Calcutta High Court
Commissioner Of Income-Tax vs E. Sefton And Co. (P.) Ltd. on 10 April, 1989
Equivalent citations: [1989]179ITR435(CAL)
JUDGMENT Ajit Kumar Sengupta, J.
1. At the instance of the Commissioner of Income-tax, West Bengal-Ill, the following question of law has been referred to this court under Section 256(1) of the Income-tax Act, 1961, for the assessment year 1973-74 :
"Whether, on the facts and in the circumstances of the case and in law, the Tribunal was correct in holding that the provisions of Section 40A(7) of the income-tax Act, 1961, did not apply to a case where no provision on account of gratuity liability has been made in the accounts and/ or whether Section 40A(7) applied to such a case is a debatable matter and in that view holding that the allowance of Rs. 1,08,864 being liability for payment of gratuity against the express prohibition contained in Section 40A(7)(ii) was not a mistake apparent from the record subject to rectification under Section 154 of the Income-tax Act, 1961 ?"
2. The facts relating to this reference shortly stated are that in respect of the assessment year 1973-74, the assessee had claimed deduction of Rs. 1,08,864 on account of gratuity and the Income-tax Officer allowed the claim by his order dated August 30, 1974. The amount represented liability for gratuity for the year under consideration determined on the basis of actuarial valuation. Later on, the Income-tax Officer, however, found that the Finance Act of 1975 inserted Sub-section (7) of Section 40A which specifically prohibited retrospectively with effect from April 1, 1973, the allowance of provision for gratuity where no approved gratuity fund existed. The Income-tax Officer, therefore, held that in view of this retrospective legislation, the allowance of Rs. 1,08,864 was a mistake which was required to be rectified under Section 154. The assessee objected but the Income-tax Officer rectified the order, adding the liability of Rs. 1,08,864 which had earlier been allowed.
3. Before the Appellate Assistant Commissioner, it was contended that the assessee had already applied for approval of the gratuity fund and the matter was still pending before the Commissioner of Income-tax. The Appellate Assistant Commissioner, however, held that in view of the retrospective legislation, there was a mistake which could be rectified as the conditions contained in Section 40A(7)(ii) were not fulfilled. He further observed that after the Commissioner of Income-tax had granted recognition to the fund, the disallowance now made shall be withdrawn under Section 155(13) of the Act.
4. Before the Tribunal, it was submitted that the assessee's claim was based on ascertained liability in view of the coming into force of the Central Gratuity Fund Act. It was pointed out that the assessee had made a very small provision but the claim before the Income-tax Officer was in respect of the liability which had been actuarially valued and claimed. It was contended that the amount of Rs. 1,08,864 had not been provided in the assessee's accounts and reliance was placed on an order of the Tribunal in which it was held that the provisions of Section 40A(7)(b) were not applicable where provision was not made but the claim was made on the basis of actuarial valuation. It was also contended that as the matter was arguable and more than one view was possible, the provisions of Section 154 could not be applied. The Tribunal, after hearing the parties, held as follows :
"We have considered the facts of the case. We find that there was no mistake apparent from the record which could be rectified by the Income-tax Officer under Section 154 of Income-tax Act. Where no provision is made in the books and a claim is made on the basis of actuarial valuation, a view has been taken in several cases by the Tribunal that the provisions of Section 40A(7) have no application and the claim can be allowed under the general principles of law. Thus, there is a dispute regarding the interpretation of Section 40A(7) and it cannot be held that where a claim of the assessee had been allowed on the basis of actuarial valuation, there was a mistake apparent from the record which could be rectified under Section 154. It may be mentioned that whereas Section 155(13) provides for the rectification of an order where the disallowance had been made after the conditions given in Section 40A(7) are fulfilled, there is no similar provision for rectification of an order where allowance had been made even though there was no provision in the books. We, therefore, set aside the orders of the lower authorities and hold that the order under Section 154 was illegal. The assessee's appeal for the assessment year 1973-74 is, therefore, allowed."
5. A mistake either of law or of fact, if apparent from the record, can be rectified under Section 154 of the Act. The question is whether the mistake in the instant case is capable of being demonstrated objectively. The rectification in this case was necessitated by the retrospective amendment by insertion of Section 40A(7) prohibiting the allowance of provision for gratuity when no approved gratuity fund existed. The provision of Section 40A(7) shall be deemed to have been included in the statute from the date on which the amendment came into force, i.e., April 1, 1973, and the assessment order having been passed subsequent to that date, it must be in consonance with the amended provision. If the assessment order is plainly and obviously inconsistent with the specific and clear provision as amended retrospectively, undisputably there is a mistake apparent from the record. In the light of the retrospective amendment, the assessment order has to be revised. No question of construction and the legal effect of the amended provision that has to be applied does arise for consideration. The provision for gratuity cannot be allowed if any one of the conditions of Section 40A(7) is not complied with. In our view, the Tribunal was not right in holding that the order under Section 154 was illegal. The view of the Tribunal that the assessee was entitled to get deduction of the amount of gratuity although there was no compliance with the provision of Section 40A(7) of the Act which came into effect from the relevant assessment year cannot be sustained. In our view, the Income-tax Officer was justified in revising the assessment order in the light of the provisions of Section 40A(7) inserted retrospectively with effect from April 1, 1973.
6. For the reasons aforesaid, we answer the question in this reference in the negative and in favour of the Revenue.
7. There will be no order as to costs.
Bhagabati Prasad Banerjee, J.
8. I agree.