Rajalakshmi Mills Ltd.
v. ITO
ITA No. 1074/Mds./1987
A.Y. : 1981-82. Dated : 24-4-2009
Income-tax Act, 1961 — S. 36(1)(v), S. 40A(7) and S. 263 —
Whether it is necessary for CIT to make further inquiries before cancelling
the assessment order of the AO — Held, No. Whether the CIT can regard an order
as erroneous on the ground that the AO should have made further inquiries
before accepting the statements made by the assessee in his return — Held,
Yes. Whether the word ‘erroneous’ in S. 263 includes cases where there has
been failure to make the necessary inquiries — Held, Yes. Whether it is
incumbent on the AO to investigate the facts stated in the return when
circumstances would make such an inquiry prudent and the word ‘erroneous’ in
S. 263 includes cases where there has been failure to make such an enquiry —
Held, Yes. Whether it is correct to say that the provision made by the
assessee in the accounts for the purposes of making contributions to approved
gratuity fund should be allowed despite the fact that there was no incremental
liability towards the gratuity due for the assessment year under consideration
— Held, No.
Facts :
For the A.Y. 1981-82 the balance sheet of the assessee
company reflected provision for gratuity at Rs.7,85,600 which sum was claimed
by the assessee, in its return of income, u/s.36(1)(v). The AO allowed the
same without making any discussion in the assessment order. The Commissioner
of Income-tax (CIT) assumed jurisdiction u/s.263 as in his opinion the order
was erroneous and prejudicial to the interest of the revenue.
The CIT found that the approved (sic actuarial) gratuity
liability as on 31-3-1981 and 31-3-1980 was Rs.55,35,469 and Rs.51,974,80
respectively. Hence, the amount payable as contribution to the fund was
Rs.3,37,989. The AO had allowed Rs.7,85,600. Accordingly, the CIT by relying
on the decision of the Apex Court in the case of Shree Sajjan Mills Ltd. (156
ITR 585) directed the AO to withdraw the excess allowance of Rs.4,47,611.
In an appeal to the Tribunal the assessee contended that
the conditions precedent for invoking S. 263 have not been satisfied and also
that it is entitled to claim deduction of Rs.7,85,600 being provision for
gratuity actually paid to an approved gratuity fund.
The President of the ITAT constituted a Special Bench to
consider the following questions :
(1) Whether the CIT was correct in invoking the
provisions of S. 263 and in withdrawing the claim of deduction of
Rs.7,85,600, allowed by the AO, being the amount actually paid to an
approved gratuity fund and in allowing incremental actuarial liability
worked out at Rs.3,37,989 ?
(2) Whether the assessee was entitled to claim deduction
of Rs.7,85,600 being the provision of 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 Appellate Tribunal’s order dated
21-6-1990 in ITA No. 529(Mds.)/87 rendered in the assessee’s own case for
A.Y. 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 ?
Held :
The Special Bench (SB) found that the AO had not made any
inquiries regarding the allowability of the sum of Rs.7,85,600 claimed by the
assessee as provision for gratuity actually paid to an approved gratuity fund.
The SB after considering the ratio of the decision of the Apex Court in the
case of Rampyari Devi Saraogi v. CIT, (67 ITR 84) (SC) held as under :
“It is not necessary for the CIT to make further
enquiries before cancelling the assessment orders of the AO. The CIT can
regard the order as erroneous on the ground that in the circumstances of the
case the AO should have made further inquiries before accepting the
statements made by the assessee in his return. The reason is obvious. Unlike
a Civil Court which is neutral in giving a decision on the basis of evidence
produced before it, an AO is not only an adjudicator but also an
investigator. He cannot remain passive in the face of a return which is
apparently in order but calls for further enquiry. It is the duty of the AO
to ascertain the truth of the facts stated in the return when the
circumstances of the case are such as to provoke inquiry. The meaning to be
given to the word ‘erroneous’ emerges out of this context. The word
erroneous would include cases where there has been failure to make the
necessary inquiries. It is incumbent on the AO to investigate the facts
stated in the return when the circumstances would make such an inquiry
prudent and the word ‘erroneous’ in S. 263 includes the failure to make such
an enquiry. The order becomes erroneous because such an enquiry has not been
made and not because there is anything wrong with the order if all the facts
stated therein are assumed to be correct.”
Accordingly, it held that the order passed by AO was
erroneous and prejudicial to the interest of the revenue and that the
conditions precedent for exercising jurisdiction u/s.263 did exist in the
facts of the present case.
As regards the contention of the assessee that since the
provision was made by the assessee for the purpose of payment of a sum by way
of contribution towards the approved gratuity fund, the amount of provision
should be allowed within the meaning of S. 40A(7)(b), the SB following the
ratio of the decision of Madras High Court in CIT v. Loyal Textile Ltd.,
(231 ITR 573) held that it would be incorrect to say that provision made by
the assessee in the accounts for the purposes of making contributions to
approved gratuity fund should be allowed u/s.40A(7)(b)(i) despite the fact
that there was no incremental liability towards the gratuity due for the
assessment year under consideration. It held that an expenditure which is
deductible for income-tax purposes is towards a liability actually existing at
the time, but setting apart money which might become expenditure on the
happening of an event is not expenditure allowable under the law. Since the
assessee did not place anything to demonstrate the nature of liability nor was
there any material to come to a conclusion that the liability was an
ascertained liability the contention of the assessee was rejected.
