ORDER

M.K. Chaturvedi, Vice President. - Under section 255(3) of the Income-tax Act, 1961 (hereinafter called the Act) the President of the Income-tax Appellate Tribunal (hereinafter called the Tribunal) has constituted this Special Bench to consider the following questions :—

"1. Whether on the facts and in the circumstances of the case the Commissioner of Income-tax was correct in invoking the provisions of section 263 of the Act in withdrawing the claim of deduction of gratuity provision of Rs. 7,85,600 actually paid to an approved gratuity fund and allowed by the Assessing Officer in the original order of assessment as against incremental actuarial liability worked out at Rs. 3,37,989?

2. Whether the assessee is entitled to claim deduction of Rs. 7,85,600 being the provision for gratuity in terms of section 36(1)(v) of the Act, actually paid to an approved gratuity fund on the facts and in the circumstances of the case?

3. Whether the Appellate Tribunal's order dated 21-6-1990 in ITA No. 529(Mds.)/1987 rendered in the assessee's own case for the assessment year 1982-83 could be said to be an order rendered per incuriam and not binding in view of non-consideration of correct legal position in this regard?"

2. We have heard the rival submissions in the light of the material placed before us and the precedents relied upon. This appeal is directed against the order passed under section 263 of the Act. The assessee is a company. For the relevant assessment year in the balance sheet of the assessee a provision for gratuity was reflected at Rs. 7,85,600. The assessee claimed this as deduction in the return of income. The Assessing Officer allowed the same without making any discussion in the order of assessment. Thereafter the Commissioner of Income-tax assumed jurisdiction under section 263 of the Act, as in his opinion the order was erroneous and prejudicial to the interest of the revenue. In the case of Rampyari Devi Saraogi v. CIT [1968] 67 ITR 84 the Hon'ble Apex Court has held that in order that the Commissioner may consider an order to be erroneous for the purposes of section 263, the error of law may not be apparent on the face of the order. The Commissioner may consider an order of the Assessing Officer to be erroneous not only if it contains some apparent error of reasoning or of law or of fact on the face of it but also because it is a stereotyped order which simply accepts what the assessee has stated in his return and fails to make enquiries which are called for in the circumstances of the case.

3. It is not necessary for the Commissioner of Income-tax to make further enquiries before cancelling the assessment orders of the Assessing Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Assessing Officer should have made further inquiries before accepting the statements made by the assessee in his return. The reason is obvious. Unlike the Civil Court which is neutral to give a decision on the basis of evidence produced before it, an Assessing Officer is not only an adjudicator but is also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further enquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke inquiry. The meaning to be given to the word 'erroneous' in section 263 emerges out of this context. The word 'erroneous' in that section includes cases where there has been failure to make the necessary inquiries. It is incumbent on the Assessing Officer to investigate the facts stated in the return when circumstances would make such an inquiry prudent and the word 'erroneous' in section 263 includes the failure to make such an enquiry. The order becomes erroneous because such an enquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.

4. In the facts of the present case we find that the Assessing Officer failed to make any enquiry in regard to the allowability of the provision for gratuity. As such in our opinion the order was erroneous and prejudicial to the interests of the revenue. Therefore the conditions precedent for assuming jurisdiction under section 263 did exist in the facts of the present case.

5. The learned counsel for the assessee vehemently contended that the claim of the assessee in regard to the provision for gratuity is allowable under section 36(1)(v) of the Act. This section reads as under :—

"36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28—

(v)any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust."

The term 'paid' is defined under section 43(2) of the Act as under :—

"43. In sections 28 to 41 and in this section, unless the context otherwise requires—

(2) 'paid' means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head "Profits and gains of business or profession."

6. According to the learned Departmental Representative section 40A(7) overrides the provisions of section 36(1)(v). Section 40A(7) reads as under:—

"40A. (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provisions of this Act relating to the computation of income under the head "Profits and gains of business or profession'

(7)(a) 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.

(b) Nothing in clause (a) shall apply in relation to any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund or for the purpose of payment of any gratuity, that has become payable during the previous year."

7. The learned counsel for the assessee submitted that the provisions of section 36(1)(v) are applicable to the facts of the case in regard to the claim of the assessee. Incurring of the liability of the amount in dispute would be demonstrated with reference to the method of accounting. According to the learned counsel for the assessee the assessee did follow mercantile system of accounting. Albeit, in the order of assessment the Assessing Officer did not mention anything in this regard. The column for method of accounting is left blank. Shri Sridhar submitted that on a combined reading of sections 36(1)(v) and 43(2) it is evident that the assessee did make the payment. Besides, the provision of section 40A(7) will not override the provision of section 36(1)(v). Reliance was placed on the decision of the Hon'ble Madras High Court rendered in the case of Commissioner Of Income-Tax v. Premier Cotton Spg. Mills Ltd. [2002] 258 ITR 253 . In this case the Hon'ble High Court has held that section 40A(7) has no application when there was an actual payment to an approved gratuity fund.

8. In the case of Pereira and Roche v. CIT [1966] 61 ITR 371 (Mad.) the Hon'ble jurisdictional High Court has held that the definition of the word 'paid' has specifically been made dependent upon the method of accounting upon the basis of which the profits and gains of the assessee's business are to be computed, in case the assessment is on the basis of cash system of accounting, 'paid' means 'actually paid', i.e., there must be a physical transfer of the amount or its equivalent from the payer to the payee. On the other hand if the assessment is made on the basis of mercantile system of accounting the word 'paid' means no more than the increment of the liability by the assessee for payment. In the latter case, 'actually paid' or 'paid' is not to be understood in a physical sense, but in the sense the liability for the expense has been actually incurred. In the case of Kanpur Tannery Ltd. v. CIT [1958] 34 ITR 863 (All.) it was held that even under the mercantile system of accounting a liability incurred cannot be entered in the accounts as an expenditure unless the liability has become an ascertained sum of money. Until ascertained, the liability no doubt exists, but proceedings have yet to be taken in some way or other to determine the exact amount. A vague liability to make a payment cannot be entered into accounts and in that state it cannot be said to have been incurred so as to count as "paid" within the meaning of section 43(2).

9. In the facts of the present case we find that the assessee did not describe with exactitude the true nature of the liability. The Commissioner of Income-tax found that the approved gratuity liability as on 31-3-1981 and 31-3-1980 was Rs. 55,35,469 and Rs. 51,97,480 respectively. Hence the amount payable as contribution to the fund was only Rs. 3,37,989. The Assessing Officer has allowed Rs. 7,85,600. Accordingly the Commissioner of Income-tax directed the Assessing Officer to withdraw the excess allowance of Rs. 4,47,611. In arriving at this conclusion reliance was placed on the decision of the Hon'ble Apex Court rendered in the case of Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 . In this case the Hon'ble Apex Court has held as under :—

"On a plain construction of clause (a) of section 40A(7) of the Income-tax Act, 1961, whatever is provided for future use by the assessee out of the gross profits of the year of account for payment of gratuity to employees on their retirement or on the termination of their services would not be allowed as a deduction in the computation of profits and gains of the year of account, unless the respective conditions specified in clause (b) were fulfilled. The expression 'provision made by the assessee' is not used in any artificial sense, e.g. of setting apart specifically by the assessee for meeting the liability for gratuity in his account books, but in its ordinary sense. The embargo under clause (a) is on deduction of amounts provided for future use in the year of account for meeting the ultimate liability to payment of gratuity. Clause (b)( i) excludes from the operation of clause (a) contribution to an approved gratuity fund and amount provided for or set apart for payment of gratuity which would be payable during the year of account. Clause (b)( ii) deals with a situation where the assessee might provide by the spread over method and provides that such provision would be excluded from the operation of clause (a) provided the three conditions laid down by the sub-clauses are satisfied.

The marginal note or heading to section 40A is a clear indication that certain payments and expenses which would be otherwise deductible would not be deductible except in certain circumstances indicated in the section.

Actual payments or provisions for payment would have been eligible for deduction or could have been deducted either under section 28 or under section 37 of the Act. But the use of the non obstante expression in section 40A(1) makes it clear that if there is any legislative base dealing with the provision for gratuity, then the same would be applicable in spite of and notwithstanding any other provision of the Act. Read with the marginal note to section 40A, the non obstante clause of sub-section (1) of section 40A has an overriding effect over the provisions of any other section by providing that the provisions of the section will have effect notwithstanding anything to the contrary contained in any other provision relating to the computation of income under the head 'Profits and gains of business or profession'. Expenditures or allowances which mere deductible under any other provision relating to the head 'Business or profession' will be disallowed in cases to which the provisions of section 40A apply.

Contingent liabilities do not constitute expenditure and cannot be the subject-matter of deduction even under the mercantile system of accounting. Expenditure which is deductible for income-tax purposes is towards a liability actually existing at the time but setting apart money which might become expenditure on the happening of an event is not expenditure."

It may be stated that for the assessment year 1973-74 onwards the applicable law would be in accordance with section 40A(7), as declared by the Hon'ble Apex Court in the case of Shree Sajjan Mills Ltd. (supra).

10. It was further alleged by the learned counsel for the assessee that since provision was made by the assessee for the purpose of payment of a sum by way of contribution towards approved gratuity fund, as such the amount of provision should be allowed within the meaning of section 40A(7)(b).

11. We find it difficult to accept the contention raised by the learned counsel because the assessee did not comply with the conditions contained under section 40A(7)(b) of the Act. In the case of Commissioner Of Income-Tax v. Loyal-Textile Ltd. [1998] 231 ITR 573 (Mad.) the Hon'ble jurisdictional High Court has held that the expression 'that has become payable during the previous year' in section 40A(7)(b)(i ) qualifies both the parts of section 40A(7)(b)( i), viz., (a) any provision made by the assessee for the purpose of payment of any contribution towards an approved gratuity fund, and (b) any provision made by the assessee for the purpose of any gratuity. It cannot be said that the said expression qualifies only the latter of the abovesaid two parts of section 40A(7)(b)(i ). Therefore it is not correct to say that the provision made by the assessee in the accounts for the purposes of making contributions to approved gratuity fund should be allowed under section 40A(7)(b)(i ) despite the fact that there was no incremental liability towards the gratuity due for the assessment year under consideration.

12. Nothing was placed before us to demonstrate the nature of the liability. There is absolutely no material to say that the liability in question was an ascertained liability. An expenditure which is deductible for income-tax purposes is towards a liability actually existing at the time, but setting apart money which might become expenditure on the happening of an event is not expenditure allowable under the law. As such we do not find any merit in the contention of the learned counsel for the assessee in this regard.

13. The view which we have taken here is perfectly in consonance with the decision of the C-Bench of this Tribunal rendered in assessee's own case for the assessment year 1982-83 in ITA No. 529 (Mds.)/1987, dated 21-6-1990. The aforesaid decision of the Tribunal cannot be construed to be per incuriam. "Incuria" literally means "carelessness". In practice per incuriam is taken to mean per ignoratium. English courts have developed this principle in relaxation of the rule of stare decisis. The "quotable in law" is avoided and ignored if it is rendered, "in ignoratium of a statute or other binding authority". We find that the Tribunal considered carefully all the relevant provisions of law. As such, we find no merit in the contention of the learned counsel for the assessee that the decision of the Tribunal was rendered per incuriam.

14. In the result the appeal of the assessee stands dismissed.