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Income Tax Appellate Tribunal, ‘’ C’’ BENCH, AHMEDABAD
Before: SHRI WASEEM AHMED
आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal is filed at the instance of Revenue against the order of the Learned Commissioner of Income Tax (Appeals)-10 Ahmedabad, [Ld. CIT (A) in short] dated 27/06/2018 arising in the matter of assessment order passed under s. 147 r.w.s 143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") for the Assessment Year 2011-2012.
The Revenue has raised the following grounds of appeal:
1. That the ld.CIT(A) has erred in lawa and/or on facts in deleting the additions on account of disallowance of Rs.1,67,90,200/- of the claim of provision to contribution to Gratuity Fund u/s.36(1)(5).
2. That the ld.CIT(A) has substantially erred by not considering the fact that the gratuity contribution paid is allowable as deduction only if the registration have been granted to the trust under I.T Act. 3. That the ld.CIT(A) has substantially erred by not considering the fact that registration for the gratuity has been granted to the assessee under I.T Act w.ef. 01.04.2012 and the Assessing officer has made disallowance in the A.Y. 2011-12 which is before the effective date of the registration towards gratuity fund. 4. The appellant craves, to leave, to amend and/or to alter any ground or add a new ground which may be necessary.
3. The only effective issue raised by the Revenue is that the learned CIT-A erred in allowing the claim of the assessee under section 36(1)(v) of the Act for Rs. 1,67,90,200/- on account of gratuity contribution, thuough the gratuity fund was not approved under the Act.
The Fact in brief is that the assessee is a registered cooperative society and engaged in distribution of agricultural inputs, outputs, oil seeds, food grains etc. The assessee during the under consideration claimed deduction of Rs. 1,67,90,200/- on account of contribution made toward employee gratuity fund. The assessee submitted that it being a Co-operative societies created an Irrecoverable Gratuity Trust namely Gujarat State Co-Op Marketing Federation Limited Employee Group Gratuity Cum Life Assurance Scheme. Subsequently the assessee has taken master policy for gratuity with Pension and Group Scheme Department of LIC in the year 1985 for its employee benefit vide master policy No. GGI/13903 of LIC and paying premium on behalf of such trust. For this purpose the assessee applied to the Income tax department vide application dated 25-11-1985 for approval of its gratuity scheme. But due to unforeseen reason no communication received by the assessee from department. On enquiry in the year 2016 it was learnt that the document were misplaced by the department therefore the assessee filed fresh application dated 08-03-2016. The learned CIT approved the scheme w.e.f. 01-04- 12. The assessee in support of its claim submitted copy of application filed with department dated 25-11-1985 and other relevant document. The assessee further submitted that gratuity trust is independent from its control and its business. The trust and LIC is independently managing the fund of gratuity. As such the assessee has no control or lien on such fund created for the benefit of employees. The assessee further claimed that the fact of its case is fully covered by the judgment of the Hon’ble Supreme Court in case of CIT vs. Textool Co. Ltd reported in 35 taxmann.com 639.
4.1 However the AO disallowed the claim of the assessee by holding that the Trust of the assessee is not recongnised trust under the Act. Though the learned CIT granted approval of the trust but the same is w.e.f. 1st April 2012, therefore the year under consideration is not cover under the approval. Further the case law relied by the assessee is factually not applicable as in such case the assessee was making payment to LIC with respect to approved trust under the Act. Accordingly the AO added the entire claim of deduction to the total income of the assessee.
The aggrieved assessee preferred to appeal to the ld. CIT (A). The assessee before the learned CIT(A) submitted that the requirement of approval of the gratuity scheme by the ld. CIT for claiming deduction under section 36(1)(v) of the Act was made with the intention to prevent the misuse of the fund created for the benefit of the employee. However in the present case the contribution was paid to LIC in form of premium and in turn the LIC is managing all the fund independently. It has no control of whatsoever on fund, hence the situation for the utilization of such fund by diverting to the business of the assessee cannot arise. Further these fact can be verified from formation deed of gratuity trust as well from rule and condition attached to master policy of LIC. The assesse once again placed its reliance on the Judgment of Hon’ble SC in case of Textool Co. Ltd (supra). The assessee also submitted that all the conditions stipulated under section 36(1)(v) and relevant rules for getting approval were satisfied and accordingly applied before authorized authority. But the department did not take cognizance by pointing out any defect in application made earlier viz a viz not denied the approval. Therefore it should not denied from claiming such deduction just because the approval was granted on a later date w.e.f. from subsequent year.
5.1 The learned CIT (A) after considering all the facts allowed the appeal of the assessee by observing as under: 2.4 On careful consideration of entire facts, it is observed that Appellant has taken master policy with pension and group Schemes Departm,ent of LIC “Employees Group Gratuity-cum-life Assurance Scheme” from 1985 and in support of such claim it has submitted copy of mster policy of LIC along with contribution made to Assessing officer. During the course of Assessment Proceedings, Appellant has also submitted copy of application dated 25th November, 1985 filed with Department for granting approval of gratuity fund. These facts are not disputed by Assessing Officer in Assessment Order. It is also observed that Appellant has made revised application for such approval with effect from 1-4-2012. It is not the case that Appellant has not made any application prior to 31st May, 2016. The documents submuitted by Appellant clearly shows that Appellant has made application for approval of graturity fund in 1985 and nothing was brought on record by AO that such application was rejected subsequently. The Hon’ble Jaipur ITAT in the case of Man Structure Pvt. Limited V/s ACIT (ITA No.63 to 65/JP/2016 dated 16th August, 2016) has held that “once the revenue is accepting the status of Assesee being approved gratuity fund and has been extended the benefit of gratuity fund after the application was initially filed on 13th May, 1996, now the Revenue cannot deny the benefit merely on the basis of non-grant of approval by Authorities. For the non-action of the Revenue, the Assesse cannot be denied with the benefit of the pendency of deduction on account of above contribution made to gratuity fund.”
Being aggrieved by the order of the learned CIT (A) the Revenue is in appeal before us
The learned DR before us contended that the gratuity fund for the year under consideration was not approved under the Act. Therefore any contribution made by the assessee to such unapproved fund cannot be allowed as deduction.
On the other hand learned AR before us filed a paper book running from pages 1 to 195 and contended that the assessee has made an application in the year 1985 as evident from the details placed on pages 41 to 45 of the paper book. But the same was neither rejected nor considered by the Commissioner of income tax for the purpose of granting approval. As such the application was misplaced from the office of the income tax. Accordingly a fresh application was made in the year 2016 which was approved with effect from 1 April 2012 without pointing out any flaw in the scheme of gratuity. Accordingly the learned AR contended that the deduction under section 36(1)(v) cannot be denied. The learned AR alternatively claimed that the contribution should be treated as an expense for the purpose of the business of the assessee and therefore the same should be allowed as deduction under section 37 of the Act.
8.1 Both the learned DR and the AR before us vehemently supported the order of the authorities below as favourable to them.
We have heard the rival contentions of both the parties and perused the materials available on record. The limited controversy that arises for our adjudication in the given facts and circumstances whether the assessee is entitled for the deduction for the contribution made to the gratuity fund which was not approved by the Commissioner of income tax under section 2(5) of the Act in the year under consideration.
9.1 The gratuity represents a lump sum amount which is paid by the employer to the employee upon his retirement. The amount of gratuity is calculated based on length of service of the employee and its payment to the employee is subject to other conditions as specified under the Payment of Gratuity Act 1972. The provisions of section 4A of the gratuity Act directs the employer to take compulsory insurance to ensure the liability towards the gratuity accruing upon him as employer. The purpose of taking the insurance policy is to prevent any lapse on the part of the employer which may occur while discharging the gratuity liability. The provisions of section 4A states that every employer other than an employer or an establishment belonging to, or under the control of, the Central Government or a State Government shall either -
(a) Obtain an insurance for his liability for payment towards the gratuity from the Life Insurance Corporation of India [Sec 4A(1)] or (b) Establish an approved gratuity fund [Sec 4A(2)].
9.2 Now coming to the deduction available to the assessee on account of the gratuity liability as provided under section 36(1)(v) of the Act. The provisions states that the assessee an employer shall be allowed a deduction of any sum paid by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust. Thus, the Income Tax Act envisages to allow deduction of contributions made only to an approved gratuity fund.
9.3 The provisions of Section 2(5) of Income Tax Act defines an approved gratuity fund as a gratuity fund which has been and continues to be approved by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner of Income Tax in accordance with the rules contained in Part C of the Fourth Schedule. Such a fund must be created as an irrevocable trust i.e. contributions once made to the fund shall never be under the control of the employer organization.
9.4 Undoubtedly, the gratuity fund created by the assessee was not approved by the Commissioner of income tax under section 2(5) of the Act in the year under consideration. In fact, the approval was granted by the Commissioner of income tax with effect from 1st April 2012 effective from the assessment year 2013-14. However, it is also a fact on records that the assessee has made an application for the approval under section 2(5) of the Act to the Commissioner of income tax vide letter dated 25-11-1985. This fact has not been disputed by the authorities below as well as the learned DR appeared before us. The copy of the application for the approval under section 36(1)(v) of the Act is placed on pages 41-45 of the paper book. At this stage the question arises, the assessee can be penalised for non- granting of the approval by the Commissioner of income tax. In this connection, we note that substantial time has been elapsed between the original application made by the assessee and the fresh application made by the assessee dated 08-03-2016. To our understanding, the assessee should be vigilant enough to pursue its matter before the authorities. The assessee should not fold his hands on the reasoning that its job has done upon making the requisite application before the Commissioner of income tax under section 2(5) of the Act.
9.5 Be that as may be, undisputedly the approval was granted under section 2(5) of the Act subsequently by the Commissioner of income tax with effect from 1st April 2012. Furthermore, we note that the purpose of creating the approved gratuity fund was to ensure that the amount contributed by the assessee as the employer should leave the possession from its hands. In other words, the assessee should not have any control on the fund created for the welfare of the employees. In the case on hand, there is no ambiguity that there was no control of the assessee of whatsoever on the funds created by it for the welfare of the employees as the fund was invested with the LIC of India and LIC was directly paying amount to the employee on occasion of retirement.
9.6 The Hon,ble Supreme Court in the case of CIT vs. Textool Co. Ltd (Supra) has held that:
“True that a fiscal statute is to be construed strictly and nothing should be added or subtracted to the language employed in the Section, yet a strict construction of a provision does not rule out the application of the principles of reasonable construction to give effect to the purpose and intention of any particular provision of the Act. (See : Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585/23 Taxman 37 (SC). From a bare reading of Sectin 36(1)(v) of the Act, it is manifest that the real intention behind the provision is that the employer should not have any control over the funds of the irrevocable trust created exclusively for the benefit of the employees. In the instant case, it is evident from the findings recorded by the Commissioner and affirmed by the Tribunal that the assessee had absolutely no control over the fund created by the LIC for the benefit of the employees of the assessee and further all the contribution made by the assessee in the said fund ultimately came back to the Textool Employees Gratuity Fund, approved by the Commissioner with effect from the following previous year. Thus, the conditions stipulated in Section 36(1)(v) of the Act were satisfied. Having regard to the facts found by the Commissioner and affirmed by the Tribunal, no fault can be found with the opinion expressed by the High Court, warranting our interference.”
9.7 We also find that the Hon’ble coordinate bench of this tribunal in the case of Prakash Software Solution (P.) Ltd vs. ITO reported in 89 taxmann.com 130 has held that:
“7. Having observed so, we may also mention that quite interestingly, under rule 8(1), while the trustees may appeal against the approval being declined or approved being withdrawn, there is no appellate remedy against the date from which the approval is to take effect, even though, as evident from the facts of this case, serious prejudice may be caused to the assessee employer on account of grant of approval with effect from a date later than the date on which the trust is created. To quote the oft quoted words of Lord Justice Denning in the case of Seaford Court Estates Ltd. v. Asher [1949] 2 All ER 155 at p. 164 : " ………when a defect appears, a Judge cannot simply fold his hands and blame the draftsmanship. He must set out to work on the constructive task of finding the intention of Parliament …….and then he must supplement the written word so as to give "force and life" to the intent of legislature ……….. A Judge should ask himself the question how, if the makers of the Act had themselves came across this ruck in the texture of it they would have straightened it out? He must do as they would have done. A Judge must not alter the material of which the Act is woven, but he can and should iron out the creases." In many cases, embarking upon such a voyage to discover the legislative intent may not really be workable for a variety of reasons but given the fact that it is a non-appealable decision of the Commissioner and it is not only contrary to the scheme of the Act but is causing wholly unjust prejudice to the taxpayer, we have, on these facts, no hesitation in holding that the date on which approval is to take effect can only be the date on which fund is created or the date on which the terms of funds are altered to meet the requirements of rule 3- which does not apply to this fact situation. One can understand that such a denial of deduction for contribution to the gratuity fund to the employer assessee is inevitable, and is on account of the lapses of trustees, when terms and conditions of the gratuity fund are altered, to meet the requirements of Part C to Third Schedule to the Income Tax Act, and such situation fully justify the approval being granted effective from the date on which the conditions are so altered. In our humble understanding, it is mainly this eventuality which justifies the date of approval being later than the date on which the fund is created. In a situation in which the terms and conditions of the fund, established under the irrevocable trust, are the same as the terms and conditions on the basis of which such a fund was set up, there cannot be, in our humble understanding, any justification for the effective date of approval being a date later than the date on which the said fund was set up.” 9.8 In the light of the above judgements, there is hardly any doubt regarding allowability of deductions for any contributions made to an approved gratuity fund established under an irrevocable trust. Further, no deduction shall be allowed to an organization of any provision for payment of gratuity.
9.9 In view of the above and after considering the facts in totality, we do not find any reason to disturb the finding of the learned CIT (A). Accordingly we uphold the same. Consequently the AO is directed to delete the addition made by him. Hence the ground of appeal of the revenue is dismissed.
In the result the appeal filed by the Revenue is dismissed.
Order pronounced in the Court on 31/05/2021 at Ahmedabad.