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Income Tax Appellate Tribunal, “A” BENCH, KOLKATA
Before: Shri A. T. Varkey, JM & Shri Rajesh Kumar, AM]
ORDER Per Shri A.T.Varkey, JM This is an appeal preferred by the assessee against the order of Ld. CIT(A)-1, Kolkata dated 29.11.2019 for AY 2014-15.
The sole ground raised by the assessee is against the action of Ld. CIT(A) in upholding the disallowance of contribution to Rs. 38,85,096/- [ which figure according to Ld AR is an error because AO disallowed Rs. 65,92,737/-] made to gratuity fund (LIC Group Gratuity Scheme).
Brief facts of the case as noted by the AO is that the assessee which is a State Co- operative Bank returned an income of Rs. 6,84,00,990/-. During the scrutiny, the AO found that the assessee has debited in its profit and loss account of Rs. 66,74,983/- as gratuity expenses which was payment made as subscription to LIC towards its Group Gratuity Scheme. The AO asked the assessee to produce the Commissioners approval for the fund. The assessee contended that the deduction is sought u/s 37 of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) and therefore according to it the actual payment of Rs. 65,92,737/- is to be allowed. However the AO did not accept the same since the assessee failed to produce the approval of Commissioner in respect of gratuity fund to which the assessee has made the contribution. Therefore according to the AO as The Andaman & Nicobar State Corporation Bank, AY: 2014-15 per Section 36(1)(v) of the Act, the deduction is not allowable, so he disallowed the amount of Rs. 65,92,737/-.
Aggrieved the assessee preferred an appeal before the Ld. CIT(A) wherein it challenged the action of AO to have disallowed contribution made by it as LIC premium on the scheme of Gratuity for the employees to the tune of Rs. 38,85,096/- (wrongly given and Correct figure as per AO order is Rs. 65,92,737/-) and the Ld. CIT(A) was pleased to dismiss the appeal, thus sustaining the disallowance.
Aggrieved the assessee is before us.
Assailing the action of Ld. CIT(A) the Ld. A.R. of the assessee Shri Dudhwewala contended that the Ld. CIT(A) erred in upholding the action of AO by citing Section 40A(7) of the Act as well as Section 36(1)(v) of the Act. According to Ld. A.R., the assessee had made the payment as per Sub-section (1) of Section 4A of Gratuity Act. According to Ld. A.R., as per section 4A of the Gratuity Act – ‘Compulsory Insurance’ provides for a mechanism to ‘insure’ the gratuity liability which accrues on an employer, so as to prevent any lapse that may occur in future while discharging the gratuity liability. According to Ld. A.R., as per the Sub-section (1) of Section 4A of Gratuity Act an employer other than the Central Government or the State Government shall obtain an insurance for his liability for payment towards Gratuity from the Life Insurance Corporation of India (in short LIC). Further it was pointed out by the Ld. A.R. that as per the Gratuity Act, Section 4A(2) provides another alternative for the employer other than the Central Government or State Government to establish a gratuity fund after obtaining approval of Commissioner for discharging the gratuity liability of its employees and the assessee had chosen the course as suggested by Section 4A(1) of the Act wherein it has obtained an insurance for its liability for payment towards gratuity from the LIC of India. Therefore according to the Ld. A.R. the actual payment made by the assessee to the tune of Rs. 65,92,737/- is an allowable expenditure u/s 37 of the Act and therefore the action of Ld. CIT(A)/AO in disallowing the same u/s 40A(7) / 37(1)(v) of the Act is erroneous and for that proposition he cited the decision of Hon’ble Supreme Court in the case of CIT vs. Textool Company Ltd. (263 CTR 257) wherein the Hon’ble Apex Court while hearing the similar appeal from the decision of Hon’ble Madras High Court has held that the principles
The Andaman & Nicobar State Corporation Bank, AY: 2014-15 of reasonable construction shall not be ruled out even if one has to give strict construction in respect of fiscal statute. The Hon’ble Supreme Court held that, the intention of Section 36(1)(v) of the Act, is that the employer should not have any control over the funds of the irrevocable trust created exclusively for the benefit of the employees (gratuity) of the assessee. Thereafter he drew our attention to the decision of Hon’ble Allahabad High Court in the case of M/s Scooters India Ltd. vs. CIT (399 ITR 559) wherein identical issue came up before the Hon’ble High Court wherein the Hon’ble High Court relying on the decision of the Hon’ble Supreme Court in the case of Textool Company Ltd. (supra) decided in favour of the assessee.
And the Ld. A.R. has relied on the decision of Co-ordinate Bench of this Tribunal in the case of DCIT vs. Epcos Ferrities Ltd. (102 taxmann.com 422) wherein the Tribunal held as under:
We have heard both the parties and perused the material available on record, we note that these grounds relate to payment of gratuity u/s.40A(7) of the Act and contribution to superannuation fund u/s. 40A(9) of the Act. Before us, Ld Counsel for the assessee submitted that the assessee company was not maintaining the group gratuity and superannuation funds on its own but are maintained and managed through the Life Insurance Corporation of India (LIC). In this connection, it was stated that since the funds are not being maintained by the assessee company or the trusts set up by the assessee so there was no need to get any approval from the concerned Commissioner. The assessee duly stated the above facts before the tax auditor but they did not appreciate the above fact and qualified the same under section 43B of the Act in his tax audit report that approval of the Commissioner of Income Tax is awaited for both the funds. We note that the assessee has claimed the deduction for the contribution made to Gratuity fund and Superannuation fund during the previous year relevant to the assessment year under consideration. The assessee was maintaining the said fund not on its own but managed and maintained through the Life Insurance Corporation of India. Therefore, the contribution made to Superannuation and Gratuity fund maintained by the LIC can be claimed by the assessee while computing the total income and would not be hit by the provision of sections 40A(7) & 40A(9) of the Act. Therefore, we delete the above mentioned additions. That being so we decline to interfere in the order passed by the Ld C1T(A), his order on this issue is hereby upheld and grounds raised by the Revenue are dismissed. ” And thereafter the Ld AR relied on the decision of Co-ordinate Bench of this Tribunal in various cases wherein the same view has been reiterated. In the light of the aforesaid judicial precedents, the Ld. A.R. pleaded that the disallowance made by the authorities below should be reversed and the deduction should be given to contribution actually made by the assessee to the tune of Rs. 65,92,737/-.
The Andaman & Nicobar State Corporation Bank, AY: 2014-15 8. Per contra, the Ld. D.R. relied on the order of the Ld. CIT(A) and cited the decision of the Hon’ble Madras High Court in the case of CIT vs. Coimbatore Premier Corporation (244 ITR 753) and Hon’ble Supreme Court decision in Shree Sajjan Mills Ltd. vs. CIT (156 ITR 585) and does not want us to interfere with the order of the Ld. CIT(A).
We have heard both the parties and perused the records. It is noted that the issue in dispute relates to the disallowance of payment made towards LIC employees’ group gratuity scheme u/s 40A(7) of the Act. From the material placed before us, it is noted that the assessee had acquired Employees’ Group Gratuity Scheme from Life Insurance Corporation of India. In terms of the said Policy, the assessee was required to bear and pay the policy premium, and all the benefits arising under it shall be payable only to the Members i.e. the eligible employees of the assessee. The LIC was in-charge of the said Fund which would maintain the register of members containing the details of the eligible employees, both present and future who are entitled to obtain benefits i.e. gratuity payments under this Scheme. The LIC would directly pay the benefits arising under the Scheme to the employees upon their retirement and/or to their beneficiaries upon their death. The assessee neither exercised any control or influence over the management of the funds nor did it have any say in the matters relating to payments of the benefits arising or accruing there from which was due to the Members.
It is noted that somewhat similar issue came up for consideration before the Hon’ble Supreme Court in the case of CIT VsTextool Ltd (263 CTR 257) wherein the Hon’ble Court after considering the earlier decision rendered in the case of Shree Sajjan Mills Ltd Vs CIT (156 ITR 585) [ relied by Ld DR] held that, the intention of Section 36(1)(v) of the Act, is that the employer should not have control over the funds of the irrevocable trust created exclusively for the benefit of the employees of the assessee. Applying the principle of reasonable construction, the Hon’ble Apex Court in that case noted that, the assessee had absolutely no control over the fund created by the LIC for the benefit of the employees of the assessee and hence allowed the deduction claimed for the payments made by the assessee to LIC. The relevant extracts of the judgment is as follows:
“8. Having considered the matter in the light of the background facts, we are of the opinion that there is no merit in the appeal. 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
The Andaman & Nicobar State Corporation Bank, AY: 2014-15 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.
Taking note of both the above judgments of the Hon’ble Supreme Court in the case of CIT Vs M/s Textool Ltd (supra) & M/s Shree Sajjan Mills Ltd Vs CIT (156 ITR 585), we find that the Hon’ble Allahabad High Court in the case of M/s Scooters India Ltd Vs CIT (399 ITR 559) allowed the contributions paid by the assessee to LIC directly for obtaining policies under the group gratuity scheme as deductible business expense. The questions which came up for consideration before the Hon’ble High Court were as follows:
(iii) Whether the Tribunal was justified in overlooking the provisions of section 43B relating to disallowance of Rs. 1,40,57,860 on account of payment of gratuity paid under the scheme of the LIC but disallowed the said amount by invoking the provisions of section 40A(7) of the Act, 1961 ? (iv) Whether the Tribunal was justified in not considering the fact that premium paid by the appellant to LIC was under a scheme known as 'Group Gratuity Scheme' formed by LIC and the insurance premium paid under the said scheme is treated as a deductible business expense of the company ? (v) Whether the Tribunal was justified in relying upon a decision of this court which was decided on ex parte basis and the decision of the Madras High Court in the case of CIT v. Textool Co. Ltd. was not considered ? (vi) Whether the Tribunal was justified in not considering the fact that a bare reading of section 36(1)(v) of the Act, 1961 clearly shows that real intention behind the provision is that employer should not have any control over the funds of irrevocable trust created exclusively for the benefit of the employees and thus the condition is satisfied and the deduction is allowable ? (vii) Whether the Tribunal was justified in not considering the decision of apex court in CIT v. Textool Co. Ltd. [2013] 1 ITR-OL 241 (SC) ; [2013] 216 Taxman 327 (SC) wherein the apex court has considered its earlier decision in the case of Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585 (SC) wherein it has been held that the condition of section 36(1)(v) of the Act, 1961 stands satisfied if the employer does not have any control over the funds of the irrevocable trust created exclusively for the benefit of employees."
Answering the above questions in favor of the assessee, the Hon’ble High Court held as follows:
The Andaman & Nicobar State Corporation Bank, AY: 2014-15 “25. Now coming to questions Nos. (iii), (iv), (v), (vi) and (vii), learned counsels for the parties, at the outset, could not dispute that these questions stand covered by the Supreme Court's judgment in CIT v. Textool Co. Ltd. [2013] 216 Taxman 327/35 taxmann.com 639 in favour of the assessee. The Tribunal had disallowed payment made to LIC under the gratuity insurance scheme by referring to section 40A(7) observing that fund was not recognized by Department. A similar question was considered in CIT v. Textool Co. Ltd. (supra) where also payment was made to the L.I.C. towards group life assurance scheme and this was held to be an approved scheme and there was no violation of section 36(1)(v) of the Act, 1961. The court held that a narrow interpretation straining language of sub-clause (v) so as to deny deduction to the assessee should not be followed since the objective of fund was achieved….. …… 26. In view thereof, we answer questions Nos. (iii) to (vii) in favour of the assessee and against the Revenue. Both these appeals are allowed and impugned judgment of the Tribunal dated August 21, 2014 to the extent aforesaid questions have been answered in favour of the assessee, is hereby set aside.”
We note that in this case, the assessee neither exercised any control or influence over the management of the funds nor did it have any say in the matters relating to payments of the benefits arising or accruing there from which was due to the Members/ Employees. So by relying on the ratio of the Hon’ble Supreme Court in CIT vs. Text Tool (supra) wherein it was held that, the intention of Section 36(1)(v) of the Act, is that the employer should not have control over the funds of the irrevocable trust created exclusively for the benefit of the employees of the assessee and the Hon’ble Allahabad High Court decision in M/s Scooters India Ltd. (supra) which decision is on identical issue, we hold that the assessee is entitled for the deduction of the payments made to LIC towards the group gratuity scheme, so we are inclined to allow the claim of the assessee. Accordingly, we set aside the orders of the lower authorities and allow the appeal of the assessee. However, the AO is directed to verify the actual payment made by the assessee towards the gratuity scheme to LIC of India since there is confusion in the order of Ld. CIT(A) on this issue. With the aforesaid observation, the claim of the assessee is allowed.
In the result, the appeal of the assessee is allowed.