1979 (6) TMI 16 - HC - Income Tax

Summary

Issues:
Challenge to notice issued by Commissioner of Income-tax regarding deduction of gratuity; Validity of circular of Central Board of Direct Taxes overriding earlier circular; Interpretation of Supreme Court decision in Bombay Dyeing and Manufacturing Co. Ltd.; Validity of notice of reassessment on unreasonable grounds.

Analysis:
The judgment addresses the challenge to a notice issued by the Commissioner of Income-tax regarding the deduction of gratuity by a company. The notice, dated September 26, 1975, was issued under section 263 of the Income Tax Act, proposing to modify the assessment made by the Income Tax Officer. The Commissioner relied on a circular of the Central Board of Direct Taxes from September 26, 1974, which sought to re-examine the allowance of provision towards service gratuity based on a Supreme Court decision in Bombay Dyeing and Manufacturing Co. Ltd. The judgment highlights that the validity of this circular was in question, as it was found to misinterpret the Supreme Court decision in Metal Box Company's case and subsequent decisions. The court also referred to a Division Bench decision of the Bombay High Court and a judgment by M. M. Dutt J. in a similar context, where notices of reassessment were struck down for being based on non-existent and unreasonable grounds.

The judgment further mentions that another judge, Sabyasachi Mukharji J., had also followed the Bombay High Court decision in a separate case involving a show-cause notice issued by the Commissioner for another assessment year. The court noted that a similar view was taken by the Court of Exchequer in Scotland regarding the deduction of gratuity in computing profits. Based on these precedents and the reasoning provided, the court made the rule absolute and issued a writ of certiorari quashing the impugned show-cause notice and all further proceedings in pursuance of it. Additionally, a writ of mandamus was issued commanding the respondents not to give any further effect to the notice or the proceedings. The judgment concluded by staying the operation of the order for four weeks and making no order for costs.