High Court upholds Revenue's disallowance of gratuity deduction under amended Income-tax Act

The High Court of Calcutta ruled in favor of the Revenue, holding that the Income-tax Officer was justified in disallowing the deduction for gratuity where no approved fund existed, as per the retrospective amendment of section 40A(7) of the Income-tax Act, 1961. The Court found that the assessment order needed revision to align with the amended provision, rejecting the Tribunal's view that the order under section 154 was illegal. Justice Bhagabati Prasad Banerjee concurred with the judgment.

---

---

Issues involved: Interpretation of section 40A(7) of the Income-tax Act, 1961 regarding the allowance of provision for gratuity when no approved gratuity fund existed for the assessment year 1973-74.

Summary:
The Commissioner of Income-tax, West Bengal-III referred a question to the High Court of Calcutta regarding the applicability of section 40A(7) of the Income-tax Act, 1961 to a case where no provision for gratuity liability was made in the accounts. The assessee had claimed a deduction of Rs. 1,08,864 for gratuity, which was initially allowed by the Income-tax Officer. However, a retrospective amendment prohibited such allowance where no approved gratuity fund existed. The Income-tax Officer rectified the order disallowing the deduction, which was upheld by the Appellate Assistant Commissioner. The Tribunal later held that there was no mistake apparent from the record as the claim was based on actuarial valuation and not provided in the accounts. The Tribunal set aside the lower authorities' orders, deeming the order under section 154 as illegal, and allowed the assessee's appeal for the assessment year 1973-74.

The High Court held that a mistake was apparent from the record due to the retrospective amendment of section 40A(7), disallowing provision for gratuity without an approved fund. The assessment order had to be revised to comply with the amended provision, and the Tribunal's view that the order under section 154 was illegal was deemed incorrect. The Income-tax Officer was justified in revising the assessment order based on the provisions of section 40A(7) inserted retrospectively from April 1, 1973. Consequently, the High Court answered the question in the reference in the negative and in favor of the Revenue.

Judge's Opinion:
Justice Bhagabati Prasad Banerjee concurred with the judgment.

---