Ajit Kumar Sengupta, J. - (1.) At the instance of the Commissioner of Income-tax, West Bengal-Ill, the following question of law has been referred to this court under Section 256(1) of the Income-tax Act, 1961, for the assessment year 1973-74 : "Whether, on the facts and in the circumstances of the case and in law, the Tribunal was correct in holding that the provisions of Section 40A(7) of the income-tax Act, 1961, did not apply to a case where no provision on account of gratuity liability has been made in the accounts and/ or whether Section 40A(7) applied to such a case is a debatable matter and in that view holding that the allowance of Rs. 1,08,864 being liability for payment of gratuity against the express prohibition contained in Section 40A(7)(ii) was not a mistake apparent from the record subject to rectification under Section 154 of the Income-tax Act, 1961 ?"
(2.) The facts relating to this reference shortly stated are that in respect of the assessment year 1973-74, the assessee had claimed deduction of Rs. 1,08,864 on account of gratuity and the Income-tax Officer allowed the claim by his order dated August 30, 1974. The amount represented liability for gratuity for the year under consideration determined on the basis of actuarial valuation. Later on, the Income-tax Officer, however, found that the Finance Act of 1975 inserted Sub-section (7) of Section 40A which specifically prohibited retrospectively with effect from April 1, 1973, the allowance of provision for gratuity where no approved gratuity fund existed. The Income-tax Officer, therefore, held that in view of this retrospective legislation, the allowance of Rs. 1,08,864 was a mistake which was required to be rectified under Section 154. The assessee objected but the Income-tax Officer rectified the order, adding the liability of Rs. 1,08,864 which had earlier been allowed.
(3.) Before the Appellate Assistant Commissioner, it was contended that the assessee had already applied for approval of the gratuity fund and the matter was still pending before the Commissioner of Income-tax. The Appellate Assistant Commissioner, however, held that in view of the retrospective legislation, there was a mistake which could be rectified as the conditions contained in Section 40A(7)(ii) were not fulfilled. He further observed that after the Commissioner of Income-tax had granted recognition to the fund, the disallowance now made shall be withdrawn under Section 155(13) of the Act.;