ANADILAL & GANESH PODAR SOCIETY ,MUMBAI vs. DCIT (EXE) I(1), MUMBAI, MUMBAI

order dated 16th December 2016, determining the total income of the assessee at nil. In the return of income, the assessee claimed to have applied for objective of the trust provision for leave encashment and gratuity. The Assessing Officer disallowed the claim holding that it was in the nature of provision and, therefore, cannot be considered as an expenditure or utilization. The Assessing Officer disallowed the sum of Rs. 78,73,310, from the expenditure / utilization for the object of the assessee trust claimed for the year under consideration.

“After careful consideration, I am reasonably convinced by the view point of the AO that in the case of a trust, the total income has to be arrived at after allowing expenses actually incurred, as reflected in the Income & Expenditure statement. The provisions u/s 11-13 of I.T. Act, governing taxation of Trusts, recognize earning of income and applications of income on receipt basis. Thus, following the matching principle of accounting, when Section 11 stipulates consideration of real receipts and not accrued income for the purpose of arriving at the gross income of the Trust during an assessment year, then following the same matching principle, the applications of income i.e., expenses, have to be on real basis and not on accrued basis. Therefore, I am largely in agreement with the decision of AO that under the framework of trust assessments, similar to real receipts being considered as income of trust, the real expenses and not the provision for gratuity i.e., has to be considered as 'application of income'. Since no ad-hoc provision is actuarially discharged by the end of the assessment year under consideration, the same would not be treated as 4 Anandilal & Ganeshy Podar SocietySamria & Co. application of income till time of its actual payments, as per the matching principle, notwithstanding the fact that the liability might have been clearly ascertained during the year under consideration. In view of the above, ground of appeal is dismissed.”

The assessee is before us against the disallowance of provision for 6. gratuity and leave encashment confirmed by the CIT(A).

During the course of hearing before us, the Authorized 7. 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.

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The learned A.R. also contended that the quantification of the 8. 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.

The ld. A.R. also stated that such provisions are based on 9. 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.

The ld. A.R. also submitted that the assessee has constantly 10. 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.

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The ld. CIT (DR) submitted before us that since there is no actual 11. outflow of money, such provision cannot be considered as application of income.

Considered the rival submissions and material on record. We are 12. 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 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.

The contention of the Ld. CIT(DR) appears to be on the 13. assumption that the expenditure should necessarily involve actual

7 Anandilal & Ganeshy Podar SocietySamria & Co. 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.

If depreciation is not provided for, the books will not contain a true 14. 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 15. Calcutta High Court while constructing the expression 'expenditure

8 Anandilal & Ganeshy Podar SocietySamria & Co. 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 16. ‘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.

Coming to the additional ground of appeal raised by the assessee,

17. Ld AR submitted that the assessee has not raised this ground before the CIT(A) in view of the fact that the same remained unnoticed mainly due to the reason that nothing specifically has been discussed regarding the same by the AO in the assessment order. Ld AR submitted that this ground raised by the assessee pertains to AO’s action of not allowing the excess expenditure during the year under consideration to be carry forward to the subsequent assessment years.

The ld. AR submitted that there was excess of expenditure over 18. income during the year under consideration and prayed that such excess amounting to ` 2,13,06,095/- is allowed to be carried forward to subsequent assessment years, Ld AR has placed reliance on the 9 Anandilal & Ganeshy Podar SocietySamria & Co. decision of Hon'ble Bombay High Court in the case of CIT vs. Institute of Banking Personnel Section, [2003] 264 ITR 110 (Bom.), wherein following question was referred to their Lordships for decision:

3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law forward the deficit of earlier year and set it off against the surplus of subsequent years when the same was not allowable in the case of assessee trust in whose case income exempted under section 11 of the Income-tax Act, 1961.

It was held that: 19.

5. Now coming to question No. 3, the point which arises for consideration is whether excess of expenditure in the earlier years can be adjusted against the income of the subsequent year and whether such adjustment should be treated as application of income in subsequent year for charitable purposes? It was argued on behalf of the Department that expenditure incurred in the earlier years cannot be met out of the income of the subsequent year and that utilization of such income for meeting the expenditure of earlier years would not amount to application of income for charitable or religious purposes. In the present case, the Assessing Officer did not allow carry forward of the excess of expenditure to be set off against the surplus of the subsequent years on the ground that in the case of a Charitable Trust, their income was assessable under self-contained code mentioned in section 11 to section 13 of the Income- tax Act and that the income of the Charitable Trust was not assessable under the head profits and gains of business under section 28 in which the provision for carry forward of losses was relevant. That, in the case of a Charitable Trust, there was no provision for carry forward of the excess of expenditure of earlier years to be adjusted against income of subsequent years. We do not find any merit in this argument of the Department. Income derived from the trust property has also got to be computed on commercial principles and if commercial principles are applied then adjustment of 10 Anandilal & Ganeshy Podar SocietySamria & Co. expenses incurred by the Trust for charitable and religious purposes in the earlier years against the income earned by the Trust in the subsequent year will have to be regarded as application of income of the Trust for charitable and religious purposes in the subsequent year in which adjustment has been made having regard to the benevolent provisions contained in section 11 of the Act and that such adjustment will have to be excluded from the income of the Trust under section 11(1)(a) of the Act. Our view is also supported by the Judgment of the Gujarat High Court in the case of CIT v. Shri Plot Swetamber Murti Pujzk Jain Mandal [1995] 211 ITR 293. Accordingly, we answer question No. 3 in the affirmative i.e., in favour of the assessee and against the Department."

We find the facts of the present case is identical to the facts of the 20. decision of Hon’ble Bombay High Court and thus, the present case is entirely covered by the decision of Hon’ble Bombay High Court in the case of CIT vs. Institute of Banking Personnel Section (Supra). Further, the Hon’ble Supreme court has dismissed the SLP filed by the revenue on the same issue in the case of DIT (Exem.) v/s Maharashtra Industrial Development Corporation (MIDC) (ITA No 2652 of 2011). Therefore, respectfully following the decision of jurisdictional High Court and Hon’ble Supreme Court, the present additional ground raised by the assessee is allowed. Since, we have deleted the disallowance made by AO in respect of provision for gratuity and leave encashment, the assessed deficit will increase to ` 2,91,79,405/- and thus, we direct the AO to allow the carry forward of the deficit amount of ` 2,91,79,405/- to 11 Anandilal & Ganeshy Podar SocietySamria & Co. subsequent assessment years. Thus, the additional ground raised by the assessee is allowed.

In the result, assessee’s appeal is allowed. 21. Order pronounced in the open court on 03.08.2021