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Facts
The Revenue appealed against the deletion of disallowances for provisions made for gratuity and leave encashment by the CIT(A). The assessee, a charitable trust, claimed these provisions based on actuarial valuation reports, considering them as application of income for charitable purposes.
Held
The Tribunal held that provisions for gratuity and leave encashment, made on the basis of actuarial valuation and in accordance with accounting standards, constitute a valid application of income under Section 11 of the Act. The disallowance by the Assessing Officer was therefore incorrect.
Key Issues
Whether provisions for gratuity and leave encashment, based on actuarial valuation, are considered 'utilization of fund' and a valid application of income for charitable trusts under the Income Tax Act, 1961.
Sections Cited
143(3), 147, 148, 139(1), 12AA, 10(23C)(vi), 11, 12, 44(A)
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Income Tax Appellate Tribunal, ‘C’ BENCH
Before: SHRI AMIT SHUKLA & SHRI GIRISH AGRAWAL
आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeals have been filed by the Revenue against the common impugned orders passed by the Ld. CIT(A)-47, Mumbai, dated 27.03.2025, for the quantum assessments framed under section 143(3) read with section 147 for A.Ys. 2019-20 and 2020-21, and under section 143(3) for A.Y. 2021-22.
and others Podar Education and Sport Trust 2. The sole issue raised in all three appeals are as under: 1.Whether on the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance of provisions for gratuity and leave encashment, without appreciating that such provisions do not constitute 'utilization of fund' under section 11 and section 12 of the Income Tax Act, 1961, which do not allow for such deductions?" 2. "Whether on the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance of provisions of gratuity and leave encashment, without considering that such allowances are only deductible on actual payment within prescribed due date, as held by the Hon'ble Supreme Court in Union of India & Ors. Vs Exide Industries Limited and others?"
At the very outset, it has been submitted that the issue involved stands squarely covered by the decision of the Tribunal in assessee’s own case for A.Ys. 2012–13 to 2018–19 vide order dated 28.09.2022.
Briefly stated, the assessee is a trust registered under sections 12AA and 10(23C)(vi) of the Act, bearing PAN AAATP9243N, and is engaged in charitable activities. For the years under appeal, the assessee derived income from interest and other incidental sources, including income from educational activities, which are claimed as exempt. Returns of income were duly filed under section 139(1), declaring total income at ‘Nil’.
In A.Y. 2019–20, the case was reopened pursuant to information flagged on the Insight portal, and reassessment proceedings under section 148 were initiated. During and others Podar Education and Sport Trust assessment, the Assessing Officer noted that the assessee had created provisions towards gratuity and leave encashment as under:- Particulars Rs. Gratuity 1,80,65,490/- Leave Encashment 5,64,18,382/- Total 7,44,83,872/-
In response to the show-cause notice, the assessee submitted before the Assessing Officer that the issue had already been decided in its favour by the Tribunal. Nevertheless, as the Revenue had preferred an appeal before the Hon’ble High Court on this very issue, the Assessing Officer proceeded to disallow the sum of Rs.7,44,83,872 in A.Y. 2019–20. Similar disallowances were also made for A.Ys. 2020–21 and 2021–22.
7. The Ld. CIT(A), however, deleted the additions after rendering a well-reasoned finding, which reads as under:
5. Decision on ground no. 1: 5.1 In this ground the appellant has urged that the AO erred in disallowing provision for gratuity and leave encashment of Rs 1,80,65,490/- and Rs 5,64,18,382/-. 5.2 I have gone through the submissions of the appellant, the assessment order, relevant records and the facts of the case. It is noted that the AO reopened the proceedings u/s 147 of the Act after information was received on Insight portal. The appellant is a public charitable trust registered u/s 12A and 12AA of the Act. The AO noted that the appellant had claimed provisions on account of employees amounting to Rs 7,44,83,872/- on account of gratuity and leave encashment.
and others Podar Education and Sport Trust The appellant was asked to justify the claim as it was merely in the nature of provision. The appellant filed its submissions stating that the same were done by following AS 15 relating to employees benefits issued by ICAI and thus should be considered as an application of money for charitable purposes. The AO however disallowed the same on the ground that no supporting document in respect of actual payment of gratuity and leave encashment had been filed. 5.3 Before me the appellant has submitted that provision for gratuity and leave encashment has been made on the basis of the actuarial valuation report and although the alleged expenses claimed on account of utilization of the appellant trust's income are purely provisional in nature and not actual expenditure, such provisions were required to be made as per mandate of Law otherwise the books of accounts would not reveal the true and fair picture without making provision for these expenses. It further submitted that AO erred in assuming that the expenditure should necessarily involve actual delivery of or parting with the money. However, the provisions are necessary to be made for certain purposes like, provision for depreciation is to be made in respect of decrease in value of property through wear and tear, deterioration or obsolescence and allowance is made for this purpose in book-keeping, accountancy, etc. It is the provision made for the loss or expenses incurred through using the asset for earning profits, and should, therefore, be charged against those profits as they are earned. If depreciation is not provided for, the books will not contain a true record of revenue or capital. Similarly provision for gratuity and leave encashment also required to be provided as mandated by Law. 5.4 The appellant also relied upon the decision of Hon'ble ITAT, Mumbai dated 03.08.2021 in passed in the case of Anandilal & Ganesh Podar Society (a Group entity) for AY 2014-15 wherein the AO had made disallowance of Provision of Gratuity and Provision for Leave Encashment in the assessment order passed u/s 143(3) of the Act dated 16.12.2016. The relevant paras are reproduced as under: "12. Considered the rival submissions and material on record. We are of the view that the provision for gratuity and leave encashment has been made by the assessee based on and others Podar Education and Sport Trust the actuarial valuation report and although these disallowances are purely provision in nature and not actual expenditure but such provisions are required to be made as per mandate of Law and the books of accounts will not reveal the true and fair picture without making provision for these expenses. For e.g.. the depreciation is also a book entry and no actual flow of money takes place but provision for depreciation in books of accounts is mandated by law in order to reflect the true and correct profit of the entity. Like depreciation, the provision for gratuity and leave encashment has necessarily be provided in the books of accounts and although there are no direct judicial precedents regarding allowability of provision for gratuity and leave encashment in case of Trust. However, there are various judicial precedents which allows the claim of depreciation while computing the taxable income of the trust.
13. The contention of the Ld. CIT(DR) appears to be on the assumption that the expenditure should necessarily involve actual delivery of or parting with the money. It seems to us that it need not necessarily be so. The expenditure should be understood as necessary outgoings. The provisions are necessary to be made for certain purposes like, provision for depreciation is to be made in respect of decrease in value of property through wear and tear, deterioration or obsolescence and allowance is made for this purpose in book-keeping, accountancy, etc. It is the provision made for the loss or expenses incurred through using the asset for earning profits, and should, therefore, be charged against those profits as they are earned.
14. If depreciation is not provided for, the books will not contain a true record of revenue or capital. If the asset were hired instead of purchased, the hiring fee would be charged against the profits, having been purchased, the asset is, in effect, then hired by capital to revenue, and the true profit cannot be ascertained until a suitable charge for the use of the asset has been made. Likewise, the provision for gratuity and leave encashment also required to be provided as mandated by Law. Without being such provisions made, the balance sheet will not present a true and fair view of the state of affairs. and others Podar Education and Sport Trust 15. In CIT v. Indian Jute Mills Association [1982] 134 ITR 68 the Calcutta High Court while constructing the expression 'expenditure incurred' in section 44(A) of the Act observed: "depreciation claim shall include the expenditure incurred."
16. Thus, in our considered view, in case of trust, the meaning 'applied' need not be construed as 'spent'. It includes the necessary provisions required to be made as per statutory requirement. Therefore, we direct the AO to allow the provision for gratuity and leave encashment as applied for the object of the trust. Accordingly, the ground raised
by the assessee is hereby allowed." 5.5 It is further noted that an identical addition was made by the AO for the AY 2012-13 in the assessment order passed u/s 143(3) r.w.s 153A of the Act dated 29.12.2019 in Appellant Trust's own case. The Ld. CIT(A) vide order dated 11.08.2021 in Appeal No. CIT(A)-47/ 10290/19-20 respectfully following the decision of Hon'ble ITAT, Mumbai in the Appellant Trust's own case for AY 2014-15, had directed to delete the disallowance/addition made by the AO in respect of provision for gratuity and provision for leave encashment. Thereafter, the revenue had preferred an appeal before the Hon'ble ITAT, Mumbai. The Hon'ble ITAT. Mumbai at Para 30,31 & 32 of the order dated 10.03.2023 has given the decision in favour of the appellant. The relevant paras are reproduced as under:
30. Considered the rival submissions and material placed on record. We find that the Ld. DR contended that these are mere provisions without any actual outflow of funds and therefore the same cannot be allowed as deduction. On the other hand, the Ld.AR stated that the issue regarding the provision for leave encashment and gratuity is squarely covered by the decision of the coordinate Bench of the Tribunal in the assessee's own case for the AY 2014-15. We find that the issue in dispute is squarely covered by the decision of this tribunal in dated 03.08.2021 and the operative portion of the judgement is reproduced below: - and others Podar Education and Sport Trust "6. The assessee is before us against the disallowance of provision for gratuity and leave encashment confirmed by the CIT(A).
During the course of hearing before us, the Authorized Representative of the assessee argued that the assessee is required to make provision based on statutory provisions and terms of employment for post-retirement benefits of existing employees. As per the Leave Policy of the assessee, employees are entitled to encashment of earned leave subject to certain conditions. Similarly. as per the Payment of Gratuity Act, 1972, the assessee is required to pay gratuity to all the employees who complete 5 years of employment with the assessee. The provision that the assessee has made in the books of account is for the leaves already earned by the employees and for the period of service already provided by the employees. The charge has already crystallized and the liability has been incurred by the assessee by 31st March 2014 and provision is required to be made in the books of accounts as the same are maintained on accrual basis of accounting to arrive at the "income" of the trust which is based on the respective laws governed for the benefit of the employees.
The learned A.R. also contended that the quantification of the charge is as per Actuarial Valuation as prescribed by Accounting Standards 15 Employees Benefits (AS-15) issued by ICAI. Since the post retirement cost is already incurred by the assessee society, the same is application for its objects only.
9. The ld. A.R. also stated that such provisions are based on employment terms and statutory provisions and in compliance of Accounting Standards 15- Employees Benefits issued by ICAI. However, the Ld. AO while disallowing the said provisions, has misunderstood meaning of "applied" (application of income) as spent only instead of cost incurred by the assessee, which is very narrow and inconsistent with judicial authorities which has clarified that "income" should be understood in its commercial sense, however, the Ld. AO has ignored the same. and others Podar Education and Sport Trust 10. The ld. A.R. also submitted that the assessee has constantly recorded (i.e.. year after year) the said employment cost (postretirement benefit cost in accordance of AS-15) and allowed in all past assessment years. Thus, on the principles of consistency, Ld. AR requested to allow the said provisions.
11. The ld. CIT (DR) submitted before us that since there is no actual outflow of money, such provision cannot be considered as application of income.
Considered the rival submissions and material on record. We are of the view that the provision for gratuity and leave encashment has been made by the assessee based on the actuarial valuation report and although these disallowances are purely provision in nature and not actual expenditure but such provisions are required to be made as per mandate of Law and the books of accounts will not reveal the true and fair picture without making provision for these expenses. For e.g., the depreciation is also a book entry and no actual flow of money takes place but provision for depreciation in books of accounts is mandated by law in order to reflect the true and correct profit of the entity. Like depreciation, the provision for gratuity and leave encashment has necessarily been provided in the books of accounts and although there are no direct judicial precedents regarding allowability of provision for gratuity and leave encashment in case of Trust. However, there are various judicial precedents which allows the claim of depreciation while computing the taxable income of the trust.
13. The contention of the Ld. CIT(DR) appears to be on the assumption that the expenditure should necessarily involve actual delivery of or parting with the money. It seems to us that it need not necessarily be so. The expenditure should be understood as necessary outgoings. The provisions are necessary to be made for certain purposes like, provision for depreciation is to be made in respect of decrease in value of property through wear and tear, deterioration or obsolescence and allowance is made for this purpose in book-keeping, accountancy, etc. It is the provision made for the loss or expenses incurred through using the asset for and others Podar Education and Sport Trust earning profits, and should, therefore, be charged against those profits as they are earned.
14. If depreciation is not provided for, the books will not contain a true record of revenue or capital. If the asset were hired instead of purchased, the hiring fee would be charged against the profits, having been purchased, the asset is, in effect, then hired by capital to revenue, and the true profit cannot be ascertained until a suitable charge for the use of the asset has been made. Likewise, the provision for gratuity and leave encashment also required to be provided as mandated by Law. Without being such provisions made, the balance sheet will not present a true and fair view of the state of affairs.
15. In CIT v. Indian Jute Mills Association[1982] 134 ITR 68 the Calcutta High Court while constructing the expression 'expenditure incurred' in section 44(A) of the Act observed: "depreciation claim shall include the expenditure incurred."
16. Thus, in our considered view, in case of trust, the meaning 'applied' need not be construed as 'spent'. It includes the necessary provisions required to be made as per statutory requirement. Therefore, we direct the AO to allow the provision for gratuity and leave encashment as applied for the object of the trust. Accordingly, the ground raised
by the assessee is hereby allowed."
31. Respectfully following the aforesaid decision, the Ground No. 6 raised by the revenue is hereby dismissed.
32. As stated earlier, the decision rendered by us hereinabove for the A.Y. 2012-13 shall apply mutatis mutandis for other assessment years also i.e., A.Y.s. 2013- 14, 2014-15, 2015-16, 2016-17, 2017-18 & 2018-19, in view of identical facts and grounds, except with variance in figures." 5.6 The appellant has further relied upon following decisions in its own case, for other years • Podar Education Sports Trust vs DCIT CC-1(4) ITA 66 to 69/Mum/2021 for AY 2012-13 and 2013-14 and others Podar Education and Sport Trust • Podar Literacy and Education Trust vs DCIT, CC 1(4) ITA 67 & 68/Mum/2021 for AY 2015-16 and 2016-17 • DCIT vs Podar Education and sports Trust ITA 1876, 1877 to 1880, 1869/Mum/2021 for AY 2012-13, 2014-15 and 2017-18 and 2018-19 5.7 I have gone through the above judgements. The relevant paras of order passed by the Hon'ble ITAT, Mumbai in the case of Podar Education Sports Trust vs DCIT CC-1(4) ITA 66&69/Mum/2021 for AY 2012-13 and 2013-14 are reproduced as under: "24. As regards, the merits of the case, we find that the issue is covered in favour of the assessee by the decision of ITAT in assesse's group case in Anandilal & Ganesh Podar Society(supra) wherein following was held. "12. Considered the rival submissions and material on record. We are of the view that the provisions for gratuity and leave encashment has been made by the assessee based on the actuarial valuation report and although these disallowances are purely provision in nature and not actual expenditure but such provisions are required to be made as per mandate of law and the books of accounts will not reveal the true and fair picture without making provision for these expenses. For e.g., the depreciation is also a book entry and no actual flow of money takes place but provision for depreciation in books of accounts is mandated by law in order to reflect the true and correct profit of the entity. Like depreciation, the provision for gratuity and leave encashment has necessarily be provided in the books of accounts and although there are no judicial precedents regarding allowability of provision for gratuity and leave encashment in case of Trust. However, there are various judicial precedents which allows the claim of depreciation while computing the taxable income of the trust.
The contention of the Ld. CIT(DR) appears to be on the assumption that the expenditure should necessarily involve actual delivery of or parting with the money. It seems to us that it need not necessarily be so. The expenditure should be understood as necessary outgoings. The provisions are necessary to be made for certain purposes like, provision for and others Podar Education and Sport Trust depreciation is to be made in respect of decrease in value of property through wear and tear, deterioration or obsolescence and allowance is made for this purpose in book-keeping, accountancy, etc. It is the provision made for the loss or expenses incurred through using the asset for earning profits, and should, therefore, be charged against those profits as they are earned.
If depreciation is not provided for, the books will not contain a true record of revenue or capital. If the asset were hired instead of purchased, the hiring fee would be charged against the profits, having been purchased, the asset is, in effect, then hired by capital to revenue, and the true profit cannot be ascertained until a suitable charge for the use of the asset has been made. Likewise, the provision for gratuity and leave encashment also required to be provided as mandated by Law. Without being such provisions made, the balance sheet will not present a true and fair view of the state of affairs.
In CIT v. Indian Jute Mills Association [1982] 134 ITR 68 the Calcutta High Court while constructing the expression 'expenditure incurred' in section 44(A) of the Act observed: "depreciation claim shall include the expenditure incurred."
Thus, in our considered view, in case of trust, the meaning 'applied' need not be construed as 'spent'. It includes the necessary provisions required to be made as per statutory requirement. Therefore, we direct the AO to allow the provision for gratuity and leave encashment as applied for the object of the trust. Accordingly, the ground raised
by the assessee is hereby allowed.
25. Further, since the provision has been made on the basis of actuarial valuation the same is duly supported by the decision of Hon'ble Supreme Court in the case of Metal Box Company Ltd. (supra). The decisions referred above by the DR rendered by Hon'ble Kerala High Court and Madras High Court were on the issue of leave encashment and donation respectively. Hence, they are not applicable on the facts here. Hence. assessee's appeal on merits of addition for gratuity provision stands allowed."
5.8 For the A.Yrs. 2014-15 to 2018-19, in appellant own case, Hon'ble ITAT, Mumbai vide 1816, 1864, 1865 & 1890/Mum/2021 dated 29.09.2022 upheld the decision of Ld CIT(A) - 47, Mumbai, who had respectfully followed the decision of Hon'ble ITAT, Mumbai in earlier years and allowed the appeal of the appellant. 5.9 Considering the above facts and the respectfully following the judicial precedents in appellant’s own case on identical issue for earlier years the AO is directed to delete the addition made on account of provisions of leave encashment and gratuity. Accordingly, the ground of appeal no. 1 is allowed.
8. From the above, it is evident that the Ld. CIT(A) has delivered a comprehensive and cogent finding, resting upon a consistent line of judicial precedents including those rendered in the assessee’s own case for earlier years. It is observed that the Coordinate Benches of this Tribunal have repeatedly affirmed that provisions for gratuity and leave encashment, based on actuarial valuation and in accordance with Accounting Standard 15, constitute a valid application of income under section 11 of the Act.
Accordingly, the matter is squarely covered in favour of the assessee, and we find no reason to depart from the binding precedents of earlier years, especially when the underlying facts and legal issues remain identical across all assessment years under appeal.
In view of the foregoing, we uphold the findings of the Ld. CIT(A) and dismiss all grounds raised by the Revenue.
In the result, appeals of the Revenue are dismissed.
Order pronounced on 31st July, 2025.