1993 (8) TMI 48 - HC - Income Tax

Summary

Issues:
1. Reopening of assessment based on gratuity deduction.
2. Entitlement of the assessee to claim deduction for gratuity at the rate of 8 per cent of the salary.

Analysis:
1. The case involves the reopening of an assessment for the assessment year 1975-76 by the Income-tax Officer based on a discrepancy in the deduction claimed for gratuity by the assessee, a public limited company. The original assessment disallowed a portion of the claimed deduction, which was affirmed by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. However, the Revenue audit later pointed out that the deduction allowed was in excess, leading to the Income-tax Officer reopening the assessment and making an addition to the taxable income. The Commissioner of Income-tax (Appeals) held that the reopening was unwarranted, as it was a mere change of opinion by the Income-tax Officer based on the audit report, and no new information justified the reassessment. The Appellate Tribunal also found that all relevant materials were before the Income-tax Officer during the original assessment, and the reassessment was solely based on a change of opinion, not new information.

2. The Appellate Tribunal further analyzed the merits of the deduction claimed for gratuity by the assessee. It was observed that before the introduction of section 40A(7) of the Income-tax Act, the deduction was governed by section 36(1)(v) along with rule 103 of the Income-tax Rules. However, post the introduction of section 40A(7), the deduction calculation was to be based on this new provision. The Tribunal concluded that the deduction allowed in the original assessment was correct, as per the provisions of section 40A(7), and no income had escaped assessment. The Tribunal held that the application of rule 103 was not relevant after the introduction of section 40A(7), and the assessee was entitled to the deduction claimed. The Tribunal dismissed the Revenue's appeal, affirming that the reopening of the assessment was invalid and the original deduction was justified.

3. The court, after hearing arguments from both parties, upheld the Tribunal's decision. It emphasized that all relevant materials were available to the Income-tax Officer during the original assessment, and the reassessment was solely based on a change of opinion triggered by the audit report. The court agreed that the reopening of the assessment lacked justification and was a case of a mere change of opinion. Additionally, the court concurred with the Tribunal's interpretation that the deduction for gratuity should be calculated under section 40A(7) post its introduction, and the original deduction allowed was appropriate. Consequently, the court answered both questions raised in the affirmative, favoring the assessee and rejecting the Revenue's contentions.