1997 (1) TMI 64 - HC - Income Tax

Summary

Issues:
1. Challenge against Circular No. 146 dated September 26, 1974, and assessment order for the year 1972-73.
2. Validity of Circular No. 146 in light of Supreme Court judgments regarding gratuity provisions.
3. Applicability of law for assessment years 1972-73 and onwards.

Analysis:
The appeal challenged an order directing a fresh assessment for the year 1972-73, disregarding Circular No. 146 dated September 26, 1974. The writ petitioner sought to quash the circular and any assessment based on it. The judgment relied on a Bombay High Court case concerning a similar circular for later assessment years, not relevant to 1972-73 due to the insertion of section 40A(7) in the Income-tax Act from April 1, 1973. The Supreme Court's ruling in Metal Box Co. of India Ltd. case established that estimated liabilities like gratuity, if properly valued, can be deducted as trading expenses under section 37(1) of the Act.

The Circular issued on September 26, 1974, contradicted the Supreme Court's decision in Metal Box Co. of India Ltd. case by disallowing deductions for unapproved gratuity funds under section 37(1). The Supreme Court's judgment in Shree Sajjan Mills Ltd. case clarified that provisions for estimated liabilities could be deductible under sections 28 or 37 before the introduction of section 40A. The Circular's conflict with established law led to it being deemed ineffective for the assessment year 1972-73.

The judgment directed a fresh assessment for 1972-73 in accordance with the law laid down by the Supreme Court in Metal Box Co. of India Ltd. case, ignoring Circular No. 146 dated September 26, 1974. It clarified that for subsequent years, the law under section 40A(7) would apply as per the Supreme Court's rulings in Shree Sajjan Mills Ltd. case and D. V. Bapat, ITO case. The decision emphasized adherence to judicial precedents and established legal principles in tax assessments.

The Chief Justice agreed with the judgment's analysis and decision, underscoring the importance of following Supreme Court decisions in tax matters. The appeals were disposed of with directions for fresh assessments based on the applicable legal framework, ensuring consistency with judicial interpretations and statutory provisions.