Case Law Details
RELEVANT PARAGRAPH
2. We have heard the rival submissions in the light of the material placed before us and the precedents relied upon. This appeal is directed against the order passed under section 263 of the Act. The assessee is a company. For the relevant assessment year in the balance sheet of the assessee a provision for gratuity was reflected at Rs.7,85,600/ -. The assessee claimed this as deduction in the return of income. The Assessing Officer allowed the same without making any discussion in the order of assessment. Thereafter the Commissioner of Income-tax assumed jurisdiction under section 263 of the Act, as in his opinion the order was erroneous and prejudicial to the interest of the Revenue. In the case of Rampyari Devi Saraogi v. CIT, 67 ITR 84 (S.C.) the Hon’ble apex court has held that in order that the Commissioner may consider an order to be erroneous for the purposes of section 263, the error of law may not be apparent on the face of the order. The Commissioner may consider an order of the Assessing Officer to be erroneous not only if it contains some apparent error of reasoning or of law or of fact on the face of it but also because it is a stereo-typed order which simply accepts what the assessee has stated in his return and fails to make enquiries which are called for in the circumstances of the case.
3. It is not necessary for the Commissioner of Income-tax to make further enquiries before canceling the assessment orders of the Assessing Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Assessing Officer should have made further inquiries before accepting the statements made by the assessee in his return. The reason is obvious. Unlike the Civil Court which is neutral to give a decision on the basis of evidence produced before it, an Assessing Officer is not only an adjudicator but is also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further enquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke inquiry. The meaning to be given to the word ‘erroneous’ in section 263 emerges out of this context. The word ‘erroneous’ in that section includes cases where there has been failure to make the necessary inquiries. It is incumbent on the Assessing Officer to investigate the facts stated in the return when circumstances would make such an inquiry prudent and the word ‘erroneous’ in section 263 includes the failure to make such an enquiry. The order becomes erroneous because such an enquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.
4. In the facts of the present case we find that the Assessing Officer failed to make any enquiry in regard to the allowability of the provision for gratuity. As such in our opinion the order was erroneous and prejudicial to the interests of the Revenue. Therefore the conditions precedent for assuming jurisdiction under section 263 did exist in the facts of the present case.
9. In the facts of the present case we find that the assessee did not describe with exactitude the true nature of the liability. The Commissioner of Income-tax found that the approved gratuity liability as on 31.3.1981 and 31.3.1980 was Rs.55,35,469/ – and Rs.51,97,480/ – respectively. Hence the amount payable as contribution to the fund was only Rs.3,37,989/ -. The Assessing Officer has allowed Rs.7,85,600/ -. Accordingly the Commissioner of Income-tax directed the Assessing Officer to withdraw the excess allowance of Rs.4,47,611/ -. In arriving at this conclusion reliance was placed on the decision of the Hon’ble apex court rendered in the case of Shree Sajjan Mills Ltd. v. CIT, 156 ITR 585. In this case the Hon’ble apex court has held as under:
“On a plain construction of cl.(a) of s.40A(7) of the I.T.Act, 1961, whatever is provided for future use by the assessee out of the gross profits of the year of account for payment of gratuity to employees on their retirement or on the termination of their services would not be allowed as a deduction in the computation of profits and gains of the year of account, unless the respective conditions specified in clause(b) were fulfilled. The expression ‘provision made by the assessee’ is not used in any artificial sense, e.g., of setting apart specifically by the assessee for meeting the liability for gratuity in his account books, but in its ordinary sense. The embargo under clause (a) is on deduction of amounts provided for future use in the year of account for meeting the ultimate liability to payment of gratuity. Clause(b)(i) excludes from the operation of clause(a) contribution to an approved gratuity fund and amount provided for or set apart for payment of gratuity which would be payable during the year of account. Clause(b) (ii) deals with a situation where the assessee might provide by the spread over method and provides that such provision would be excluded from the operation of clause(a) provided the three conditions laid down by the sub-clauses are satisfied.
The marginal note or heading to section 40A is a clear indication that certain payments and expenses which would be otherwise deductible would not be deductible except in certain circumstances indicated in the section.
Actual payments or provisions for payment would have been eligible for deduction or could have been deducted either under section 28 or under section 37 of the Act. But the use of the non obstante expression in section 40A(1) makes it clear that if there is any legislative base dealing with the provision for gratuity, then the same would be applicable in spite of and notwithstanding any other provision of the Act. Read with the marginal note to section 40A, the non obstante clause of sub-section( i) of section 40A has an overriding effect over the provisions of any other section by providing that the provisions of the section will have effect notwithstanding anything to the contrary contained in any other provision relating to the computation of income under the head ‘Profits and gains of business or profession’. Expenditures or allowances which mare deductible under any other provision relating to the head ‘Business or profession’ will be disallowed in cases to which the provisions of section 40A apply.
Contingent liabilities do not constitute expenditure and cannot be the subject-matter of deduction even under the mercantile system of accounting. Expenditure which is deductible for income-tax purposes is towards a liability actually existing at the time but setting apart money which might become expenditure on the happening of an event is not expenditure. “
It may be stated that for the assessment year 1973-74 onwards the applicable law would be in accordance with section 40A(7), as declared by the Hon’ble apex court in the case of Shree Sajjan Mills Ltd., cited supra.
11. We find it difficult to accept the contention raised by the learned counsel because the assessee did not comply with the conditions contained under section 40A(7)(b) of the Act. In the case of CIT vs. Loyal Textile Ltd, 231 ITR 573 (Mad.) the Hon’ble jurisdictional High Court has held that the expression ‘that has become payable during the previous year’ in section 40A(7)(b)(i) qualifies both the parts of section 40A(7)(b)(i) , viz., (a) any provision made by the assessee for the purpose of payment of any contribution towards an approved gratuity fund, and (b) any provision made by the assessee for the purpose of any gratuity. It cannot be said that the said expression qualifies only the latter of the above said two parts of section 40A(7)(b)(i) . Therefore it is not correct to say that the provision made by the assessee in the accounts for the purposes of making contributions to approved gratuity fund should be allowed under section 40A(7)(b)(i) despite the fact that there was no incremental liability towards the gratuity due for the assessment year under consideration.
12. Nothing was placed before us to demonstrate the nature of the liability. There is absolutely no material to say that the liability in question was an ascertained liability. An expenditure which is deductible for income-tax purposes is towards a liability actually existing at the time, but setting apart money which might become expenditure on the happening of an event is not expenditure allowable under the law. As such we do not find any merit in the contention of the learned counsel for the assessee in this regard.
