R.L Gulati, J.:— The petitioner is a public limited company having its registered office at Kanpur and carries on business of manufacture and sale of cotton textiles. For the assessment year 1973-74, the petitioner filed an estimate under section 212(1) of the Income-tax Act, 1961, in Form No. 29 on 13th of September, 1972, disclosing an income of Rs. 10,000. Later on, the estimate was revised under section 212(2) on 12th March, 1973, and income of Rs. 63,12,880 was disclosed. On this income an advance tax amounting to Rs. 36,44,078 was paid. Later, the petitioner filed a return under section 139(1) of the Act for the assessment year 1973-74, on September 4, 1973, declaring a loss of Rs. 1,14,35,090. In computing the loss, the following two amounts were claimed as deductions:
Rs. (a) Liability for gratuity … 1,67,34,000 (b) Unabsorbed depreciation and development rebate carried forward from the assessment years 1970-71, 1971-72 and 1972-73 … 96,94,121
2. The claim for gratuity was made in accordance with the actuarial valuation report of an actuary. Section 141A(1) provides that where a return has been furnished under section 139 and the assessee claims that the advance tax already paid by him exceeds the tax payable on the return, the Income-tax Officer may make a provisional assessment of the tax refundable to the assessee, if in the opinion of the Income-tax Officer the regular assessment of the assessee is likely to be delayed, and if no assessment has been made within six months, the Income-tax Officer is bound to make a provisional assessment of the tax refundable. As the petitioner had filed a return showing a net loss, the entire advance tax amounting to Rs. 36,44,078 became refundable. The petitioner accordingly applied to the Income-tax Officer for a provisional assessment. The Income-tax Officer appears to have referred the matter to the higher authorities for guidance and thereafter on March 5, 1974, passed an order rejecting the assessee's claim for refund of advance tax. The Income-tax Officer held that the deductions claimed by the assessee in respect of the estimated liability of Rs. 1,34,42,000 for payment of gratuity was not admissible. He recorded a similar finding in respect of the claim for set-off of unabsorbed depreciation and development rebate. According to the Income-tax Officer, since the assessments for the year to which the unabsorbed depreciation and development rebate related had not been completed, therefore, the depreciation and development rebate could not be allowed as deductions. In our opinion, the view of the Income-tax Officer on both these points is patently erroneous.
3. As regards the claim in respect of the liability for payment of gratuity, the Income-tax Officer has recorded the following finding:
“The assessee who follows the mercantile system of accounting has charged the accounts with actual payment of gratuity for the year provided for in the accounts the accrued liability for gratuity for the year as per actuarial report, and has further claimed the estimated liability of Rs. 1,34,42,000 for payment of gratuity under its own gratuity scheme as per actuarial valuation however, it has made no provision for the same in the accounts. In the circumstances the estimated liability of Rs. 1,34,42,000 is found to be not prima facie allowable.”
4. Now, admittedly, the assessee follows the mercantile system of accounting and the claim for estimated future liability on account of gratuity is based on actuarial valuation.
5. This court in Madho Mahesh Sugar Mills (P.) Ltd. v. Commissioner Of Income-Tax., [1973] 92 ITR 503 (All) has held that in such circumstances claim for gratuity is clearly admissible, even if the assessee had made no provision for it in the account books. This view has been taken by this court on the basis of the decision of the Supreme Court in Metal Box Company Of India Ltd. v. Workmen, [1969] 73 ITR 53. In view of the decision of this court it was not open to the Income-tax Officer to disallow the claim merely on the basis of the instructions issued to him by the higher authorities. An Income-tax Officer in the State of Uttar Pradesh is bound by the decision of this court. It is indeed surprising that the Income-tax Officer has chosen to follow the departmental instructions in preference to the decision of this court.
6. Mr. Deokinandan, learned counsel for the department, did not dispute this position that on the basis of the above-mentioned decision of this court, the claim of gratuity had to be allowed by the Income-tax Officer. But he tried to make out that the actuarial report was not placed before the Income-tax Officer. We cannot accept this submission. The fact that the claim is based upon the actuary's report has been mentioned by the Income-tax Officer in the impugned order. If the copy of the actuary's report was not on the record he could have easily asked for it.
7. The view taken by the Income-tax Officer that unabsorbed depreciation and development rebate amounting to Rs. 96,94, 121 could not be allowed as regular assessment had not been made in respect of the year to which the claim pertained is also erroneous. But we are not expressing any final opinion on this point, because if the claim for gratuity is held admissible, the return filed by the assessee would become a loss return and the entire advance tax paid by the assessee would be refundable.
8. It may be mentioned here that the respondents have sought to justify the impugned order on the basis of the amendment in section 40A of the Act. Sub-section (7) has been added to section 40A which provides that subject to the provisions of clause (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason. Clause (b) then provides the exceptions. Sub-clause (ii) of clause (b) permits the allowance of any such provision for the previous year relevant to the assessment year commencing on or after the 1st day of April, 1973, but before the 1st day of April, 1976. The assessment year in question is clearly governed by this exception. This clause, no doubt, provides that the provision should be made in accordance with the actuarial valuation of ascertainable liability and the assessee should create an approved gratuity fund. It lays down some further conditions, but all those conditions have to be fulfilled in future. Sub-section (7), therefore, creates no bar so far as the present case is concerned. For the reasons stated above, the petition is allowed. The order of the Income-tax Officer, dated 5th March, 1974, passed under section 141A of the Act is quashed. He is directed to pass a fresh order under section 141A in accordance with the law and the observations made hereinabove.
9. The petitioner is entitled to the costs.
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