Calcutta H.C : Whether, on the facts and in the circumstances of the case and in law, the Tribunal was correct in holding that the provisions of s. 40A (7) of the IT 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 s. 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 s. 40A (7)(ii) was not a mistake apparent from the record subject to rectification under s. 154 of the IT Act, 1961 ?

Section 154

Asst. Year 1973-74

AJIT KUMAR SENGUPTA, J.:

At the instance of the CIT, West Bengal-III, the following question of law has been referred to this Court under s. 256(1) of the IT Act, 1961, for the asst. yr. 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 s. 40A (7) of the IT 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 s. 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 s. 40A (7)(ii) was not a mistake apparent from the record subject to rectification under s. 154 of the IT Act, 1961 ?”

2. The facts relating to this reference shortly are that in respect of the asst. yr. 1973-74, the assessee had claimed deduction of Rs. 1,08,864 on account of gratuity and the ITO allowed the claim by his order dt. 30th Aug., 1974. The amount represented liability for gratuity for the year under consideration determined on the basis of actuarial valuation. Later on, the ITO, however, found that the Finance Act of 1975 inserted sub-s. (7) of s. 40A which specifically prohibited retrospectively w.e.f. 1st April, 1973, the allowance of provision for gratuity where no approved gratuity fund existed. The ITO, 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 s. 154. The assessee objected but the ITO rectified the order, adding the liability of Rs. 1,08,864 which had earlier been allowed.

Before the AAC, it was contended that the assessee had already applied for approval of the gratuity fund and the matter was still pending before the CIT. The AAC, however, held that in view of the retrospective legislation, there was a mistake which could be rectified as the conditions contained in s. 40A(7)(ii) were fulfilled. He further observed that after the CIT had granted recognition to the fund, the disallowance now made shall be withdrawn under s.155(13) of the Act.

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 ITO 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 s. 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 s. 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 ITO under s. 154 of IT 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 s. 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 s. 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 s. 154. It may be mentioned that whereas s.155(13) provides for the rectification of an order where the disallowance had been made after the conditions given in s. 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 order of the lower authorities and hold that the order under s. 154 was illegal. The assessee’s appeal for the asst. yr. 1973-74 is, therefore, allowed.”

3. A mistake either of law or of fact, if apparent from the record, can be rectified under s. 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 s. 40A(7) prohibiting the allowance of provision for gratuity when no approved gratuity fund existed. The provision of s. 40A(7) shall be deemed to have been included in the statute from the date on which the amendment came into force, i.e., 1st April, 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 s. 40A(7) is not complied with. In our view, the Tribunal was not right in holding that the order under s. 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 s. 40A(7) of the Act came into effect from the relevant assessment year cannot be sustained. In our view, the ITO was justified in revising the assessment order in the light of the provision of s. 40A(7) inserted retrospectively w.e.f. 1st April,

1973.

For the reasons aforesaid, we answer the question in this reference in the negative and in favour of the Revenue. There will be no order as to costs.

BHAGABATI PRASAD BANERJEE, J.:

I agree.

[Citation : 179 ITR 435]