B.P. Jeevan Reddy, C.J. - (1.) THE petitioner, the Elgin Mills Co. Ltd., Kanpur, is questioning the validity of a notice dated March 14, 1980, issued by the respondent (the Inspecting Assistant Commissioner of Income-tax (Assessment) 'D' Range, Kanpur), under Section 148 of the Income-tax Act, 1961.
(2.) THE impugned notice is in the prescribed pro forma. Except saying that the Income-tax Officer proposes to reopen the assessment for the year 1976-77 inasmuch as he has reasonable grounds to believe that income assessable to tax has escaped assessment, the notice does not mention or contain any facts. Soon after receiving this notice, the petitioner approached this court by way of this writ petition on April 15, 1980. It was admitted on April 16, 1980, and on the stay petition it was directed that the petitioner should file his return in response to the impugned notice and the Income-tax Officer may also continue the assessment proceedings but shall not sign the assessment order. Counsel for the Revenue was given six weeks' time for filing a counter-affidavit. THE writ petition came up for hearing before us in the year 1991. After hearing the matter for some time, we thought it appropriate that the respondents be given a further opportunity of filing a counter or of producing the record and, accordingly, adjourned the matter. THE writ petition again came up on (sic). THE respondents neither filed the counter nor did they produce the record. Since the matter is eleven years old, we did not think it appropriate to adjourn the matter further. Accordingly, we heard learned counsel for the petitioner as well as learned standing counsel for the Revenue. The petitioner has come forward with the following averments : The petitioner is a limited company engaged in the manufacture and sale of cotton textile goods. The previous year relevant to the assessment year 1976-77 is the calendar year 1975, i.e., the year commencing on January 1, 1975, and ending with December 31, 1975. In its return relating to the assessment year 1972-73, the petitioner, inter alia, claimed deduction in respect of a sum of Rs. 51,61,166 representing the retirement gratuity liability as on December 31, 1971, as per latest actuarial valuation for the preceding years. In the said preceding years, no provision was made in that behalf and, hence, a provision was made in the said assessment year. This was disallowed by the Income-tax Officer. He held that the petitioner has been following the mercantile system of accounting and if so, he ought to have provided for the liability accruing each year in that year itself. He observed that there was no reason why the petitioner should make a provision for the said previous years in the calendar year 1971 (assessment year 1972-73). The Income-tax Officer observed further that hitherto the petitioner has been following the mercantile system and claiming deduction on the basis of actual payment and there is no reason why the petitioner should suddenly change over to the actuarial system of valuation of retirement gratuity liability. He rejected the argument that the issuance of a notification dated November 19, 1971, by the Government of Uttar Pradesh has any relevance to the change of method of calculation of liability by the petitioner. The Appellate Assistant Commissioner affirmed the order of the Income-tax Officer. Thereafter, the matter was carried in further appeal to the Income-tax Appellate Tribunal. The Tribunal allowed the appeal relating to this aspect following its own decision dated January 20, 1979, in I. T. As. Nos. 1358 and 1275 of 1976-77 (Kanpur Textiles Ltd. v. ITO). A copy of the order of the Tribunal in the petitioner's appeal dated November 28, 1979, as also the earlier decision of the Tribunal in Kanpur Textiles is enclosed to the writ petition. Along with the return relating to assessment year 1976-77 (accounting year being the calendar year 1975), the petitioner enclosed the balance-sheet as on December 31, 1975. The balance-sheet contained a note to the following effect : "(3) On account of the amended provisions of the Income-tax Act, and as the company does not intend to create a gratuity fund under Section 36(1)(v) of that Act, the directors have reverted to the old practice of debiting to the profit and loss account, amounts paid or payable to workers retiring in each year and, therefore, the balance of provision made in the accounting years 1972 and 1973 for retirement gratuity on accrual basis as per actuarial valuation of Rs. 81,20,209 has been transferred back to the profit and loss account. Liability for retirement gratuity of the company as at December 31, 1975, has not been ascertained nor has any provision, therefore, been made in the accounts."
(3.) THIS note constitutes the basis for the impugned notice issued by the respondent under Section 148. Soon after receiving the impugned notice, the petitioner addressed a letter dated March 31, 1980, to the respondent stating that the impugned notice does not contain any reasons or grounds for which the assessment is sought to be reopened and asserting further that none of the grounds relevant for reopening of the assessment mentioned in either of the two clauses in Section 147 are attracted in this case. The representative of the petitioner also personally met the respondents. The respondents informed the petitioner's representative that he proposes to include the aforesaid amount of Rs. 51,61,166 in the income of the petitioner-company in the assessment year 1976-77 under Section 41(1) of the Act. The petitioner's representative was also apprised of the fact that action is sought to be taken under Clause (b) of Section 147. Subsequently, the petitioner received a letter dated April 8, 1980, from the respondents stating merely that he has initiated the proceedings under Clause (b) of Section 147 but without giving or setting out the reasons on the basis of which he assumed the jurisdiction in the matter. Under the said letter, the respondents called upon the petitioner to submit his return before he could consider the petitioner's request for supplying the "reasons" recorded under Sub-section (2) of Section 148. The petitioner's contention is that Section 41(1) was not attracted in the facts and circumstances of the case ; that the said amount of Rs. 51,61,166 was allowed as a deduction by the Tribunal in the assessment year 1972-73 though the said amount represented the liability which accrued in the previous assessment years. The liability for which the said amount was set apart still exists ; it has not ceased. No reverse entries have also been made by the petitioner in his account books relating to the said amount. In such circumstances, Section 41(1) has absolutely no application. Learned counsel for the petitioner submits that merely because the petitioner has reverted to the old practice of debiting to the profit and loss account, amounts actually paid or payable to workers retiring in that year, it cannot be said that the liability for which the aforesaid amount was provided, has ceased. It is true, says learned counsel, that prior to the assessment year 1972-73, the petitioner was following the practice of debiting the profit and loss account, with amounts actually paid or payable to the retiring workers in each year and had shifted to the actuarial valuation system from that assessment year onwards and has, in later years, shifted back to the old system, it does not follow therefrom that either the liability for which the said amount was provided has ceased or that there are any other facts or grounds attracting the provisions contained in Section 41(1) of the Act. Learned counsel also explains that the petitioner has transferred back the amount of Rs. 81,20,209 representing the amount which was set apart as a provision for meeting the retirement gratuity liability, on actuarial valuation, during the assessment years 1973-74 and 1974-75, but the company has not transferred back the said amount of Rs. 51,61,166, the amount which was set apart as provision during the assessment year 1972-73 in respect of liability which accrued in the previous years. In other words, the disputed amount has never been transferred back to the profit and loss account and, if so, there is no occasion for invoking Section 41(1).;