M/S.NORTANS MARINE SERVICES PVT. LTD. vs. THE ASSISTANT COMMISSIONER OF INCOME TAX

ITA/27/2011HC KeralaKLHC01026375201106 August 2018Author: HONOURABLE MR.JUSTICE K.VINOD CHANDRAN,HONOURABLE MR. JUSTICE ASHOK MENON11 pages
AI SummaryAllowed

What were the facts?

The assessee, M/s. Nortrans Marine Services Pvt. Ltd. (now Trans Asian), took over the business of Trans Asian Shipping Services Pvt. Ltd. The employees of the previous company were also taken over with continuity of service and statutory benefits, including gratuity. The assessee formed a trust and obtained approval for a group gratuity scheme. A sum of ₹47,75,849/- was paid to the Life Insurance Corporation of India (LIC) on 29.03.2005 to indemnify gratuity payments. The assessee claimed deduction under Section 36(1)(v) of the Income Tax Act. The Assessing Officer allowed ₹32,90,843/- as deduction based on Rule 104, disallowing ₹14,85,006/- as it pertained to prior years when employees were not with the present assessee. The Commissioner (Appeals) and the ITAT upheld the Assessing Officer's order.

What did the High Court hold?

The High Court held that the entire contributions paid by the assessee to the LIC for indemnifying gratuity liability, even for prior years when employees were with the previous employer, are eligible for deduction under Section 36(1)(v). The Court reasoned that Rule 104, which limits deduction to 8 1/3% of the employee's salary for each year of past service with the employer, should not be interpreted to exclude service with a previous employer, especially when the take-over agreement explicitly fastens the liability for past service gratuity on the assessee. The Court found that the intention of Section 36(1)(v) is to ensure the employer has no control over the trust funds, a condition satisfied in this case as per the Supreme Court's ruling in Textool Company Ltd. The Court also noted that the decision in CIT v. Saravana Spinning Mills Pvt.Ltd., relied upon by the Tribunal for disallowing the claim under Section 37, was not relevant given the allowance under Section 36(1)(v). The question of law was answered in favour of the assessee.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the initial contribution to an approved gratuity fund in respect of employees taken over, for the period they were employed with the previous employer, on the basis of a contract of employment entered into at the time of take over, is not an allowable deduction either under Section 36(1)(v) read with Rule 104 or under Section 37 of the Income Tax Act. Assessee's Contention: The assessee argued that the entire contribution is allowable. They relied on the Supreme Court decision in CIT v. Textool Co.Ltd. and a Kerala High Court decision in CIT v. Pratap Cashew Co.(P) Ltd. The assessee contended that the take-over agreement fastened the liability for past service gratuity, and Rule 104 should not create an impediment. Revenue's Contention: The revenue argued that Rule 104 creates an impediment as it only allows contributions for services rendered with the current employer. They contended that contributions for past service with another employer are not permissible under Rule 104. The revenue also argued that the decision in Pratap Cashew Co. did not consider Rule 104.

Which sections of the Income-tax Act were involved?

Section 36(1)(v),Section 37

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON MONDAY, THE 6TH DAY OF AUGUST 2018 / 15TH SRAVANA, 1940 AGAINST THE ORDER/JUDGMENT IN ITA 981/2008 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 20-08-2010 APPELLANT(S): M/S.NORTRANS MARINE SERVICES PVT.LTD. (NOW KNOWN AS TRANS ASIAN) CHITTOOR, PALAKKAD. BY ADV.SRI.SAJI VARGHESE RESPONDENT(S): THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1(3), RAVIPURAM P.O, COCHIN-682 015. R BY ADVS. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES)

SRI.JOSE JOSEPH, SC, FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 06-08-2018, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: DG APPENDIX PETITIONER'S EXHIBITS: ANNEXURE A: COPY OF ORDER U/S.143(3) DATED 27.12.2007 FOR THE ASSESSMENT YEAR 2005-06. ANNEXURE B: COPY OF THE ORDER DATED 27.08.08 OF THE COMMISSIONER OF INCOME TAX (APPEALS). ANN

The order continues below.

Read the full judgment

A free account opens 10 full judgments a month. Re-reading one you have already opened does not count again.

Create a free accountSign in

See plans and prices

The summary, the parties, the sections and the citations above are open to everyone and always will be. Only the text of the order and the PDF are metered.

More judgments on Section 36(1)(v)

All 124 judgments and leading authorities on Section 36(1)(v) →

Recent GST High Court judgments

Search GST case law →