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TMI Blog2009 (4) TMI 475X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 1961 (hereinafter called "the Act") the President of the Income-tax Appellate Tribunal (hereinafter called the Tribunal) has constituted this Special Bench to consider the following questions: "1. Whether, on the facts and in the circumstances of the case, the CIT was correct in invoking the provisions of s. 263 of the Act in withdrawing the claim of deduction of gratuity provision of Rs. 7,85,600 actually paid to an approved gratuity fund and allowed by the AO in the original order of assessment as against incremental actuarial liability worked out at Rs. 3,37,989? 2. Whether, the assessee is entitled to claim deduction of Rs. 7,85,600 being the provision for gratuity in terms of s. 36 (1)(v) of the Act, actually paid to an approved gratuity fund on the facts and in the circumstances of the case? 3. Whether the Tribunal's order dt. 21st June, 1990 in ITA No. 529/Mad/1987 rendered in the assessee's own case for the asst. yr. 1982-83 could be said to be an order rendered per incuriam and not binding in view of non-consideration of correct legal position in this regard?" 2. We have heard the rival submissions in the light of the material placed before us and the precedents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hing wrong with the order if all the facts stated therein are assumed to be correct. 4. In the facts of the present case we find that the AO failed to make any enquiry in regard to the allowability of the provision for gratuity. As such in our opinion the order was erroneous and prejudicial to the interests of the Revenue. Therefore the conditions precedent for assuming jurisdiction under s. 263 did exist in the facts of the present case. 5. The learned counsel for the assessee vehemently contended that the claim of the assessee in regard to the provision for gratuity is allowable under s. 36(1)(v) of the Act. This section reads as under: "36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in s. 28- ......... (v) any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust." The term 'paid' is defined under s. 43(2) of the Act as under: "43. In ss. 28 to 41 and in this section, unless the context otherwise requires,- ......... (2) 'pai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y been made dependent upon the method of accounting upon the basis of which the profits and gains of the assessee's business are to be computed. In case the assessment is on the basis of the cash system of accounting, 'paid' means actually 'paid', i.e., there must be a physical transfer of the amount or its equivalent from the payer to the payee. On the other hand if the assessment is made on the basis of the mercantile system of accounting the word 'paid' means no more than the incurrence of the liability by the assessee for payment. In the latter case, 'actually paid' or 'paid' is not to be understood in a physical sense, but in the sense the liability for the expense has been actually incurred. In the case of Kanpur Tannery Ltd. vs. CIT (1958) 34 ITR 863 (All) it was held that even under the mercantile system of accounting a liability incurred cannot be entered in the accounts as an expenditure unless the liability has become an ascertained sum of money. Until ascertained, the liability no doubt exists, but proceedings have yet to be taken in some way or other to determine the exact amount. A vague liability to make a payment cannot be entered into accounts and in that state it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or could have been deducted either under s. 28 or under s. 37 of the Act. But the use of the non obstante expression in s. 40A(1) makes it clear that if there is any legislative base dealing with the provision for gratuity, then the same would be applicable in spite of and notwithstanding any other provision of the Act. Read with the marginal note to s. 40A, the non obstante clause of sub-s. (1) of s. 40A has an overriding effect over the provisions of any other section by providing that the provisions of the section will have effect notwithstanding anything to the contrary contained in any other provision relating to the computation of income under the head 'Profits and gains of business or profession'. Expenditures or allowances which are deductible under any other provision relating to the head 'Business or profession' will be disallowed in cases to which the provisions of s. 40A apply.......... Contingent liabilities do not constitute expenditure and cannot be the subject-matter of deduction even under the mercantile system of accounting. Expenditure which is deductible for income-tax purposes is towards a liability actually existing at the time but setting apart money which ..... X X X X Extracts X X X X X X X X Extracts X X X X
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