Madras H.C : Whether, on the facts and circumstances of the case, the Tribunal was right in holding that there was a mistake rectifiable under s. 154 of the IT Act, 1961 ?

High Court Of Madras

M.V.S. Sastry vs. CIT

Sections 37(1), 40A(7), 154

Asst. Year 1974-75

Thanikkachalam & N.V. Balasubramanian, JJ.

Tax Case No. 1256 of 1982

6th February, 1997

Counsel Appeared

Utham Reddi, for the Assessee : C.V. Rajan, for the Revenue

JUDGMENT

THANIKKACHALAM, J. :

In pursuance of the order passed by this Court in T.C.P. No. 226 of 1981, dt. 19th Oct., 1981, the Tribunalreferred the following two questions for the opinion of this Court under s. 256(2) of the IT Act, 1961 :

“(i) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that there was a mistake rectifiable under s. 154 of the IT Act, 1961 ?

(ii) Whether, on the facts and circumstances of the case, the gratuity amount became payable on 31st March, 1974, and deduction of the gratuity was allowable in computing the total income ?”

2. The assessee is an HUF. In respect of its income from business, the assessee had claimed an amount of Rs. 29,348 (a sum of Rs. 1,050 representing actual payment of gratuity to an employee leaving service and Rs. 28,290 representing the provision made in the accounts) as “gratuity” liability in the accounts for the year ending 31st March, 1974, relevant to the asst. yr. 1974-75 under consideration. In the original assessment made on 31st Oct., 1974, this was allowed. Subsequent to the assessment, the ITO noticed that there was no recognised gratuity fund. In this view, it was not allowable and the allowance was a mistake apparent from the records. He issued a notice under s. 154 of the IT Act, 1961 (in short “the Act”), calling for the assessee’s object to withdrawal of the allowance. The assessee replied that there was an application for approval. Since the ITO found that the approval has not been granted, he passed the impugned order, withdrawing the allowance of Rs. 29,348. The AAC, on appeal, found that the assessee’s business was converted into a partnership consequent on partition of the family as at the end of the relevant accounting year 31st March, 1974, and that it was, therefore, not a liability to the employees but a capital liability handed over to the successor. In this view, the AAC justified the disallowance on the merits. The AAC had also found that there was no recognised gratuity fund. According to her, there was no request for recognition from the assessee and the deduction was hit by s. 40A(7). Accordingly, the AAC held that the allowance granted in the original assessment is due to a mistake and that, therefore, the ITO is having jurisdiction to withdraw the same.

On further appeal, the Tribunal found that the allowance or disallowance of provision relating to gratuity is governed by s. 40A(7) inserted by the Finance Act, 1975, with retrospective effect for and from the asst. yr. 1973- 74. The original assessment order was made on 30th Oct., 1974, prior to the Finance Act. Hence, there was in the opinion of the Tribunal, jurisdiction on the part of the ITO to rectify the assessment under s. 154 following the decision of the Supreme Court in M.K. Venkatachalam, ITO vs. Bombay Dyeing and Manufacturing Co. Ltd. (1958) 34 ITR 143 (SC) : TC 53R.157. The Tribunal found that the deduction was not admissible because there was no recognised fund under s. 40A(7). Even otherwise, it was found inadmissible in view of the decision in CIT vs. Gemini Cashew Sales Corporation (1967) 65 ITR 643 (SC) : TC 16R.1500 and Stanes Motors (South India) Ltd. vs. CIT (1975) 100 ITR 341 (Mad) : TC 26R.356, since the assessee had ceased to carry on the business from the end of the accounting year.

Learned counsel appearing for the assessee before us submitted that the business carried on by the HUF was transferred in favour of the partnership, in accordance with the partition which took place in the family at the end of the relevant accounting year 31st March, 1974, relevant to the asst. yr. 1974-75. The business was transferred with all the assets and liabilities in favour of the partnership concern by the HUF. In such transfer, the gratuity liability was also transferred to the partnership concern. Since the business concern was transferred as a going concern, the employees of the HUF were taken over by the partnership concern and they are continuing their service in the business run by the partnership firm. When the assets and liabilities of the business were transferred in favour of the partnership concern, as a going concern, the gratuity liability would be deemed to have been made as payment to the successor partnership firm. When there is no provision for gratuity liability, but the amount due to the employees who worked under the HUF by way of gratuity was actually paid by the HUF to the partnership concern, the provisions of s. 40A(7) of the Act would not be made applicable to the facts arising in this case. In support of this contention, reliance was placed upon the decision of this Court in CIT vs. Sarada Binding Works (1987) 62 CTR (Mad) 21 : (1985) 152 ITR 520 (Mad) : TC 16R.1447. Sec. 40A(7) of the Act was inserted by s. 6 of the Finance Act, 1975, which came into effect from 1st April, 1973. The exemption provided under s. 40A(7)(b) of the Act would be available only when the assessee made any provision for the payment of the same by way of any contribution towards approved gratuity fund. Inasmuch as the assessee in the present case made actual payment of the gratuity liability to the successor partnership firm, the provisions contained in s. 40A(7) of the Act will not apply to the facts arising in this case. It was, therefore, submitted that the Tribunal was not correct in holding that the withdrawal of the allowance of the provisions made in the accounting year relevant to the assessment year under consideration, by exercising the power under s. 154 of the Act, is in order.

Insofar as the rectification made by the ITO under s. 154 of the Act is concerned, learned counsel appearing for the assessee submitted that the provisions of s. 40A(7) of the Act were introduced by s. 6 of the Finance Act, 1975, w.e.f. 1st April, 1973, and, therefore, on the date when the original assessment order was passed on 30th Oct., 1974, this provision was not available. At the end of the financial year, i.e., on 31st March, 1974, the business of the HUF was closed. Thereafter, the HUF is not in existence. Therefore, according to learned counsel appearing for the assessee, the assessee cannot be expected to follow the conditions prescribed under s. 40A (7)(b) of the Act. It was further submitted that whether the provisions of s. 40A(7) of the Act would be applicable in a case where actual payment was made for gratuity liability is a debatable question, which could be concluded only by a long drawn process of reasoning. There are two conflicting views expressed by the Madras High Court in CIT vs. Sarada Binding Works (supra) and Pandian Roadways Corporation Ltd. vs. CIT (1985) 152 ITR 496 (Mad) : TC 18R.704 on this aspect. Therefore, there may be conceivably two opinions in the matter of allowing actual payment of gratuity liability by applying provision of s. 40A(7) of the Act. According to learned counsel appearing for the assessee all the objections raised by the Department are answered in the decision of this Court in CIT vs. Sarada Binding Works (supra). It was therefore, submitted that both on the merits and in the matter of rectification, the Department has no case to disallow the gratuity payment made by the assessee, while transferring the business in favour of the partnership concern.

On the other hand, learned standing counsel appearing for the Department submitted that in the accounts, the assessee made provision for gratuity liability. If any allowance for gratuity liability is claimed, the assessee must himself comply with the conditions prescribed under s. 40A(7)(b) of the Act. In the present case, till the rectification order was made, the assessee has not applied for approval for creating a gratuity fund. The Finance Act, 1975, which came into effect from 1st April, 1973, by inserting s. 40A(7) requires the assessee in order to get deduction of the provision made for gratuity liability, to comply with the conditions prescribed in cl. (b) of s. 40A(7) of the Act. Inasmuch as the assessee has not complied with the conditions prescribed under the abovesaid provisions, the assessee is not entitled to get allowance for deduction of gratuity liability which was allowed in the original assessment made by the ITO on 30th Oct., 1974. Non-compliance of the provisions contained in the statute would amount to an error apparent, on the face of the record. Since the allowance was granted by the ITO in the original assessment without considering the provisions contained in s. 40A(7) of the Act, the ITO invoked the provisions of s. 154 of the Act and rectified the error by withdrawing the allowance already granted by him. Therefore, it cannot be said that the ITO has got no jurisdiction to rectify the assessment under s. 154 of the Act. According to learned standing counsel appearing for the Department, the gratuity liability was not paid directly in the present case in the hands of the employees. What was transferred in the present case was the gratuity liability and the partnership concern would be entitled to ask for deduction after the partnership concern satisfied the conditions prescribed under s. 40A(7) of the Act. According to learned standing counsel appearing for the Department there was no actual payment of gratuity liability. In fact, the assessee made the provision in the accounts for gratuity liability and therefore deduction can be claimed only if the assessee satisfied the conditions stated under s. 40A(7) of the Act. Sec. 40A(7) of the Act overrides the other provisions in the matter of allowing deduction with regard to the provision made for gratuity liability. The provision for gratuity liability cannot be allowed under s. 37 of the Act. If the assessee was unable to satisfy the conditions prescribed under s. 40A(7) of the Act under whatever circumstances, the assessee would not be entitled to claim exemption under s. 40A(7)(b) of the Act. According to learned standing counsel appearing for the Department, the facts that the assessee was not able to fulfil the conditions or there is impossibility of performance of the conditions prescribed under s. 40A(7) of the Act would be immaterial in the matter of claiming exemption under s. 40A(7)(b) of the Act. For all these reasons, it was submitted that on the merits the assessee is not entitled to claim any deduction of the provision made for gratuity liability.

In the matter of rectification under s. 154 of the Act, learned standing counsel for the Department submitted that inasmuch as no actual payment was made for gratuity liability to the employees directly the assessee cannot avail of the decision of the Madras High Court rendered in CIT vs. Sarada Binding Works (supra). Learned standing counsel further pointed out that there is a contrary decision of the Madras High Court in Pandian Roadways Corporation Ltd. vs. CIT (supra), wherein on similar facts this Court held that the assessee is not entitled to deduction with regard to the provision made for gratuity liability, especially when there was a transfer of the business by the assessee in favour of the third parties. According to learned standing counsel, inasmuch as the provision of s. 40A(7) of the Act was not made applicable in the original assessment, there is a mistake apparent on the face of the record, which is an obvious and patent mistake warranting rectification under s. 154 of the Act. In order to support this contention, reliance was placed upon a decision of the Calcutta High Court in CIT vs. E. Sefton & Co. (P) Ltd. (1989) 80 CTR (Cal) 64 : (1989) 179 ITR 435 (Cal) : TC 53R.384. Accordingly, learned standing counsel appearing for the Department submitted that both on the merits as well as on the question of rectification, the Tribunal was correct in holding that the ITO was correct in withdrawing the allowance originally granted with regard to the provision made for gratuity liability.

10. We have heard learned counsel appearing for the assessee as well as learned standing counsel appearing for the Department. The assessee is an HUF in the year 1974-75. The assessee from his business income claimed gratuity liability in the accounting year ending on 31st March, 1974, relevant to the asst. yr. 1974-75. The assessee made a provision in the accounts towards gratuity liability of Rs. 29,348. It seems that the HUF had converted the business into a partnership firm, after partitioning the assets on 24th March, 1974, to take effect from 31st March, 1974. The HUF transferred the business with all assets and liabilities in favour of the partnership concern as a going concern. The HUF while carrying on the business did not contribute to the gratuity fund and there was also no application for recognition. The gratuity liability became an item in the P&L a/c, while calculating the accrued liabilities of the assessee as an employer towards its employees. It is under such circumstances, the assessee claimed the amount that actually represents the accrued liability till 31st March, 1974, as a deduction. Since the business run by the HUF was transferred in favour of the partnership firm in its entirety with all assets and liabilities it would amount to actual payment of gratuity liability owned by the HUF in favour of the partnership concern. Therefore, when the actual gratuity liability accrued to the employees hitherto working under the HUF was transferred in favour of the partnership concern, the provisions of s. 40A(7) of the Act, which deals with the deduction of the provision made for gratuity liability cannot be made applicable. On the other hand, according to learned standing counsel appearing for the Department, since there was a transfer of gratuity liability in favour of the partnership concern, there in no actual payment of gratuity liability directly to the employees. In the accounts, the assessee made provision for gratuity liability the deduction of which was claimed as such in the original assessment and in the absence of the provisions of s. 40A(7) of the Act, the ITO allowed the provision for gratuity liability made on actuarial basis as a deduction. After the insertion of s. 40A(7) by the Finance Act, 1975,w.e.f. 1st April, 1973, unless the assessee fulfils the conditions prescribed thereunder, it is not possible to allow the provision made for gratuity liability as a deduction. Therefore, according to the Department in as much as the assessee has not fulfilled the conditions prescribed under s. 40A (7)(b) of the Act, the ITO was perfectly justified in exercising his jurisdiction under s. 154 of the Act to withdraw the allowance already granted in the original assessment insofar as the provision made for gratuity liability is concerned.

11. A similar question came up for consideration before this Court in CIT vs. Sarada Binding Works (supra). According to the facts arising in that case during the accounting period ending on 31st March, 1972, relevant to the asst. yr. 1972-73, the assessee gave up possession of its assets and liabilities in respect of one of its businesses in favour of another concern. On a settlement of the assets and liabilities of the said business, it was noticed that the excess of liabilities over assets came to Rs. 67,687 and the assessee paid the said sum to the transferee, who succeeded to the business. The agreement entered into between the assessee and the transferee stated that all the employees in the business would become the employees of the transferee on terms no less favourable to them with continuity of service. One of the items of liability that was considered in the settlement was a sum of Rs. 80,309 which was the provision for gratuity due to the employees of the business taken over by the transferee. In its assessment to income-tax, the assessee claimed as a deduction the provision for gratuity in respect of the business retained by it as well as the business that was transferred. On these facts, the following question was referred to this Court for its opinion, viz., whether the Tribunal was right, on the facts and in the circumstances of the case, in directing the deduction of gratuity liability of Rs. 80,309 (subject to verification of the figures) as stated in para 7 of the Tribunal’s order. While answering this question, this Court held that in respect of the business that was transferred, though the payment under the agreement was not made directly to the employees as such, the amount was paid for discharging the assessee’s liability to pay gratuity to its employees for the period ending with the date of transfer, and hence, the payment should be taken to be a payment made to discharge the assessee’s liability for gratuity and, hence, had to be allowed as a deduction. In the above-said decision, this Court distinguished the decisions in CIT vs. Gemini Cashew Sales Corporation (supra), CIT vs. Salem Bank Ltd. (1979)

13 CTR (Mad) 1 : (1979) 120 ITR 224 (Mad) : TC 16R.1443 and Stanes Motors (South India) Ltd. vs. CIT (supra). In the decision reported in Pandian Roadways Corporation Ltd. vs. CIT (supra), a part of the business of the assessee was taken over by another corporation along with the buses running in the routes and the employees as on 1st Jan., 1974. At the stage of the transfer of a portion of the business, a sum of Rs. 9,05,104 was paid to the corporation by the assessee as representing the gratuity liability in respect of the employees of the assessee transferred to the corporation. In its assessment for the year 1974-75, the assessee claimed deduction of the above sum as a revenue expenditure, but the claim was rejected by the Tribunal on the ground that the amount transferred was only a provision and that the assessee did not satisfy the conditions laid down under s. 40A(7) of the Act and hence the claim was not allowable under the abovesaid provisions or on the basis of actual payment. This view of the Tribunal was accepted by this Court in the abovesaid decision. It remains to be seen that according to the facts arising in the abovesaid decision, the buses were transferred without any liability. There was no liability on the part of the assessee-company under s. 25FF of the Industrial Disputes Act for payment of gratuity to its erstwhile employees. In the said decision, it was also pointed out that factually, it is only a provision which is transferred to another public sector organisation, that as a provision it cannot be allowed because admittedly it does not satisfy the conditions under s. 40A(7) of the Act, that gratuity liability is allowable either under s. 40A(7) of the Act or on the basis of actual payment and that in this case it can neither be brought under s. 40A(7) nor has there been an actual payment to the employees concerned. Therefore, following the decisions in Stanes Motors (South India) Ltd. vs. CIT (supra), CIT vs. Pathinen Grama Arya Vysya Bank Ltd. 1977 CTR (Mad) 135 : (1977) 109 ITR 788 (Mad) : TC 16R.1445, and the decision of the Supreme Court in CIT vs. Gemini Cashew Sales Corporation (supra), this Court came to the abovesaid conclusion. Therefore, according to the facts arising in the abovesaid decision, there was no actual payment of gratuity liability, but only a provision made for gratuity liability was required to be allowed as a deduction. Therefore, the decision in Pandian Roadways Corporation Ltd. vs. CIT (supra) is distinguishable on the facts. So also, the Andhra Pradesh High Court, in the decision in CIT vs. Bakelite Hylam Ltd. (1995) 127 CTR (AP) 46 : (1996) 217 ITR 469 (AP) : TC 16PS.38 following the decisions of the Supreme Court in CIT vs. Andhra Prabha (P) Ltd. (1986) 54 CTR (SC) 313 : (1986) 158 ITR 416 (SC) : TC 16R.168 and Shree Sajjan Mills Ltd. vs. CIT (1985) 49 CTR (SC) 193 : (1985) 156 ITR 585 (SC) : TC 18R.685, while considering the provisions of s. 40A of the Act, held that even after the introduction of the provisions of s. 40A(7) of the Act in 1973, there is no change in the legal position insofar as the actua payment of gratuity is concerned. Hence, the actual payment made towards the gratuity liability is allowable in the year for which it is paid.

In the decision in Shree Sajjan Mills Ltd. vs. CIT (supra), while considering the provisions of ss. 28, 37, 40A(7) of the Act, the Supreme Court held that the position till the provisions of s. 40A(7) of the Act were inserted in the Act in 1973 was as follows : “(1) Payments of gratuity actually made to the employee on his retirement or termination of his services were expenditure incurred for the purpose of business, in the year in which the payments were made and allowed under s. 37 of the Act. (2) Provision made for payment of gratuity which would become due and payable in the previous year was allowed as an expenditure of the previous year on accrued basis when the mercantile system was followed by the assessee. (3) Provision made by setting aside an advance sum every year to meet the contingent liability for gratuity as and when it accrued by way of provision for gratuity or by way of reserve or fund for gratuity was not allowed as an expenditure of the year in which such sum was set apart. (4) Contribution made to an approved gratuity fund in the previous year was allowed as a deduction under s. 36(1)(v). (5) Provision made in the P&L a/c for the estimated present value of the contingent liability properly ascertained and discounted on an accrued basis as falling on the assessee in the year of account could be deductible either under s. 28 or s. 37 of the Act.”

Therefore, payments of gratuity actually made to the employees on their retirement or on the termination of their services were incurred for the purpose of business in the year in which the payments were made and therefore allowable under s. 37 of the Act. For allowing gratuity liability, actually paid as deduction under s. 37 of the Act, we are entirely depending upon the decision of the Supreme Court in Shree Sajjan Mills Ltd. vs. CIT (supra). In the present case, as per the decision of this Court in CIT vs. Sarada Binding Works (supra), when the business was transferred by the assessee in favour of the partnership concern, as a going concern with all assets and liabilities that would lead to the conclusion that on the date of transfer there was termination of services of the employees working under the assessee and the gratuity payments due to them were paid actually by the assessee to the partnership concern, which is the subsequent employer of the erstwhile employees of the assessee. If the gratuity liability was made as actual payment either to the employee or to the employer, representing payment on behalf of the employees the provision under s. 40A(7) of the Act, cannot be applied since that provision would apply where deduction is claimed in respect of the provision made for gratuity liability. In the decision reported in CIT vs. W.T. Suren & Co. Ltd. (1982) 31 CTR (Bom) 128 : (1982) 138 ITR 91 (Bom) : TC 16R.1446, While holding that gratuity liability payable to the employees was not deductible under s. 10(2)(xv) of the Act, the Bombay High Court has followed the decisions of the Madras High Court in Stanes Motors (South India) Ltd. vs. CIT (supra), CIT vs. Salem Bank Ltd. (supra) and CIT vs. Pathinen Grama Arya Vysya Bank (supra). In the decision in CIT vs. Sarada Binding Works (supra), this Court pointed out that the view taken by the Bombay High Court in CIT vs. W.T. Suren & Co.Ltd. (supra), is not the correct view and, therefore, this Court is not agreeable to the view taken by the Bombay High Court in the said decision.

It was further pointed out that the view taken by the Bombay High Court in the abovesaid decision, viz., that the liability of the assessee to pay gratuity to its employees was merely a contingent liability which arose only when the employment of the employee was determined by death, retirement or resignation and that the liability did not exist in praesenti on the date of the transfer of the business, is no longer legally tenable in view of the decision in CIT vs. Andhra Prabha (P) Ltd. (1980) 14 CTR (Mad) 269 : (1980) 123 ITR 760 (Mad) : TC 16R.169, which has categorically ruled that if the gratuity liability has been calculated on the basis of scientific and actuarial data, then such liability could not be taken as a mere contingent liability, but should be taken as an accrued liability. It also remains to be seen that admittedly, the payment was made in the present case to the purchaser for the discharge of an obligation incurred already while the business was carried on by him and it is not a payment made in respect of a liability arising after the transfer or on the closure of the business as in the case of CIT vs. Gemini Cashew Sales Corporation (supra). In fact, the said decision in CIT vs. Gemini Cashew Sales Corporation (supra) lays down the proposition, that though the amount paid to the transferee by the assessee represents the gratuity liability payment by the assessee in all the earlier years, it can be claimed as deduction in the year in which the actual transfer of funds or payment was made. It was further pointed out that in CIT vs. Sri Ranilakshmi Ginning, Spinning & Weaving Mills (P) Ltd. (1981) 132 ITR 360 (Mad) : TC 16R.1474, this Court allowed the deduction in one year in respect of the estimated gratuity payment to the employees for all the earlier years arrived at scientifically or actually under an agreement entered into by the assessee with the labour.

In the present case, in order to get rid of the assessee’s accrued liability to pay gratuity to the employees for the period when they were in service payment was made by the transferor to the transferee to discharge an assessee’s liability. Therefore, it should be taken as business expenditure. According to the facts arising in CIT vs. Sri Venkateswara Bank Ltd. (1979) 120 ITR 207 (Mad) : TC 16R.1434 a bank entered into an agreement with another bank on 29th Dec., 1967, to transfer a substantial part of its business to the latter bank. Under the agreement, the transferee bank did not undertake any liability arising out of the past services rendered by the employees of the transferor-bank and any such liability had to be discharged by the transferorbank itself. Therefore, the transferor-bank paid a total sum of Rs. 26,032 to its employees as and by way of gratuity. The assessee claimed allowance of this amount as a deduction either under s. 36(1)(ii) or under s. 37(1) of the Act. On these facts this Court held that the amount in question, whether as a retrenchment compensation or gratuity, cannot be a sum referred to in s. 36(1)(ii) of the Act and it cannot be allowed under that provision. However the Court further held that since a part of the business of the assessee had been closed down, the payment made in the course of the business as gratuity cannot be treated as a terminal payment on the closure of the business so as to be disallowed. The payment cannot be treated as one made at the time of the transfer of the undertaking of the assessee. The payment was, therefore, allowable as a deduction under s. 37(1) of the Act. This was also the view taken by a Full Bench of the Kerala High Court in CIT vs. Standard Furniture Co. Ltd. (1979) 8 CTR (Ker) 54 (FB) : (1979) 116 ITR 751 (Ker) (FB) : TC 16R.1436.

According to the facts arising in the decision in CIT vs. Salem Bank Ltd. (supra) the banking business of the assessee-bank was transferred to the Indian Bank Ltd. As per the terms of the agreement, the transferor-bank agreed to pay the gratuity in respect of certain employees on the basis of the gratuity scheme applicable to them. The transferor-bank paid to the transferee-bank certain amounts to be kept as deposit so that the payment could be made as and when the occasion to pay the gratuity arose. The assessee-bank claimed deduction of the said amount paid to the transferee-bank as an expenditure under s. 37 of the Act or under s. 36(1)(ii) of the Act. The same was allowed by the Tribunal. On a reference, this Court held that since the liability arose in the course of carrying on the banking business and since the business had been transferred, the assessee cannot claim any deduction of the amount as business expenditure, after it ceased to carry on the banking business, either under s. 36(1)(ii) or under s. 37 of the Act. In taking this view, this Court followed the decision of the Supreme Court in CIT vs. Gemini Cashew Sales Corporation (supra) and Stanes Motors (South India) Ltd. vs. CIT (supra).

According to the facts arising in this case for the entire year relevant to the assessment year under consideration, the assessee was doing the business and the liability arose during the period in which the business was going on and the liability to pay gratuity arose during the accounting year under consideration and it did not arise on the transfer of the business. Therefore, the assessee in the present case is entitled to ask for deduction of gratuity payment made actually to the transferee as business expenditure. Since the provisions under s. 40A(7) of the Act are not applicable to the facts of the assessee’s case, the deduction claimed by the assessee is not with regard to the provision made for gratuity liability, but it is with regard to the actual payment of the statutory liability to the transferee.

So far as question No. (1) is concerned, it relates to a mistake rectified under s. 154 of the Act. The original assessment for the year 1974-75 was made on 31st Oct., 1974. The assessee had claimed an amount of Rs. 29,348 as gratuity liability in the accounts for the year ending 31st March, 1974. This was allowed by the ITO. Since the approval was not granted, the ITO invoked the provisions of s. 154 of the Act and rectified the mistake by withdrawing the allowance of Rs. 29,348 granted in the original assessment. On appeal, the AAC, considering the provisions contained in s. 40A(7) of the Act inserted by the Finance Act, 1975, with retrospective effect for and from the asst. yr. 1973-74, confirmed the view taken by the ITO, in the matter of applying s. 154 of the Act. On further appeal, the Tribunal confirmed the order passed by the AAC in justifying the action taken by the ITO under s. 154 of the Act.

Before us learned counsel appearing for the assessee submitted that rectification is not possible in the present case because the business of the assessee was closed on 31st March, 1974, and thereafter, the assessee, was not in existence. Hence, according to learned counsel, the assessee cannot be expected to provide provision for gratuity liability in accordance with the provisions of s. 40A(7) of the Act. Learned counsel further submitted that in the matter of actual payment, the applicability of the provisions of s. 40A(7) of the Act, there are two views expressed by this Court in two decisions. Therefore, a mistake cannot be something which could be established by a long drawn process of reasoning on points on which there may be conceivably two opinions. According to learned counsel, the provisions of s. 40A(7) of the Act would not be applicable to the facts of this case. Learned counsel further submitted that where there is impossibility of performance and where the assessee was not in a position to comply with the provisions of s. 40A(7) of the Act, it cannot be said that there is a mistake in the order passed by the ITO in the original assessment warranting interference under s. 154 of the Act.

On the other hand, learned standing counsel appearing for the Department submitted that after the introduction of s. 40A(7) of the Act with retrospective effect from the asst. yr. 1973-74, it is not open to the assessee to ask for deduction of provision made for gratuity liability in the books of account. Learned standing counsel appearing for the Department further pointed out that in the present case the provision was made in the accounts by providing for gratuity liability. Therefore, inasmuch as the assessee has not satisfied the conditions prescribed under s. 40A(7) of the Act, the assessee is not entitled to ask for deduction of provision for gratuity liability. Learned standing counsel for the Department further argued that s. 40A(7) of the Act overrides the other provisions contained in s. 37 of the Act. Therefore, learned standing counsel for the Department submitted that the provision for gratuity made in the accounts cannot be allowed in the present case under s. 40A(7) of the Act since the assessee has not fulfilled the conditions prescribed thereunder. Learned standing counsel further submitted that when a statutory provision was not followed in the original assessment, there is every justification for rectifying such an order under s. 154 of the Act. It was, therefore, submitted that the rectification order passed by the ITO as confirmed by the Tribunal is in order.

The point that arises for consideration in this tax case is whether the order passed by the ITO under s. 154 of the Act, rectifying the mistake by withdrawing the allowance which was already given in the original assessment with regard to the provision made for gratuity liability is in order. In the original assessment, the ITO allowed the provision made for gratuity liability of Rs. 29,348. The original assessment was made on 30th Oct., 1974, prior to the Finance Act, 1975, which introduced s. 40A(7) of the Act with retrospective effect for and from the asst. yr. 1973-74. According to the assessee, there was actual payment with regard to the gratuity liability by the assessee to the successor partnership firm by transferring the entire assets and liabilities belonging to the HUF. In such a case, the provisions of s. 40A(7) of the Act would not be applicable because s. 40A(7) of the Act would be applicable only where deduction was made with regard to the provision made for gratuity liability. Therefore, there was no error apparent on the face of the record, warranting interference under s. 154 of the Act. In the decision in T.S. Balaram, ITO vs. Volkart Brothers (1971) 82 ITR 50 (SC) : TC 53R.165, the Supreme Court while considering ss. 2 (9) and 17(1) of the 1922 Act and ss. 2(31), 113 and 154 of the 1961 Act has held that a mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long-drawn process of reasoning on points on which there may be conceivably two opinions. A decision on a debatable point of law is not a mistake apparent from the record.

21. It remains to be seen that in the matter of allowing deduction with regard to the actual payment made towards gratuity liability on transfer of the business by the assessee to a third party there are two decisions of this Court adumbrating two views. Those decisions are CIT vs. Sarada Binding Works (supra) and Pandian Roadways Corpn. Ltd. vs. CIT (supra). Hence, in the matter of allowing deduction with regard to the actual payment made towards gratuity liability on transfer of the business, there are two views. Further, it also remains to be seen that after 31st March, 1974, the assessee is not also in existence. The assessee has not applied for approval of the gratuity fund before 1st Jan., 1976, even though the payment can be made before 1st April, 1977. Unless the assessee claims deduction of provision made for gratuity liability, the assessee cannot be expected to fulfil the conditions prescribed under s. 40A(7) of the Act. In the present case, the assessee is not claiming any deduction with regard to the provision made for gratuity liability. What was actually claimed by the assessee as a deduction was the payment made towards the gratuity liability on transfer of the business in favour of the partnership. Therefore, the provisions of s. 40A (7) of the Act cannot be made applicable to the facts arising in this case. In such a situation, it also cannot be said that there is a mistake apparent on the records in allowing the gratuity liability as a deduction in the original assessment made by the ITO on 30th Oct., 1974. Therefore, we are of the opinion that there is no ground for invoking the provisions of s. 154 of the Act rectifying a mistake, which is not in existence. Accordingly, the Tribunal was not correct in confirming the order passed by the authorities below under s. 154 of the Act.

In this view of the matter, we answer question No. (i) referred to us in the negative and in favour of the assessee. In so far as question No. (ii) is concerned we answer it in the affirmative and in favour of the assessee. There will be no orders to costs.

[Citation : 232 ITR 651]

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