The Order of the Court was as follows :
A.M. RAO, A.M.
These two cross appeals are consolidated and disposed of by a common order for convenience.
2. In the Departmental appeal there are there grounds. The first ground is against the deletion of the interest which had been levied by the Income Tax Officer under the provisions of s. 216 of the Income Tax Act 1961. The Appellate Assistant Commissioner deleted the said interest on the ground that the levy under s. 216 of the Act was not mandatory but only discretionary and that this was a fit case where the Income Tax Officer should have exercised the discretion in the assessee's favour. The contentions which have been taken before us by the Department are two fold. The first contention is that the levy of interest under s. 216 is not discretionary as has been held by the Appellate Assistant Commissioner but is mandatory. It is submitted that the expression 'may' which has been used in that section is to be construed as 'shall' and in that view of the matter, there can be no question of the Income Tax Officer exercising any discretion. secondly it is urged that as the estimate u/s . 212 (1) was filed in the last month of the accounting year there was no reason why the assessee could not have framed a more accurate estimate of its income. The assessee, on the other hand, has relied entirely on the order of the Appellate Assistant Commissioner on this issue and has refuted the suggestion that the expression 'may' which has been used in that section is to be construed as 'shall' and in that view of the matter there can be no question of the Income Tax Officer exercising any discretion. An old departmental circular has also been called in aid. It has also submitted that the estimate was bonafide and in keeping with the circumstance as existing at the material time and that the shortfall in the instalments of tax was made good as soon as it was detected.
3. In our opinion, the issue has been correctly decided by the Appellate Assistant Commissioner and accordingly calls for no interference on our part. The use of the expression 'may' in s. 216 clearly points to the discretionary nature of the levy. It becomes all the more apparent when one compares the wording of s. 216 with that of s. 215 and 217 in both of which the expression 'shall' has been used. It would appear that this is also the Departmental view. In circular No. 12 of 1944 dated 17th May, 1944 which has been reproduced at page 67 of the publication, entitled Income Tax Circulars' (1957 Edition) issued by the Central Board of Revenue, as it then was, the following instructions have been issued for the guidance of the Income Tax Officer's in regard to s. 18A of the 1922 Act (corresponding to s. 216 of the Income Tax Act, 1961 ) Viz.
"The charging of penal interest under sub-s (7) depends on the Income Tax Officer's discretion which should be judicially exercised, . If the assessee satisfies the Income Tax Officer that there were reasonable grounds supported by facts and circumstances for his making low estimates for the first three instalments or for deferring the payment of tax on a part of his income and there was no wrong deferment no penal interest should be charged."
The only aspect which we therefore have to see is whether the facts of the case were such as to justify the exercise of the discretion in the assessee's favour. In this connection reference may usefully be made to the assessee letter dt 14th October, 1972 addressed to the Income Tax Officer. The shortfall in its estimate was explained in the said letter as being attributable to increased sales coupled with reduction in the overall expenditure as a result of "certain economies exercised in the consumption of raw materials" the precise effect of which came to be known only at the time of checking of the stock valuations by the auditors.The letter then goes on to say :
"Under the provisions governing the advance payments of tax, we have to file a revised estimate on or about 15th December, 1972. However we wish to pay on our own desire an amount of Rs. 6 lacs to make good the deficit in the earlier payments. With this payment, the advance tax paid up to now aggregates to Rs.26 lacs."
The fact stated in the letter have not been controverted before us. These facts in our opinion, not only provide a satisfactory explanation for the shortfall in the original estimate but also demonstrate the assessee's bona fides in the matter. The Appellate Assistant Commissioner's decision is accordingly upheld.
4. The next ground in the Departmental appeal is that
"The A.A.C. erred in allowing a sum of Rs. 5, 86, 000 being provision for gratuity."
The assessee had claimed this very amount in the immediately preceding assessment year (i.e. the assessment year 1972-73) and the Tribunal had upheld the assessee's claim. Since, however, that decision was not accepted by the Department and the matter had been taken in reference, the assessee once again repeated the claim in the assessment year 1973-74. The Appellate Assistant Commissioner disposed of this claim in the following terms :
"xx In the above circumstances the Income Tax Officer is directed to give deduction for the sum of Rs. 5.86 lacs for the asst. year 1973-74 in case it is held later that the sum is not admissible for the asst. year 1972-73
It will thus be seen that the Appellate Assistant Commissioner has not given a blanket direction for the deduction of the amount as the Departmental ground would tend to a suggest. All that he has held is that in the event of the Tribunal's decision for the asst. year 1972-73 being reversed, the allowance should then be given in the assessment year under appeal (i.e. 1973-74). The ground set out in the memo of appeal is thus not happily worded. Be that as it may, it is not clear how the Appellate Assistant Commissioner came to the conclusion that in the event of the claim not being held to be admissible for the asst. year 1972-73, it would automatically become admissible for the assessment year 1973-74. Paragraph 14 of the Tribunal's order dated 25th September, 1975, whereby it reversed the Commissioner's order under s. 263 for the assessment year 1972-73, is relevant in this context.This is what the Tribunal has stated:"
14. In this contention we would note that if the view of the additional commissioner that the actual payment of contribution to the provident fund is necessary before allowance fund is correct then out the of the sum of Rs. 8.86 lacs including the amount disallowed by the Additional Commissioner for the year under consideration Rs. 5.86 lacs would have to be allowed for asst. year 1974-75 and the allowance of this amount in that year instead of in 1972-73 it was pointed out by the learned counsel for the assessee, would benefit the assessee to the extent of about Rs. 15, 000 in tax
It would appear from the above passage that even if the view which has been taken by the Tribunal is incorrect and the view of the Commissioner ultimately prevails the assessee would be entitled to the allowance if at all, in the assessment year 1974-75 and not in the assessment year 1973-74 as has been held by the Appellate Assistant Commissioner. The conditioned direction which has been given by the Appellate Assistant Commissioner for the allowance of the amount in the assessment year 1973-74 is accordingly hereby withdrawn, and the ground pertaining to this item is allowed to this extent.
5. The third ground is against the direction of the Appellate Assistant Commissioner for the allowance of a sum of Rs. 13, 965 being the commission payable to Kirloskar Electric Co. It is not in dispute that by virtue of the agreement between the parties, the said commission of Rs. 13, 965 became payable during the accounting year. What the Department contends, however, is that the necessary provision having not been made in the accounts the deduction cannot be allowed even though the accountsof the assessee are maintained an on the mercantile system of accounting. The Department's stand on this issue is based on the decision of the Delhi High Court in the case of Escorts (Agents) P. Ltd. vs. Commissioner of income tax Delhi (1) wherein it has inter alia been held that"
before a deduction claimed can be allowed as an expenditure, it must have been actually paid or entered as a debit accordingly to the system of account maintained by the assessee during the year in which it is claimed." This decision no doub lends support to the Departments contention but then it is no longer goods law after the decision of the Supreme Court in the kedarnath jute Co.'s (2) case which decision, incidentally, has been followed by the Appellate Assistant Commissioner in deciding this point.This ground is accordingly rejected.
6. Turning next to the assessee's appeal the material facts briefly stated are that the assessee has a Gratuity Fund which has been duly approved by the Commissioner of Income Tax. It is, therefore, an admitted position that the payments to the said Gratuity constitute an admissible deduction u/s 36 (1) (v) of the Income Tax Act, 1961. The assessee had made a reference to an actuary for qualifying the exact amount of the liability to the Gratuity Fund. The actuarial valuation had, however, not been received at the time of the finalisation of the accounts. Hence the assessee estimated its liability at Rs. 5, 00, 000 and entered this amounts in it account and its also made over the amount to the trustees shortly thereafter. The actuarial certificate, when received, disclosed the actual liability at Rs. 4, 82, 8000 on these facts, the question before us is whether the authorities below were justified in disallowing a sum of Rs. 17, 200 being the excess of the provisions as made in the books over the provision as equired in the terms of the actuarial valuation.
Having heard the parties we are of the opinion that the disallowance is not justified. In the first place s. 36 (1) ( v) no where stipulates that the contributi
Please Login To View The Full Judgment!
on to an approved Gratuity Fund are necessarily to be regulated by actuarial valuation. Indeed, in the first few years of the existence of the assessee's Gratuity Fund the contributions were being made by the assessee without reference to an actuary and such contributions were being allowed for assessment purposes ; secondly whatever excess payments might have been made in this year would have been set by a corresponding reduction in the actuarial valuation for the subsequent year; and thirdly, there is the authority of the Supreme Court (vide Calcutta Co ltd vs. CIT west Bengal (3) for the view that, where the method of accounting is mercantile, it is permissible to allow an accrued liability on an estimated basis. In the circumstances particularly as the assessee's bona fide in providing for a sum of Rs. 5, 00, 000 are not in doubt, we are unable to uphold the disallowance in question. This ground is accordingly decided in the assessee's favour. 7. In the result, the assessee's appeal (I.T.A. No. 1067/Bang./1975-76) is allowed in full while the departmental appeal (I.T.A. No. 81/Bang/1976-77) is allowed in part.