1. This appeal by the department relates to the assessment year 1975-76, for which the accounting period ended on 31-12-1974.
2. The assessee is Malayala Manorama Co. Ltd., Kottayam, which publishes a Malayalam newspaper and also periodicals. For the assessment year under appeal, the assessee claimed a deduction of Rs. 3,39,873 being the actuarial valuation of the liability for payment of gratuity. In the original assessment, which was completed on 20-7-1976, Rs. 93,024 was disallowed on the ground that it relates to future incremental liability and only the remaining amount of Rs. 2,46,849 was allowed as a deduction. The assessee took up the matter in appeal before the AAC and subsequently before the Tribunal. By the order dated 13-7-1978, in IT Appeal No. 1053 (Coch.) of 1976-77, the Tribunal confirmed the disallowance of Rs. 93,024. Meanwhile the revenue audit gave on 12-8-1977 a note, pointing out that contributions to a recognised gratuity fund are regulated by Rule 103 of the Income-tax Rules, 1962 ('the Rules'), that the trust deed with regard to the constitution of the approved gratuity fund was not available to the audit and that it requires verification whether the deduction of Rs. 2,46,849 allowed by the ITO was correct. On examining the matter, the ITO found out that the contribution to the gratuity fund, which the assessee was required to make under the gratuity trust deed, was only 5 per cent of the salary paid to the employees covered by the fund, that on this basis only Rs. 1,66,930 could have been allowed as a deduction and that an excess deduction of Rs. 79,919 was allowed in the original assessment. The assessment was reopened on 18-5-1978. Overruling the objections raised by the assessee with regard to the validity of the reopening and rejecting the contentions of the assessee that the deduction originally allowed was correct, the ITO made an addition of Rs. 79,919 in the reassessment made by him on 28-3-1980.
3. In the appeal filed by the assessee against the reassessment, the Commissioner (Appeals) held that the reopening of the assessment was invalid and further that on merits also, the addition made by the ITO was not sustainable. He was of the view that with regard to the deduction on account of gratuity, the matter had been the subject-matter of appeal before the Tribunal and that thereafter it was not open for the ITO to reopen the assessment, which will have the effect of challenging the finality of the decision of the Tribunal. He also held that it was a case of the audit taking a different view of the matter. On merits, the Commissioner (Appeals) was of the view that the matter was governed by Section 40A(7) of the Income-tax Act, 1961 ('the Act'), and that, under the same, deduction was admissible of a provision made for gratuity up to 8 1/3 per cent of the salary and that there was no justification for restricting the deduction up to 5 per cent of the salary. Aggrieved by the same, the department has come up in appeal.
4.1 The first contention advanced by the department is that the Commissioner (Appeals) erred in holding that the reopening of the assessment was invalid. It is pointed out by the department that in the original assessment, the ITO had allowed the provision to the extent of Rs. 2,46,849, that the appeal by the assessee was only with regard to Rs. 93,024, which had been disallowed by the ITO, that this was the subject-matter of the appeal before the Tribunal, that the decision of the Tribunal related only to the allowability or otherwise of a deduction of Rs. 93,024 and that with regard to the amount of Rs. 2,46,849 allowed by the ITO, a reopening of the assessment was possible if there were sufficient grounds to sustain the reopening. On the other hand, it is pointed out by the assessee that the subject-matter of appeal before the Tribunal was the gratuity liability which was allowable and that the Tribunal having adjudicated upon the matter, it was not open to the ITO to reopen the assessment with regard to any portion of the amount.
4.2 On the aspect mentioned above, we are inclined to accept the contention of the department. The order of the Tribunal in the earlier appeal shows that the subject-matter of appeal was the disallowance of Rs. 93,024. The disallowance of this amount was confirmed by the Tribunal, as it represented future incremental liability. The remaining amount of Rs. 2,46,849 had been allowed by the ITO and this did not form the subject-matter of any appeal. It cannot, therefore, be said that the Tribunal had gone into the question whether the amount of Rs. 2,46,849 was deductible. The ITO was, therefore, competent to reopen the assessment with regard to this amount if a reopening of the assessment was otherwise possible.
4.3 This takes us to the question whether the reopening can be sustained on the ground that the ITO had information on the basis of which it could be said that income had escaped assessment.
4.4 In the objections filed by the assessee on 26-3-1980 to the draft assessment order issued in connection with the reassessment, the assessee stated that the gratuity trust was constituted in the year 1969, that application for approval was filed before the ITO on 15-12-1969, that the copy of the instrument of the trust and copy of the rules were also filed along with the application, that these have been acknowledged on 17-12-1969 and that the original deed was filed before the ITO with the covering letter dated 11-3-1970, which was acknowledged on 16-3-1970. It is also stated in the letter that the copy of the application for the sanction of initial contribution at 8.5 percent, made before the Commissioner on 5-11-1973, was also filed before the ITO and that the contribution to the approved gratuity fund was being considered by the ITO, year after year, from 1970-71. These facts are not disputed by the department. There is, therefore, substance in the contention of the assessee that all the relevant materials were before the ITO when he made the original assessment. It appears to be only a case of change of opinion on the part of the ITO on the basis of what was pointed out by the audit that deduction on account of gratuity liability should be confined to an amount worked out at 5 per cent of the salary. It cannot be said that there was any information, which would justify the reopening of the assessment.
4.5 On merits also, we are taking the view for the reasons set out hereinafter that the deduction originally allowed was correct. It follows that no income had escaped assessment and for this reason also, the reopening of the assessment cannot be sustained.
4.6 We, therefore, confirm the finding of the Commissioner (Appeals) that the reopening of the assessment is not legally sustainable.
5.1 The other contention advanced by the department is that the Commissioner (Appeals) erred in holding that the deduction originally allowed was correct.
5.2 Prior to the introduction of Section 40A by the Finance (No. 2) Act, 1957, with effect from 1-4-1972, claims for deduction on account of gratuity liability were governed by Section 36(1)(v) of the Act.
Under the same, any sum paid by the assessee by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of the employees under an irrevocable trust could be allowed as a deduction. The further provisions relating to deduction were Part C of the Schedule IV to the Act and the rules in Part XIV of the Rules.
Rule 104 relates to initial contributions, with which we are not concerned in the present case. Rule 103 relates to ordinary annual contributions. Under the same, the ordinary annual contribution had to be made on a reasonable basis as may be approved by the Commissioner having regard to the length of service of each employee concerned so, however, that such contribution shall not exceed 81 per cent of the salary of each employee during each year. Our attention was not drawn to any arrangement by which the annual contributions are approved from time to time. The contention of the department is that the rate of contribution mentioned in the trust deed and rules should be taken as the approved rate of contribution. If this position is accepted, the assessee can claim deduction of only contributions up to 5 per cent of the salary.
5.3 The contention of the assessee is that after the introduction of Section 40A, the deduction of provisions for gratuity is governed by the provisions of Sub-section (7) of Section 40A and that under the same, the assessee is entitled to contribute an amount up to 8 1/3 per cent of the salary of each employee. On the other hand, it was contended by the department that Rule 103 will operate even with regard to the allowing of deduction under Section 40A(7).
5.4 On a consideration of the matter, we are inclined to accept the contention of the assessee. Rule 103 was framed prior to the introduction of Section 40A(7) and must have been intended to control the deduction allowable under Section 36(1 )(v), which itself did not prescribe any limit to the deduction allowable. Section 40A was placed on the statute book, subsequently. Sub-section (1) of Section 40A provides that the provisions of Section 40A shall have effect notwithstanding anything to the contrary contained in any other provisions of the Act relating to computation of the income under the head 'Profits and gains of business or profession'. Sub-section (7) provides that subject to the provisions of Clause (b), no deduction shall be allowed in respect of any provision made for the payment of gratuity to the employees. Therefore, to allow the deduction, it must come under Clause (b). Clause (b) contains two Sub-clauses and the present case falls under Sub-clause (ii) which covers any provision made by the assessee for the previous year relevant to any assessment year commencing on or after 1-4-1973, but before 1-4-1976. The assessment year in the present case is 1975-76. Under Sub-clause (ii), a provision, which satisfies the three conditions mentioned in the Sub-clause, will be allowable to the extent the amount of such provision does not exceed the 'admissible amount'. The department has no case that the assessee has not satisfied conditions 1 to 3. The only point of controversy, therefore, is what is the 'admissible amount'.
The term 'admissible amount' has been defined in Explanation I, so far as it is relevant for the present purpose as an amount which does not exceed an amount calculated at the rate of 8 1/3 per cent of the salary of each employee. Taking into consideration the provisions in Section 40A(7), it does not seem to be a correct approach to reduce the quantum of the 'admissible amount', as defined in Explanation I, by resorting to Rule 103. The definition of the term does not make any reference to the limitation imposed by Rule 103. It has also to be borne in mind that Sub-clause (ii) is a transitory provision to help the assessees to get over the retrospective operation of the amendment.
5.5 A contention was advanced by the assessee to the effect that a claim for deduction a on account of gratuity liability calculated at the rate of 8 1/3 per cent of the salary is allowable under Circular No. 169, dated 23-6-1975, issued by the CBDT--Sampath Iyengar's Law of Income-tax, Volume 2, Seventh edn., p. 2038. It was claimed that a circular issued by the Board is binding on the ITO as has been held by the Kerala High Court in CIT v. B.M. Edward, India Sea Foods  119 ITR 334 (FB). It was held by the Kerala High Court that where the circulars affect certain important rights in regard to the assessment of the assessee, the assessees are entitled to have the assessments made and completed in accordance with the circular. But we are inclined to accept the contention of the department that the circular now relied upon by the assessee is only a general one explaining the effect and scope of Section 40A(7). The circular only paraphrases the provisions of the Sub-section. There is nothing in the circular which would indicate that the Board required the ITOs to ignore Rule 103 while dealing with case falling under Section 40A(7). The circular will, therefore, be of no help to the assessee in deciding the present issue.
The assessee is, however, entitled to succeed for the reasons given earlier.
5.6 In the light of what is stated above, the assessee was entitled to claim deduction of a provision which did not exceed an amount calculated at the rate of 8 1/3 per cent of the salary. Therefore, the deduction allowed in the original assessment was correct and was not excessive. We confirm the finding of the Commissioner (Appeals) on this aspect also.