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TMI Blog1997 (2) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... elevant to the asst. yr. 1974-75 under consideration. In the original assessment made on 31st Oct., 1974, this was allowed. Subsequent to the assessment, the ITO noticed that there was no recognised gratuity fund. In this view, it was not allowable and the allowance was a mistake apparent from the records. He issued a notice under s. 154 of the IT Act, 1961 (in short "the Act"), calling for the assessee's object to withdrawal of the allowance. The assessee replied that there was an application for approval. Since the ITO found that the approval has not been granted, he passed the impugned order, withdrawing the allowance of Rs. 29,348. 3. The AAC, on appeal, found that the assessee's business was converted into a partnership consequent on partition of the family as at the end of the relevant accounting year 31st March, 1974, and that it was therefore not a liability to the employees but a capital liability handed over to the successor. In this view, the AAC justified the disallowance on the merits. The AAC had also found that there was no recognised gratuity fund. According to her, there was no request for recognition from the assessee and the deduction was hit by s. 40A(7). Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to the facts arising in this case. In support of this contention, reliance was placed upon the decision of this Court in CIT vs. Sarada Binding Works (1987) 62 CTR (Mad) 21 : (1985) 152 ITR 520 (Mad) : TC 16R.1447. 6. Sec. 40A(7) of the Act was inserted by s. 6 of the Finance Act, 1975, which came into effect from 1st April, 1973. The exemption provided under s. 40A(7)(b) of the Act would be available only when the assessee made any provision for the payment of the same by way of any contribution towards approved gratuity fund. Inasmuch as the assessee in the present case made actual payment of the gratuity liability to the successor partnership firm, the provisions contained in s. 40A(7) of the Act will not apply to the facts arising in this case. It was, therefore, submitted that the Tribunal was not correct in holding that the withdrawal of the allowance of the provisions made in the accounting year relevant to the assessment year under consideration, by exercising the power under s. 154 of the Act, is in order. 7. Insofar as the rectification made by the ITO under s. 154 of the Act is concerned, learned counsel appearing for the assessee submitted that the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not entitled to get allowance for deduction of gratuity liability which was allowed in the original assessment made by the ITO on 30th Oct., 1974. Non-compliance of the provisions contained in the statute would amount to an error apparent, on the face of the record. Since the allowance was granted by the ITO in the original assessment without considering the provisions contained in s. 40A(7) of the Act, the ITO invoked the provisions of s. 154 of the Act and rectified the error by withdrawing the allowance already granted by him. Therefore, it cannot be said that the ITO has got no jurisdiction to rectify the assessment under s. 154 of the Act. According to learned standing counsel appearing for the Department, the gratuity liability was not paid directly in the present case in the hands of the employees. What was transferred in the present case was the gratuity liability and the partnership concern would be entitled to ask for deduction after the partnership concern satisfied the conditions prescribed under s. 40A(7) of the Act. According to learned standing counsel appearing for the Department there was no actual payment of gratuity liability. In fact, the assessee made the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of rectification, the Tribunal was correct in holding that the ITO was correct in withdrawing the allowance originally granted with regard to the provision made for gratuity liability. 10. We have heard learned counsel appearing for the assessee as well as learned standing counsel appearing for the Department. The assessee is an HUF in the year 1974-75. The assessee from his business income claimed gratuity liability in the accounting year ending on 31st March, 1974, relevant to the asst. yr. 1974-75. The assessee made a provision in the accounts towards gratuity liability of Rs. 29,348. It seems that the HUF had converted the business into a partnership firm, after partitioning the assets on 24th March, 1974, to take effect from 31st March, 1974. The HUF transferred the business with all assets and liabilities in favour of the partnership concern as a going concern. The HUF while carrying on the business did not contribute to the gratuity fund and there was also no application for recognition. The gratuity liability became an item in the P L a/c, while calculating the accrued liabilities of the assessee as an employer towards its employees. It is under such circumstances, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The agreement entered into between the assessee and the transferee stated that all the employees in the business would become the employees of the transferee on terms no less favourable to them with continuity of service. One of the items of liability that was considered in the settlement was a sum of Rs. 80,309 which was the provision for gratuity due to the employees of the business taken over by the transferee. In its assessment to income-tax, the assessee claimed as a deduction the provision for gratuity in respect of the business retained by it as well as the business that was transferred. On these facts, the following question was referred to this Court for its opinion, viz., whether the Tribunal was right, on the facts and in the circumstances of the case, in directing the deduction of gratuity liability of Rs. 80,309 (subject to verification of the figures) as stated in para 7 of the Tribunal's order. While answering this question, this Court held that in respect of the business that was transferred, though the payment under the agreement was not made directly to the employees as such, the amount was paid for discharging the assessee's liability to pay gratuity to its emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 788 (Mad) : TC 16R.1445, and the decision of the Supreme Court in CIT vs. Gemini Cashew Sales Corporation (supra), this Court came to the abovesaid conclusion. Therefore, according to the facts arising in the abovesaid decision, there was no actual payment of gratuity liability, but only a provision made for gratuity liability was required to be allowed as a deduction. Therefore, the decision in Pandian Roadways Corporation Ltd. vs. CIT (supra) is distinguishable on the facts. 12. So also, the Andhra Pradesh High Court, in the decision in CIT vs. Bakelite Hylam Ltd. (1995) 127 CTR (AP) 46 : (1996) 217 ITR 469 (AP) : TC 16PS.38 following the decisions of the Supreme Court in CIT vs. Andhra Prabha (P) Ltd. (1986) 54 CTR (SC) 313 : (1986) 158 ITR 416 (SC) : TC 16R.168 and Shree Sajjan Mills Ltd. vs. CIT (1985) 49 CTR (SC) 193 : (1985) 156 ITR 585 (SC), while considering the provisions of s. 40A of the Act, held that even after the introduction of the provisions of s. 40A(7) of the Act in 1973, there is no change in the legal position insofar as the actual payment of gratuity is concerned. Hence, the actual payment made towards the gratuity liability is allowable in the year for w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erstwhile employees of the assessee. If the gratuity liability was made as actual payment either to the employee or to the employer, representing payment on behalf of the employees the provision under s. 40A(7) of the Act, cannot be applied since that provision would apply where deduction is claimed in respect of the provision made for gratuity liability. In the decision reported in CIT vs. W.T. Suren Co. Ltd. (1982) 31 CTR (Bom) 128 : (1982) 138 ITR 91 (Bom) : TC 16R.1446, While holding that gratuity liability payable to the employees was not deductible under s. 10(2)(xv) of the Act, the Bombay High Court has followed the decisions of the Madras High Court in Stanes Motors (South India) Ltd. vs. CIT (supra), CIT vs. Salem Bank Ltd. (supra) and CIT vs. Pathinen Grama Arya Vysya Bank (supra). In the decision in CIT vs. Sarada Binding Works (supra), this Court pointed out that the view taken by the Bombay High Court in CIT vs. W.T. Suren Co.Ltd. (supra), is not the correct view and, therefore, this Court is not agreeable to the view taken by the Bombay High Court in the said decision. 15. It was further pointed out that the view taken by the Bombay High Court in the abovesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsferee bank did not undertake any liability arising out of the past services rendered by the employees of the transferor-bank and any such liability had to be discharged by the transferor-bank itself. Therefore, the transferor-bank paid a total sum of Rs. 26,032 to its employees as and by way of gratuity. The assessee claimed allowance of this amount as a deduction either under s. 36(1)(ii) or under s. 37(1) of the Act. On these facts this Court held that the amount in question, whether as a retrenchment compensation or gratuity, cannot be a sum referred to in s. 36(1)(ii) of the Act and it cannot be allowed under that provision. However the Court further held that since a part of the business of the assessee had been closed down, the payment made in the course of the business as gratuity cannot be treated as a terminal payment on the closure of the business so as to be disallowed. The payment cannot be treated as one made at the time of the transfer of the undertaking of the assessee. The payment was, therefore, allowable as a deduction under s. 37(1) of the Act. This was also the view taken by a Full Bench of the Kerala High Court in CIT vs. Standard Furniture Co. Ltd. (1979) 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he year ending 31st March, 1974. This was allowed by the ITO. Since the approval was not granted, the ITO invoked the provisions of s. 154 of the Act and rectified the mistake by withdrawing the allowance of Rs. 29,348 granted in the original assessment. On appeal, the AAC, considering the provisions contained in s. 40A(7) of the Act inserted by the Finance Act, 1975, with retrospective effect for and from the asst. yr. 1973-74, confirmed the view taken by the ITO, in the matter of applying s. 154 of the Act. On further appeal, the Tribunal confirmed the order passed by the AAC in justifying the action taken by the ITO under s. 154 of the Act. 20. Before us learned counsel appearing for the assessee submitted that rectification is not possible in the present case because the business of the assessee was closed on 31st March, 1974, and thereafter, the assessee, was not in existence. Hence, according to learned counsel, the assessee cannot be expected to provide provision for gratuity liability in accordance with the provisions of s. 40A(7) of the Act. Learned counsel further submitted that in the matter of actual payment, the applicability of the provisions of s. 40A(7) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iginal assessment, the ITO allowed the provision made for gratuity liability of Rs. 29,348. The original assessment was made on 30th Oct., 1974, prior to the Finance Act, 1975, which introduced s. 40A(7) of the Act with retrospective effect for and from the asst. yr. 1973-74. According to the assessee, there was actual payment with regard to the gratuity liability by the assessee to the successor partnership firm by transferring the entire assets and liabilities belonging to the HUF. In such a case, the provisions of s. 40A(7) of the Act would not be applicable because s. 40A(7) of the Act would be applicable only where deduction was made with regard to the provision made for gratuity liability. Therefore, there was no error apparent on the face of the record, warranting interference under s. 154 of the Act. In the decision in T.S. Balaram, ITO vs. Volkart Brothers (1971) 82 ITR 50 (SC) : TC 53R.165, the Supreme Court while considering ss. 2 (9) and 17(1) of the 1922 Act and ss. 2(31), 113 and 154 of the 1961 Act has held that a mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long-drawn process of reasoning on poi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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