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Commissioner of Income Tax, Bombay City-i, Bombay Vs. East India Cotton Association Limited - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Application No. 174 of 1983
Judge
Reported in[1984]149ITR274(Bom); 1990TAXLR316
ActsIncome Tax Act, 1961 - Sections 40A(7), 154 and 256(2)
AppellantCommissioner of Income Tax, Bombay City-i, Bombay
RespondentEast India Cotton Association Limited
Excerpt:
- .....of the application :'(1) whether, on the facts and in the circumstances of the case, the claim of gratuity liability estimated by the assessee at rs. 1,26,495 but not debited in the books of account for the previous year of the 1973-74 assessment did give rise to a debatable issue in spite of the supreme court decision in the case of metal box co. of india ltd. v. their workmen : (1969)illj785sc , and its specific prohibition of section 40a(7) of the income-tax act, 1961, since admittedly the conditions laid down had not been fulfilled ? (2) whether, on the facts and in the circumstances of the case, the tribunal was justified in cancelling the order of the income-tax officer under section 154 of the income-tax act, 1961, seeking to rectify the mistake in the allowance of deduction on.....
Judgment:

Sujata V. Manohar, J.

1. This is an application under s. 256(2) of the I.T. Act, 1961. The petitioners have prayed that the Tribunal be directed to state the case and refer to this court the following two questions of law as set out in paragraph 5 of the application :

'(1) Whether, on the facts and in the circumstances of the case, the claim of gratuity liability estimated by the assessee at Rs. 1,26,495 but not debited in the books of account for the previous year of the 1973-74 assessment did give rise to a debatable issue in spite of the Supreme Court decision in the case of Metal Box Co. of India Ltd. v. Their Workmen : (1969)ILLJ785SC , and its specific prohibition of section 40A(7) of the Income-tax Act, 1961, since admittedly the conditions laid down had not been fulfilled ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in cancelling the order of the Income-tax Officer under section 154 of the Income-tax Act, 1961, seeking to rectify the mistake in the allowance of deduction on account of gratuity liability to (sic) Rs. 1,26,495, even though the Tribunal found that the conditions laid down in section 40A(7) of the Income-tax Act, 1961, had not been fulfilled ?'

2. The relevant assessment year in the present petition is 1974-75. The company's assessment proceedings were completed by the concerned ITO by an order dated February 20, 1976, and the net loss was determined at Rs. 4,17,450. Thereafter, the ITO issued a notice under s. 154 of the I.T. Act, 1961, on the basis that there was a mistake apparent on the face of the record to the effect that a sum of Rs. 1,26,495 was allowed to be deducted as a liability for payment of gratuity, though the said amount was not shown in the balance-sheet and profit and loss account. Thereafter the said amount of Rs. 1,26,495 was added to the total income of the assessee under an order of rectification passed by the ITO under s. 154. The Commissioner (Appeals) confirmed the order of the ITO under s. 154 of the I.T. Act, 1961. The assessee company filed an appeal before the Income-tax Appellate Tribunal. The Tribunal allowed the appeal filed by the assessee. From this order of the Tribunal the Department has come by way of an application under s. 256(2), since its application before the Tribunal under s. 256(1) was rejected.

3. It is the case of the assessee that the provisions of s. 40A(7) are not applicable in the present case because the assessee has not made any provision in respect of its liability for the payment of gratuity. The assessee has contended that it is, however, entitled to claim the said amount as a deduction under other provisions of the I.T. Act, 1961. This deduction is claimed by the assessee on the ground that its liability to pay gratuity has been actuarially valued. In the case of Metal Box Co. Ltd. of India v. Their Workmen : (1969)ILLJ785SC , the Supreme Court has observed that contingent liabilities discounted and valued as necessary can be taken into account as trading expenses, if they are sufficiently certain to be capable of valuation and if profits cannot be properly estimated without taking them into consideration. It is the case of the assessee that since their liability to pay gratuity has been actuarially valued, they would be entitled to claim the said amount as a deduction. There are several decisions of the Tribunal where such a deduction has been allowed to the assessee in respect of its liability to pay gratuity, not provided for in the balance-sheet.

4. In these circumstances, the question whether the said amount should be allowed to the assessee as deduction or not is obviously a debatable question. The Tribunal, therefor, rightly observed that the provisions of s. 154 of the I.T. Act, 1961, could not be utilised for the purpose of altering the orders passed by the ITO allowing such a deduction. In these circumstances, the rule is discharged with costs.


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