J.M Panchal, J.:— At the instance of the Commissioner of Income-tax, Gujarat-I, Ahmedabad, the Income-tax Appellate Tribunal “B” Bench, Ahmedabad (“the Tribunal” for short), has made the present reference to this court under section 256(1) of the Income-tax Act, 1961 (“the Act”, for short), as the Tribunal was satisfied that three questions of law arise out of the order dated July 31, 1980, passed by it in I.T.A No. 8541.Ahd of 1979.

Facts:

The assessee-company runs a textile mill and manufactures silk cloth out of yarn purchased. The assessee-company submitted return of income for the assessment year 1973–74 showing loss of Rs. 2,88,080. The assessee had made a provision for gratuity amounting to Rs. 9,90,172 on actuarial valuation. Before the Income-tax. Officer, the assessee claimed deduction of the said amount. The Income-tax Officer took the view that the conditions specified in sub-section (7) of section 40A of the Act for the admissibility of the deduction of gratuity were not satisfied and, therefore, disallowed the said claim.

2. The assessee preferred an appeal before the Appellate Assistant Commissioner of Income-tax. The Appellate Assistant Commissioner of Income-tax found that the conditions mentioned in section 40A(7) of the Act were subsequently fulfilled, inasmuch as an irrevocable trust fund had been created before January 1, 1976, and a sum equal to 50 per cent. of the amount was paid by the assessee by way of contribution to the trust before the 1st day of April, 1976. However, it was noticed that the irrevocable trust fund created by the assessee was not approved by the Commissioner of Income-tax under the provisions of the Act. In the circumstances, the Appellate Assistant Commissioner of Income-tax directed the Income-tax Officer to give deduction of the expenditure of the admissible amount mentioned in Explanation 1 to sub-section (7) of section 40A of the Act as and when the assessee produced evidence to show that the gratuity fund created by it was accorded approval by the Commissioner of Income-tax. On production of the evidence showing that the Commissioner of Income-tax had accorded approval to the gratuity fund created by the assessee, the Income-tax Officer by order dated March 31, 1977, allowed deduction of Rs. 9,90,172 as admissible amount under Explanation 1 to sub-section (7) of section 40A of the Act.

3. The Commissioner of Income-tax, Gujarat-I, Ahmedabad, exercised revisional powers under section 263 of the Act, as he considered that the order passed by the Income-tax Officer was erroneous in so far as it was prejudicial to the interests of the Revenue. The Commissioner of Income-tax took the view that the provision for the previous year made in section 40A, sub-section (7) of the Act, would cover only actual liability, which would be the amount of gratuity liability of the year in which the provision was made without taking into consideration the accrued liability and, therefore, the actuarial valuation covering all the past liabilities of the assessee would not be entitled to deduction. He also took the view that from the accounts it was evident that the total salary and dearness allowance for the accounting period relevant to the assessment year 1973–74 was Rs. 26,89,808 and the admissible amount at the rate of eight and one-third per cent. of the salary would be Rs. 2,32,848 approximately as against the amount of Rs. 9,90,172 which was granted by the Income-tax Officer as deduction. In view of the above conclusion, the Commissioner of Income-tax set aside the order dated March 31, 1977, passed by the Income-tax Officer and directed the Income-tax Officer to recompute the admissible amount under section 40A(7)(b)(ii) of the Act in accordance with law.

4. The assessee preferred an appeal being I.T.A No. 8541.Ahd of 1979 before the Tribunal. The Tribunal took the view that the order passed by the Income-tax Officer giving relief to the assessee had merged in the order of the Appellate Assistant Commissioner and, therefore, the Commissioner of Income-tax could not have exercised powers under section 263 of the Act. The Tribunal further held that on the basis of the total salary and the dearness allowance for the accounting period relevant to the assessment year 1973–74, the amount of gratuity worked out to Rs. 9,90,172 and, therefore, the Tribunal reversed the order passed by the Commissioner of Income-tax and restored the relief which was given by the Income-tax Officer by his order dated March 31, 1977, to the assessee.

5. The Commissioner of Income-tax moved an application under section 256(1) of the Act requiring the Tribunal to draw up a statement of case and refer the questions of law for the opinion of the High Court. The Tribunal was satisfied that three questions of law arose out of the order passed by it in I.T.A No. 8541.Ahd of 1979. The Tribunal, therefore, drew up the statement of case and has made reference of the following three questions of law for the opinion of this court:

“(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the order passed by the Commissioner of Income-tax was illegal on any one of the grounds, namely, (a) that the basis of initiation of proceedings by the Commissioner of Income-tax was wrong; (b) that the order passed by the Income-tax Officer giving relief had merged in the order of the Appellate Assistant Commissioner and that, therefore, the Commissioner of Income-tax could not exercise powers under section 263 in respect thereof?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal has been right in setting aside the order of the Commissioner of Income-tax and restoring the relief given by the Income-tax Officer?

(3) Whether, on the facts and circumstances of the case, on the basis of the total salary and the dearness allowance for the accounting period relevant to the assessment year 1973–74 being Rs. 27,89,808, the admissible amount at 8-⅓ per cent. of the same worked out to Rs. 2,32,484 approximately by the Commissioner of Income-tax as against the deduction of Rs. 9,90,172 granted by the Income-tax Officer, is wrong in law?”

Reasons:

So far as the first question which pertains to exercise of powers by the Commissioner of Income-tax under section 263 of the Act is concerned, we are of the view that the Tribunal was not right in holding that the order passed by the Commissioner of Income-tax was illegal as the order passed by the Income-tax Officer giving relief to the assessee had merged in the order of the Appellate Assistant Commissioner. As noted earlier, against the order of the Income-tax Officer disallowing deduction of gratuity, the assessee had preferred an appeal before the Appellate Assistant Commissioner, who, by order dated May 27, 1976, had directed the Income-tax Officer to give deduction to the expenditure of the admissible amount under Explanation 1 to sub-section (7) of section 40A of the Act as and when the assessee produced the evidence regarding approval having been granted by the Commissioner of Income-tax to the gratuity fund created by it. The assessee had produced necessary evidence showing that approval had been granted by the Commissioner of Income-tax to the gratuity fund created by it and, therefore, by an order dated, March 31, 1977, the Income-tax Officer had allowed the deduction claimed by the assessee. Against that order of the Income-tax Officer, the Revenue had not filed any appeal before the Appellate Assistant Commissioner and, therefore, it cannot be said that the order dated March 31, 1977, passed by the Income-tax Officer had merged into the order of the Appellate Assistant Commissioner which was passed on May 27, 1976. On the facts and in the circumstances of the case, we are of the view that the Commissioner of Income-tax was entitled to exercise the powers under section 263 of the Act and exercise of the powers by him could not have been termed as bad on the ground that the order of the Income-tax Officer had merged into the order of the Appellate Assistant Commissioner and there was no order passed by the Income-tax Officer regarding which powers of revision under section 263 of the Act could have been exercised by the Commissioner of Income-tax.

6. In view of the above position, we are of the opinion that on the facts and in the circumstances of the case, the Tribunal was not right in law in holding that the order passed by the Commissioner of Income-tax was illegal on any. of the grounds, viz., (a) that the basis of initiation of proceedings by the Commissioner of Income-tax was wrong; and (2) that the order passed by the Income-tax Officer giving relief merged in the order of the Appellate Assistant Commissioner and that, therefore, the Commissioner of Income-tax could not have exercised the powers under section 263 of the Act in respect thereof. Question No. 1, therefore, referred to us is answered in the negative i.e, in favour of the Revenue and against the assessee.

7. However, the contention that the admissible amount at the rate of eight and one-third per cent. of the salary would be Rs. 2,32,484 as the total salary and dearness allowance for the accounting period relevant to the assessment year 1973–74 was Rs. 27,89,808 and, therefore, the Tribunal was not justified in allowing deduction of Rs. 9,90,172 has no substance. It may be noted that earlier the subject-matter as to allowability of contribution towards the approved gratuity fund was made in section 36(1)(v) of the Act. For and from the assessment year 1973–74, the allowability of any such provision is governed by section 40A(7) of the Act and not on general principles because of the fact that the provisions of section 40A(7) of the Act have overriding effect by virtue of the non obstante clause. Under the new section 40A(7) inserted by the Finance Act, 1975, with retrospective effect from April 1, 1973, no deduction is to be allowed in the computation of profits and gains of a business or profession in respect of any provision made for the payment of gratuity to the employees on retirement or on termination of employment. This is, however, subject to certain exceptions. The restriction is not to apply in relation to any provision made for the purpose of payment of a sum by way of contribution towards an approved gratuity fund that has become payable during the previous year, or for the purpose of meeting the actual liability in respect of payment of gratuity to the employees that has arisen during the previous year. The restriction is not also to apply in relation to any provision made for the previous year relevant to any of the assessment years 1973–74, 1974–75 and 1975–76 to the extent the amount of such provision does not exceed the “admissible amount” if the conditions set out in section 40A(7)(b)(ii) are fulfilled. In the facts of the present case, it was found by the Appellate Assistant Commissioner that subsequent to the passing of the order by the Income-tax Officer, the conditions under section 40A(7) were fulfilled by the assessee. The assessee had created an irrevocable trust fund before January 1, 1976, and had paid a sum equal to at least 50 per cent. of the amount to the fund before April 1, 1976, and the balance amount before April 1, 1977. The Commissioner of Income-tax had granted approval to the fund created by the assessee. The provision regarding gratuity was made on actuarial basis, which amounted to Rs. 9,90,172 so far as the liability for the accounting period relating to the assessment year 1973–74 was concerned. In view of the provisions of Explanation 1 to sub-section (7) of section 40A of the Act, in our opinion, admissible amount means the amount of provision made by the assessee for the payment of gratuity to its employees on the retirement or on the termination of their employment for any reason to the extent such amount does not exceed an amount calculated at the rate of eight and one-third per cent. of the salary of each employee entitled to the payment of such gratuity for each year of his service in respect of which such provision is made. The gratuity amount in question was worked out on actuarial valuation and the said amount was paid by way of contribution to the approved gratuity fund having regard to each year of service of each employee. It is not the case of the Revenue that the computation of the amount of gratuity in respect of each employee for each year of his service at the rate of eight and one-third per cent. of the salary would be less than Rs. 9,90,174. In this view of the matter, we hold that, on the facts and in the circumstances of the case, on the basis of the total salary and dearness allowance for the accounting period relating to the assessment year 1973–74, the admissible amount at the rate of eight and one-third per cent. worked out to Rs. 9,90,172 and not Rs. 2,32,484 as contended by the Revenue. We are of the view that the Tribunal on the facts and in the circumstances of the case was right in setting aside the order of the Commissioner of Income-tax and restoring the reliefs given by the Income-tax Officer.

8. In view of the above discussion, question No. 2 is answered in the affirmative, i.e, in favour of the assessee and against the Revenue. Question No. 3 referred to this court is also answered in the affirmative, i.e, in favour of the assessee and against the Revenue.

9. The reference stands accordingly disposed of with no order as to costs.