Balakrishna Eradi, J.
1. The Income-tax Appellate Tribunal, Cochin Bench, has referred to this court the following two questions of law as arising from its order dated February 4, 1975, in I.T.A. No. 260/Coch/ 72-73 :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that in computing the liability under the Kerala Industrial Employees' Payment of Gratuity Act the number of completed years of service of every employee prior to the accounting year can also be taken into consideration ?
(2) Whether the Tribunal had any material before it in holding that the assessee is the owner of the business and the employer and that the liability to pay gratuity is that of the assessee ?'
2. The assessee is a private company doing business in the processing of raw cashew-nuts. The relevant assessment year is 1971-72 and the accounting year is the period of twelve months ending with September 30, 1970. During the accounting period, the assessee-company had entered into agreements with the owners of three cashew factories whereby 'the management of the business carried on in the factories was transferred to the assessee' as going concerns with the goodwill and all existing rights and liabilities. It was expressly stipulated in the agreements that the assessee should engage all the employees working in the three factories as on the date of the agreements, that their services in the factories shall be treated by the assessee as continuous without any break, that the terms and conditions of service applicable to the employees in the factories after the said transfer shall not be in any way less favourable than those currently applicable to them and that the employees should not be in any way adversely affected by the said transfer in respect of their service conditions. The agreements also contained a further clause to the effect that the assessee undertook to hold itself liable to pay to the employees, in the event of their retrenchment, compensation on the basis that their services have been continuous and that it had not been in any way interrupted by the transfer of management. The arrangement 'transfer of management' entered into as per the agreement was to continue in force until it was terminated by either party by giving three calendar months' notice in writing to the other party. It is common ground that the agreements executed in respect of all the factories were in identical terms and a copy of one of the agreements has been appended to the statement of the case as annexure 'A'.
3. In the course of the accounting year the Kerala Industrial Employees' Payment of Gratuity Ordinance came into force which was later replaced by the Kerala Industrial Employees' Payment of Gratuity Act, 1970 (hereinafter called 'the Act'). Under Section 4 of the Act--the same provision was contained in the Ordinance--gratuity shall be payable to an employee, (a) on his superannuation, (b) on his retirement, resignation, retrenchment, discharge or dismissal from service after completion of a minimum period of five years of continuous service, and (c) on his death or total disablement due to accident or disease. In their books of account the assessee had debited Rs. 1,25,952 as representing the liability for payment of gratuity under the Act and a claim for deduction in respect of the said amount was put forward before the ITO. In the assessment order evidenced by annexure 'B' that claim for deduction was disallowed by the ITO mainly on the ground that the assessee-company had been in existence only for two years and since no worker could have completed the minimum statutory period of continuous service for five years there was no necessity to make provision for any payment of gratuity during the relevant accounting year. Another ground on which the ITO disallowed the deduction was that annexure 'A' evidenced only a lease arrangement and it was not an agreement taking over liability for payment of gratuity to employees, etc. Lastly, it was also held by the ITO that the method of quantification of liability for gratuity adopted by the assessee was defective in several respects. The assessee carried the matter in appeal before the AAC, Trivand-rum. That appeal was allowed by the appellate authority holding that under the agreement evidenced by annexure 'A' the assessee-company had taken over certain existing factories and had thereby become legally liable for payment of gratuity under the Act in respect of the entire period of service of each employee working in those factories and that hence in preparing a trading account the assessee had necessarily to provide for the liability for payment of gratuity as required by the law. The AAC was also of the view that the quantification of the liability made by the assessee was reasonable and it could not be rejected on the ground that it did not bear an actuary's authentication. Thereafter the department carried the matter in further appeal before the Tribunal. The Tribunal agreed with the AAC's view that even though the assessee is not the owner of the factory building and premises, it had the liability to pay gratuity to the employees under Section 4 of the Act on the basis of the total length of service put in by the employees in the respective factories both prior to and after the date of the agreement evidenced by annexure 'A'. Overruling the contentions raised by the department that the liability for payment of gratuity was only a contingent one and that unless it was actually crystallised by the happening of any of the events mentioned in Section 4 of the Act no deduction could be allowed in respect of it, the Tribunal held that the assessee was entitled to the deduction of the gratuity payable at a future date because the statute which creates the liability had come into force during the accounting year. In regard to the question of valuation of the liability for the purpose of deduction the Tribunal was of the view that for finding out the present value of the liability which has to be discharged at a future uncertain date an actuarial valuation of the liability should be made and hence the mode of valuation adopted by the assessee could not be considered as scientific or correct. Hence, the Tribunal directed the assessee to have an actuarial valuation made and to place the same before the ITO for scrutiny within a reasonable time. The CIT, Ernakulam, thereafter, applied to the Tribunal under Section 256(1) of the I.T. Act, 1961, praying that the aforementioned questions should be referred to this court. That application was allowed by the Tribunal and hence this reference.
4. The first point to be examined is whether under the agreement evidenced by annexure 'A' the assessee had become liable for payment of gratuity to the employees in the three factories under the provisions of Section 4 of the Act. The document (annexure 'A') is, no doubt, styled as a lease deed but a careful scrutiny of its provisions shows that what has been done thereunder is to transfer to the assessee the business carried on in the three factories as going concerns together with the goodwill and all rights and liabilities subject to the condition that the said arrangement of transfer was liable to be put an end to by either party by giving three months' notice in writing. It is not an arrangement of lease of the factory building or premises but a transfer of the right to conduct the business coupled with the liability to engage all the existing employees working in the three factories without any break in service and on the same terms and conditions as were applicable to them prior to the transfer. It is expressly stipulated in the agreement that the assessee was to be liable to pay the statutory compensation to the employees in the event of their retrenchment on the basis that their services had been continuous without being in any way interrupted by reason of the transfer of management. Obviously, the intention was that the three factories were to be taken over by the assessee as running concerns with all the existing rights and liabilities and that the workmen employed in the factories were to be retained in service on the same terms and conditions treating their service as continuous and uninterrupted. Such being the position, there cannot be any doubt that the assessee became the employer in respect of those workmen liable for the payment of gratuity under Section 4 of the Act.
5. The expression 'employer' has been defined in Section 2(a) of the Act as meaning, inter alia, 'the person who or the authority which has the ultimate control over the affairs of the factory, plantation, establishment or undertaking and where the said affairs are entrusted to any other person whether called a manager, managing director, managing agent, superintendent or by any other name, such person'. After the arrangement under annexure 'A' came 'into force it was clearly the assessee who had control over the affairs of the three factories. The Tribunal was, therefore, perfectly right in holding that the liability created by Section 4 of the Act for the payment of gratuity to the workmen employed in the three factories was on the assessee-company during the accounting year and that the assessee was, therefore, justified in making provision for the said liability.
6. In CIT v. High Land Produce Co. Ltd. : 102ITR803(Ker) , a Division Bench of this court consisting of Govindan Nair C. J. and one of us (Kochu Thommen J.) had occasion to consider with reference to Sections 36 and 37 of the I.T. Act, 1961, the question regarding the admissibility of a claim made by the assessee for deduction of an amount representing the liability for gratuity payable under Section 4 of the Act. The Division Bench observed that even though the actual obligation to pay the gratuity will arise only on superannuation, resignation, retrenchment, dismissal or death of the employees, no prudent employer would wait for the actual occurrence of the events mentioned in Section 4 without making provision for the liability either by creating a fund or determining his profits for the year by taking into account the liability towards gratuity relatable to the year of account. Accordingly, it was held that even though the liability towards gratuity may be said to be only a contingent one the assessee was entitled to a deduction in respect of the present value of the contingent liability which had arisen during the accounting period on actuarial principles. We are in respectful agreement with this view.
7. It was urged by counsel appearing on behalf of the revenue that since the assessee-company had been in existence only for about two years preceding the accounting year it could possibly have no liability at all to pay gratuity under Section 4 of the Act to any employee during the relevant period since the company could not have any employees working under it who had completed a minimum period of five years of continuous service. This argument overlooks the fact that the assessee-company had taken over the three factories as running concerns with all the workmen employed therein on the express stipulation that the workmen were to be treated as being in continuous and uninterrupted service. The entire period of service put in by the workmen has, therefore, to be taken into account in determining the liability of the assessee for payment of gratuity under Section 4 of the Act.
8. Lastly, it was argued by counsel for the revenue that in any event in the assessment year 1971-72 the extent of the deduction could only cover the liability for gratuity that had accrued during the accounting year, viz., 15 days' wages, etc., in respect of each employee for that particular year. No such contention had been raised by the department before the Tribunal and it is not also covered by the question specifically referred to us. Although the wording of question No. (1) is not very precise its scope must be understood as taking in only the points which had been raised before the Tri-bunal and considered by it. The contentions which had been put forward by the department before the Tribunal have been set out by the Commissioner of Income-tax in the 'Enclosure to the Reference Application under Section 256(1) of the Income-tax Act, 1961', which is printed at page 16 of the printed papers. It is significant that the aforesaid contention is not at all mentioned therein. In these circumstances, we do not feel called upon to go into the merits of this argument which is sought to be urged before this court for the first time.
9. In the result, we answer both the questions in the affirmative, that is, in favour of the assessee and against the department. There will be no direction regarding costs.
10. A copy of this judgment under the seal of the High Court and the signature of the Registrar will be forwarded to the Appellate Tribunal as required by Sub-section (1) of Section 260 of the I.T. Act, 1961.