THE ANDAMAN & NICOBAR STATE CORPORATION BANK LTD.,PORT BLAIR vs. D.C.I.T.,CIRCLE-3(2), PORT BLAIR

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

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

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 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:

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:

Answering the above questions in favor of the assessee, the Hon’ble High Court held as follows:

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.