Commissioner of Income Tax vs United Electrical Industries Ltd.

K.S. Paripoornan, J.—At the instance of the Revenue, the Income Tax Appellate Tribunal, Cochin Bench, has referred a question of law in I. T. R. No. 37 of 1986 and another question of law in I. T. R. No. 93 of 1988. They are as follows :

I. T. R. No. 37 of 1986 :

" Whether, on the facts and in the circumstances of the case and on an interpretation of Section 40A(7) of the Income Tax Act, 1961, the Income Tax Appellate Tribunal is right in law in not restricting the assessee''s claim for deduction of gratuity to 8 1/3 per cent. of the wage bill of the current year ?"

I. T. R. No. 93 of 1988 :

" Whether, on the facts and in the circumstances of the case, the reassessment is valid ? "

The respondent is the same assessee in both the cases. The respondent is an assessee to Income Tax. We are concerned with the assessment year 1974-75. The accounting year is the calendar year 1973. The assessee had provided in its books an amount of Rs. 5,17,363 as liability for gratuity. The Income Tax Officer effected the assessment on November 30, 1974, and disallowed the said amount claimed. According to him, there was no approved gratuity fund. Actually, the assessee had created a gratuity fund. The Commissioner of Income Tax had granted approval to this fund retrospectively with effect from December 29, 1975. On receipt of the said approval of the gratuity fund, the Income Tax Officer revised the original assessment order u/s 155 of the Income Tax Act, 1961, by his order dated November 18, 1977. He allowed a deduction of Rs. 3,42,926. In the meanwhile, there was an objection by the audit party, on the basis of which the assessment was reopened u/s 147(b) of the Income Tax Act. In the reassessment proceedings, the Income Tax Officer adverted to the fact that the total salary paid during the accounting year was Rs. 21,24,598 and 8 1/3 per cent. of this amount came to Rs. 1,76,979. So, the provision made in that behalf by the assessee and allowed earlier by order dated November 18, 1977, was in excess. The excess amount of Rs. 1,65,947 was disallowed.

In the first appeal, the Commissioner of Income Tax (Appeals) found that the reopening of the assessment was not valid. It was also found that the Tribunal, in the assessee''s own case for the assessment year 1973-74, had held that the entire amount paid to the gratuity fund is allowable as a deduction. The Commissioner of Income Tax held that all the relevant information was with the Income Tax Officer when the original assessment (November 30, 1974) and the rectification (November 18, 1977) were made, and that no fresh information came to the possession of the Income Tax Officer subsequent to the assessment. Aggrieved by the order of the Commissioner of Income Tax (Appeals), the Revenue filed second appeal before the Income Tax Appellate Tribunal. The Appellate Tribunal found that the reopening of the assessment was solely on the basis of an audit note which claimed that the ceiling amount had to be calculated on the basis of the wages paid during the relevant accounting year. The Appellate Tribunal found that the reopening of the assessment was not valid. On the merits, it was found that the Central Board of Direct Taxes had clarified that the ceiling of 8 1/3 per cent. of the salary is to be applied with respect to salary to the current salary. Even on the merits, no addition was called for. It is only thereafter at the instance of the Revenue, that the Income Tax Appellate Tribunal referred one question of law in I. T. R. No. 37 of 1986. The other question was referred in I. T. R. No. 93 of 1988, as directed by this court in O. P. No. 7878 of 1986-S.

We heard counsel.

If the question referred to this court in I. T. R. No. 93 of 1988 concerning the validity of reassessment is found against the Revenue, there is no necessity to answer the question referred by the Tribunal in I. T. R. No. 37 of 1986. If the reassessment proceedings are invalid and without jurisdiction, there is no necessity to pronounce on the merits of the matter. We shall, therefore, proceed to consider the question involved in I. T. R. No. 93 of 1988 in the first instance.

In the statement of the case forwarded in I. T. R. No. 93 of 1988, dated April 29, 1988, paragraph 5 contains the details of the audit objection, which is as follows :

" Consequent on approval of gratuity fund of the company, the original assessment order dated November 30, 1974, was revised u/s 155(13) on November 18, 1977, allowing Rs. 3,42,926 as provision for gratuity. This amount is based on actuarial certificate produced by the company. But the amount exceeds 8 1/3 per cent. of the salary and wages paid by the company during the previous year to the extent of Rs. 1,61,749. Provision for gratuity allowed is, therefore, in excess by Rs. 1,61,749 and has to be disallowed (vide Explanation 1 below Section 40A(7). Tax effect Rs. 93,400 (approximate)).

As the company has violated Clause 5 of the trust deed by providing more than 8 1/3 per cent. of the salary and wages paid during any year, derecognition of the fund has also to be considered in the light of Rule 3 read with Rule 9 of the Fourth Schedule to the Income Tax Act, 1961.

The file was checked by SAP. But this aspect was not pointed out."

It is evident that the audit, besides mentioning the provision of law which escaped the notice of the Income Tax Officer, elucidated the law and pointed out the error in the application of the statutory provisions. In paragraph 8 of the order dated March 26, 1985, the Appellate Tribunal has found thus :

" The reopening of the assessment, which is u/s 147(b), is also not sustainable under law for the reason that the opinion of the audit party on a point of law cannot be regarded as information for the purpose of Section 147(b), in the light of the decision of the Supreme Court in the case of Indian and Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, . It was, therefore, only a case of change of opinion by the Income Tax Officer on materials already considered by him. The order of the Commissioner of Income Tax (Appeals) has, therefore, only to be confirmed. ..."

A bare look at the audit objection will show that the audit party mentioned the law, which had escaped the notice of the Income Tax Officer, elucidated the relevant law and also, in consequence, determined its effect and worked out details. The Income Tax Officer mechanically followed the audit objection, reopened the assessment and held that a sum of Rs. 1,65,947 was allowed in excess of the lawful deduction permissible.

We are of the view that the decision of the Supreme Court in Indian and Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, is squarely applicable. In cases where the audit pointed out the error in the application of the provisions of the Act, the High Court of Allahabad in Gulati Pharmaceuticals Pvt. Ltd. Vs. Prakash Chandra, Income Tax Officer, applied the decision of the Supreme Court in Indian and Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, . So also, the High Court of Orissa in Commissioner of Income Tax Vs. Orissa State Financial Corporation, , held that the mechanical adoption of the audit report by the Income Tax Officer is impermissible. We are of the view that the ratio of decision of the Supreme Court in Indian and Eastern Newspaper Society, New Delhi Vs. Commissioner of Income Tax, New Delhi, , to the effect that the opinion of the audit party in enunciating and elucidating a point of law cannot be regarded as information for the purpose of Section 147(b), is applicable in this case. We are also of the view that this is not a case where the audit merely drew the attention of the Income Tax Officer regarding the provisions of law which had escaped his notice. The audit party mentioned the relevant statutory provision which had escaped the notice of the Income Tax Officer, further elucidated its implications and pointed out the error in the application of the provisions by working out details. The audit party pronounced on the law. Such a case is not covered by the ratio of the decisions in Teekoy Rubbers (India) Ltd. Vs. Commissioner of Income Tax, and Bharat Plywood and Timber Products Ltd. Vs. Commissioner of Income Tax, . We hold that the reassessment in the instant case is invalid. We answer the question of law referred in I. T. R. No. 93 of 1988, in the negative, in favour of the assessee and against the Revenue.

Since we have held that the reassessment made in the instant case is invalid, illegal and without jurisdiction, it is unnecessary to answer the question referred in I. T. R. No. 37 of 1986. We decline to answer the question referred in I. T. R. No*. 37 of 1986. The references are disposed of accordingly.

A copy of this judgment, under the seal of this court and the signature of the Registrar, shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.