1. This appeal which relates to the assessment year 1977-78 is filed by the assessee and directed against the order made by the learned Commissioner under the provisions of Section 263 of the Income-tax Act, 1961 ('the Act'). The original order of the assessment was made by the ITO on 15-9-1979, determining the total income of the assessee at Rs. 10,05,290. Thereafter, the learned Commissioner called for and examined the records of income-tax proceedings and found that the assessee-company had stopped the practice of providing for gratuity payable to its employees into the trust fund every year. The assessee had adopted the system of making cash payment of gratuity to its employees. In the light of this fact, the learned Commissioner was of the view that provisions made for the assessment years 1973-74 to 1976-77 under Section 40A(7) of the Act, which were allowed to the assessee, were required to be withdrawn as the relevant conditions were not satisfied. According to the learned Commissioner, the assessee was allowed deduction of provision of gratuity amounting to Rs. 6,21,764 during the assessment years 1973-74 to 1976-77 as per the details set out in his order. According to him, the ITO ought to have taxed the same amount for the assessment year 1977-78 in view of the above fact.
The omission on the part of the ITO to do so has resulted in an error which was prejudicial to the interests of the revenue. He, therefore, called upon the assessee to show cause as to why the assessment should not be revised.
2. The learned representative of the assessee submitted that the impugned payments for the respective years were allowed to the assessee company on fulfilling the conditions laid down under Section 40A(7).
There was no question of withdrawing the gratuity provision already allowed even if the assessee had changed the method of making payment of gratuity. In fact, the entire gratuity has been cleared by the assessee by making payments to the fund by 30-6-1981. This contention did not find favour with the learned Commissioner who observed that in view of a different system of accounting, viz., cash system, adpoted by the assessee for making payment of gratuity, the initial provision allowed for the earlier years was liable to be withdrawn and could be taxed as income for the assessment year under appeal. He, therefore, set aside the order of the ITO and directed him to make fresh assessment in accordance with law.
3. Being aggrieved, the assessee has come up in appeal before us. Shri H.M. Talati, on behalf of the assessee, reiterated the same contentions as were placed before the learned Commissioner which we have set out carlier. He submitted that there was no provision in the Act to withdraw the deduction already granted in respect of the provision for gratuity. The said provision was allowed in accordance with the provisions of Section 40A(7) on fulfilment of requisite conditions.
Though the assessee has not changed the accounting system and even if it is so assumed, the taxing authorities have no power to bring the amount to tax which has already been allowed as there was no provision in the statute to enable them to do so. The entire addition was, therefore, unjustified.
4. The learned departmental representative, on the other hand, contended that the said amount was rightly taxed in the assessment year under appeal inasmuch as the assessee had derived a benefit by claiming deduction on cash basis as well as by adopting mercantile system of accounting. It was fairly stated that no amount was credited in the assessee's books from the fund and the amount contributed to the funds in the respective years were retained with the fund. The benefit if at all was of a negative nature, i.e., the assessee could claim a benefit on the basis of cash payment cannot after having already secured the benefit in earlier years by claiming the payments on the basis of provision (sic). In other words, the contention of the departmental representative is that the assessee having obtained a deduction in respect of contributions made to the fund, ought to have made the payment of gratuity from the fund and not by debiting to its own accounts. To that extent the assessee's claim was not tenable. The amount was, therefore, rightly taxable as held by the learned Commissioner.
5. We have considered the rival submissions. In our view, the view taken by the Commissioner is wholly unsustainable both in law and on facts. It is not in dispute that the assessee had created a gratuity fund under an irrevocable trust and the said fund was granted recognition by the learned Commissioner his order dated 26-3-1976 and that the said approval was effective from 20-11-1975. On the basis of the approval granted by the learned Commissioner, the assessee had made contributions to the said fund in accordance with the provisions contained in Section 40A(7). It is also not in dispute that the assessee having fulfilled the requisite conditions, was allowed deduction in respect of the provision for gratuity for the assessment years 1973-74 to 1976-77. Now the grievance of the learned Commissioner seems to be that the assessee having made cash payments of gratuity, the payments made to the fund have been wrongly allowed ; as a consequence taxable as 'income' in the hands of the assessee for the year under appeal. We fail to see any statutory sanction behind this action. At best, Section 41(1) of the Act could help the case of the revenue but it has to be remembered that the said section creates a notional and vicarious liability and, therefore, has to be strictly construed. This section lays down that where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee and subsequently, during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains of business and accordingly chargeable to income-tax as the income of that previous year. This section postulates receipt by the assessee either in cash or in any other manner. Now the contribution made to the fund which has been recognised by the learned Commissioner have not been refunded to the assessee, nor it is the case of the revenue that the liability to make the said payment to the fund has ceased. In fact, the liability has been fully discharged by the assessee resulting in deduction claimed by the assessee and allowed to it in the earlier years. We are unable to appreciate as to how by switching over to another method of accounting the contributions already made would become the 'income' for the assessment year under appeal. The recognition of the said fund is still in existence and being an irrevocable trust, nothing would be payable to the assessee except under the conditions laid down in the scheme relating to payment of gratuity. It was pointed out that when a claim is already allowed, but subsequently is required to be withdrawn a statutory provision is made to enable the taxing authorities to withdraw the claim or allowance already granted. In this connection, the provision relating to development rebate as laid down in Section 155(5) of the Act may be referred. In other words, in absence of any statutory provision to enable the taxing authorities to tax the impugned amount which has already been allowed in the past years, the action of the learned Commissioner to direct the ITO to tax the amount as'income'of the year is wholly unwarranted. The order of the ITO, therefore, cannot be said to be erroneous insofar as it is prejudicial to the interests of the revenue. There is absolutely no material to support that finding as reached by the learned Commissioner. The order as made by the Commissioner under Section 263 is hereby quashed and that of the ITO is restored.