. The initial contribution is a matter covered by Rule 104, which provides :
'104. The amount to be allowed as a deduction on account of an initial contribution which an employer may make in respect of the past services of an employee admitted to the benefits of a fund shall not exceed8 1/3% of the employee's salary for each year of his past service with the employer.'
5. It is apparent that Rule 104 does not specify with any exactitude the actual amount which the assessee is liable to pay as the initial contribution. It lays down the principle that it shall not exceed one month's salary of the employee for each year of his past service with the employer. In the present case, records prior to 1960 were not available because they were weeded out. The assessee hence took the base year, namely, 1963-64, in which the claim was approved by the Commissioner as the test. It calculated the monthly salary of the then existing permanent employees and made the contribution on the basis of the month's salary. We agree with the Tribunal that the rule does not lay down any method of calculating the exact amount. It only lays down the limit, namely, that the initial contribution cannot exceed 8 1/3% of the employee's salary for each year of his past service. In other words, the maximum initial contribution can be of one month's salary for each year. This limit has admittedly not been exceeded. It is doubtful if in these circumstances it can be claimed that Rule 104 was not complied with.
6. The Tribunal went on to hold that in the alternative even if it be held that the assessee has made any excess contribution the excess would be clearly allowable under Section 37 of the Act because the payment has been made for business purposes and in the capacity as a trader. In our opinion, this view of the Tribunal is, in the circumstance of the case, valid.
7. In the result, we answer the question referred to us in the affirmative in favour of the assessee and against the department. The assessee will be entitled to costs which arc assessed at Rs. 200.