CENTRAL BOARD OF DIRECT TAXES VS CHLORIDE INDIA LTD., 1999 PTD-CALCUTTA-HIGH-COURT-INDIA 197 (1997)

Income-tax

----Central Board of Revenue---Circular---Business expenditure ---Gratuity-- Circular No.146, dated 26-9-1974 of C.B.D.T.---In direct conflict with Supreme Court Ruling in Metal Box Co.'s case---To be ignored in making assessments for assessment year 1972-73---Subsequent years governed by ruling in Shree Sajjan Mills' case---Indian Income Tax Act, 1961, Ss.37 & 40-A(7)---CBDT Circular No. 146, dated 26-9-1974.

In Metal Box Co. of India Ltd.'s case (1969) 73 ITR 53, the Supreme Court held that contingent liabilities discounted and valued as necessary, can be taken into account as trading expenses if they are sufficiently certain to be capable of being valued; and an estimated liability under a scheme of gratuity, even if it amounted to a contingent liability, if properly ascertainable and its present value is fairly discounted, is deductible from the gross receipts while preparing the profit and loss account. The circular of the Central Board of Direct Taxes, dated September 26, 1974, providing That any allowance of such liability towards an unapproved gratuity fund under section 37(1) of the Income Tax Act, 1961, shall not be made, is in direct conflict, with the law laid down by the Supreme Court in Metal Box Co. of India Ltd.'s case (1969) 73 ITR 53. The circular, therefore, has to be ignored in making assessments for the assessment year i972-73. For the assessment year 1973-74 onwards the law applicable would be in accordance with section 40-A(7) of the Income Tax Act, 1961, as declared by the Supreme Court in Shree Sajjan Mills Ltd. (1985) 156 ITR 585 (SC).

Bapat (D.V.) ITO v. Tata Iron and Steel Co. Ltd. (1986) 159 ITR 938 (SC); Bombay Dyeing and Manufacturing Co. Ltd. v. CWT (1974) 93 ITR 603 (SC); Metal Box Co. of India Ltd. v. Their Workmen (1969) 73 ITR 53; 39 Comp Cas. 410; 35 FJR 181 (SC); Shree Sajjan Mills Ltd. v. CIT (1985) 156 ITR 585 (SC); Standard Mills Co. Ltd. v. CWT (1967) 63 ITR 470 (SC) and Tata Iron and Steel Co. Ltd. v. D.V. Bapat, ITO (1975) 101 ITR 292 (Bom.) ref.

Dr. Debi Pal and Miss Manisha Seal for Appellant.

Rupendra Nath Mitra and Jaydeb Saha for Respondent.

JUDGMENT

BARIN GHOSH, J.---The present appeal is against an order, dated February 27, 1976, passed by the learned judge whereby the rule issued in terms of prayers (a) and (b) of the writ petition was made absolute and the respondents were directed to make fresh assessment in accordance with law for the assessment year 1972-73 ignoring Circular No.146 (see (1975) 101 ITR (St.) 46), dated September 26, 1974. In prayer (a) of the writ petition the writ petitioner had sought for a writ of certiorari seeking quashing of Circular No.146 (F. No.228/2/73-IT (A.11) (see (1975) 101 ITR (St.) 46), dated September 26, 1974, issued by the Central Board of Direct Taxes and assessment. order if any made by the assessment officer on the basis of the said circular for the assessment year 1972-73 or any subsequent assessments and in prayer (b) of the writ petition the writ petitioner had sought for a writ of prohibition for a direction upon the respondents commanding them to forbear from giving effect to anti/or taking any steps in pursuance of the aforesaid Circular No.146 (see (1975) 101 ITR (St.46) dated September 26, 1974, for the assessment year 1972-73 or any subsequent assessments.

The learned Judge passed the order under appeal on the basis of the judgment of the Bombay High Court in the case of Tata Iron and Steel Co. Ltd. v. D.V. Bapat, I T O (1975) 101 ITR, 292. In that case, although the same circular was under challenge, the concerned assessment years were 1973-74 onwards. There is no dispule that with effect from April 1, 1973, section 40-A(7) was inserted in the Income Tax Act, 1961 and the said new section, since then, is governing the field. Therefore, the judgment passed by the Bombay High Court had no bearing in relation to the very subject-matter of the writ petition, i.e., assessment year 1972-73.

In Metal Company of India Ltd. v. Their Workmen (1969) 73 ITR 53, the Supreme Court held that contingent liabilities discounted and valued as necessary, can be taken into account as trading expenses, if they are sufficiently certain to be capable of being valued: and an estimated liability under scheme of gratuity, even if it amounted to a contingent liability, if properly ascertainable and its present valued is fairly discounted, is deductible from the gross receipts while preparing the profit and loss account. In view of that decision and other decisions that followed it, it became permissible for an assessee, if he so chose to provide in his profit and loss account for the estimated liability under gratuity scheme by ascertaining its present value on accrued basis and claiming it as ascertained liability to be deducted in the computation of the profit and loss account of the previous years.

Following this judgment of the Supreme Court, a circular was issued by the Central Board of Direct Taxes on September 21, 1970, where it was provided that the Board has come to the conclusion, following the judgment of the Supreme Court, that the liability ascertained on account of provision for gratuity on a scientific basis in the form of an actuarial valuation carried out every year, cannot be considered as contingent liability and provisions for such gratuity may be treated as an admissible deduction under section 37(1) of the Income Tax Act, 1961. In view of the said circular which is based upon the decision of the Supreme Court in the case of Metal Box Company of India Ltd. (1969) 73 ITR 53, the provision made in the profit and loss account for the estimated present value of the contingent liability properly ascertained and discounted on an accrued basis as falling on the assessee in the year of account become deductible under section 37(10) of the Income Tax Act, 1961.

Since after the said judgment of the Supreme Court in Metal Box Company of India Ltd. (1969) 73 ITR 53, and until insertion of section 40-A(7), in the said Act, in this field there was no alteration either by statute or by pronouncement of the Supreme Court. However, the Central Board of direct Taxes on September 26, 1974, issued a fresh circular and therein provided that any allowance of such liability 'towards an unapproved gratuity fund under section 37(1) of the Income Tax Act shall not arise. The reason for giving this was apparently a judgment of the Supreme Court in Bombay Dyeing and Manufacturing Co. Ltd. (1974) 93 ITR 603, wherein the Supreme Court had confirmed its views in Standard Mills Co. Ltd. v. CWT (,1967) 63 ITR 470. The fact remains that Standard Mills Co. Ltd.'s case (1967) 63 ITR 470 (SC), was considered by the Supreme Court while delivering the judgment in Metal Box Co. of India Ltd.'s case (1969) 73 ITR 53 (SC). The Supreme Court distinguished the judgment in Standard Mills Co. Ltd's case (1967) 63 ITR 470 (SC) by giving express reasons there for. This aspect of the matter was also taken note of by the Supreme Court while delivering the judgment in Bombay Dyeing and Manufacturing Co. Ltd.'s case (1974) 93 iTR 603 (SC). The reason for distinguishing Standard Mills Co. Ltd.'s case (1967) 63 ITR 470 (SC) was that in standard Mills Co. Ltd.'s case, the Supreme Court was considering the debt in so far as wealth tax is concerned and not the liability of an employer accrued during the year on account of gratuity. In that view of the matter, the circular dated September 26, 1974, is in direct conflict with the law laid down by the Supreme Court in Metal Box Co. of India Ltd.'s case (1969) 73 ITR 53.

In Shree Sajjan Mills Ltd. v. CIT (1985) 156 ITR 585, the Supreme Court has laid down as to what was the law applicable in the field before section 40-A was introduced. While doing, so, it took note of the judgment of the Supreme Court in Metal Box's case (1969) 73 ITR 53 and held that provisions made in tile profit and loss account for the estimated liability properly ascertained on an accrued basis falling on the assessee in the year of account could be deductible either under section 28 or section 37 of the Act. In that view of the matter, we are ad idem with the order of the learned trial Judge, but for a different reason mentioned hereinabove. In this connection, it is our duty to point out that the judgment of the Bombay High Court relied on by the learned trial Judge was ultimately set aside by the Supreme Court in the case of D.V. Bapat, ITO v. Tata Iron and Steel Co. Ltd. (1986) 159 ITR 938. But that does not stand at all in the way in respect of the view expressed above, in view of the fact that the Supreme Court in the said judgment itself noted the fact that for the assessment year 1972-73 the assessee in that case claimed deduction of a sum of Rs.1,28,09,135 on the basis that the said amount represented its liability on account of gratuity on actuarial valuation and that claim was accepted by the Income-tax Officer pursuant to the circular, dated September 21, 1970. Further, in that judgment itself, the Supreme Court referred to its own judgment in shree Sajjan Mills Ltd.'s case (1985) 156 ITR 585, and ultimately remanded the matter to the High Court for disposal in accordance with the observation made by them which includes their observation to the effect that the provision of section 40-A(7)(b)(ii) has been considered by them in Shree Sajjan Mills Ltd.'s case (1985) 156 ITR 585 (SC) and in that view of the matter the High Court should examine whether this provisions had been complied with in the present case having regard to what has been laid down in that case.

In view of the above we hold that Circular No. 146 (see (1975) 101 ITR (St.) 46),,dated September 26, 1974, being in contravention of the law laid down by the Supreme Court in Metal Box Co. of India Ltd.'s case (1969) 73 ITR 53 in so far as the law applicable for the assessment year 1972-73, is of no effect for that particular assessment year.

We, therefore, dispose of the present appeal by directing the appellants to make a fresh assessment in accordance with the law for the assessment year 1972-73 as declared by the Supreme Court in Metal Box Co. of India Ltd. v. Their Workmen (1969) 73 ITR 53 ignoring Circular No. 146 (see (1975) 101 ITR (St.) 46), dated September 26, 1974.

It is made clear that for the assessment year 1973-74 onwards, the applicable law would be in accordance with section 40-A(7) of the Income Tax Act, 1961, as declared by the Supreme Court in Shree Sajjan Mills Ltd.'s case (1985) 156 -ITR 585, referred to hereinabove, and followed by the Supreme Court in the case of D.V. Bapat, ITO's case (1986) 159 ITR 938.

F.M.A. No.725 of 1978:

In view of our discussions made in F.M.A. No.568 of 1976, hereinabove, we hold that Circular No. 146 (see (1975) 101 ITR (St.) 46, dated September 26, 1974, being in contravention o the law laid down by the Supreme Court in Metal Box Co. of India (1969) 73 ITR 53, in so far as the law applicable for the assessment year 1972-73, is of no effect for that particular assessment year.

We, therefore, dispose of the present appeal by directing the appellants to make fresh assessment in accordance with the law for the assessment year 1972-73 as declared by the Supreme Court in Metal Box Co. of India Ltd. v. Their Workmen (1969) 73 ITR 53 ignoring Circular No. 146 (See (1975) 101 ITR (St.46 dated September 26, 1974.

It is made clear that for the assessment year 1973-74 onwards the applicable law would be in accordance with section 40-A(7) of the Income tax Act, 1961, as declared by the Supreme Court in Shree Sajjan Mills Ltd.'s case (1985) 156 ITR 585 referred to hereinabove and followed by the Supreme Court in the case of D.V. Bapat, ITO (1986) 159 ITR 938.

There will be no order as to costs.

F.M.A. No.726 of 1978:

In view of our discussions made in F.M.A. No.586 of 1976, we hold that Circular No. 146 (see (1975) 101 ITR (St.) 46), dated September 26, 1974, being in contravention fo the law laid down by the Supreme Court in Metal Box Co. of India Ltd. (1969) 73 ITR 53, in so far as the law applicable for the assessment year 1972-73, is of no effect for the particular assessment year.

We, therefore, dispose of the present appeal by directing the appellants to make fresh assessment in accordance with the law for the assessment year 1972-73, as declared by the Supreme Court in Metal Box Co. of India Ltd. v. Their Workmen (1969) 73 ITR 73 ITR 53 ignoring Circular No. 146 (see (1975) 101 ITR (St.) 46), dated September 26, 1974.

It is made clear that for the assessment year 1973-74 onwards the applicable law would be in accordance with section 40-A(7) of the Income Tax Act, 1961, as declared by the Supreme Court in shree Sajjan Mills Ltd.'s case (1985) 156 ITR 585 and followed by the Supreme Court in the case of D. V .Bapat, ITO (1986) 15 ITR 938 referred to hereinabove.

There will be no order as to costs

V.N. KHARE, C.J.---I agree.

M.B.A./1664/FOrder accordingly.