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Facts
The assessee claimed gratuity expenses, but the Assessing Officer disallowed a portion of it under section 43B. The CIT(A) allowed the claim to the extent of actual payment made to one employee but disallowed the claim related to a transferred employee, viewing it as a journal entry without actual payment.
Held
The Tribunal held that when an employee is transferred, the gratuity liability can be transferred to the other concern, and this transfer of liability constitutes a discharge of the assessee's obligation. Therefore, such transferred gratuity liability can be claimed as an expenditure.
Key Issues
Whether the transfer of gratuity liability to another concern upon employee transfer is considered actual payment and allowable as expenditure under the Income Tax Act.
Sections Cited
40A(7), 43B
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCHES ‘A’: NEW DELHI.
(Assessment Year: 2020-21) Adani Tracks Management Vs. AO-CPC (Bangalore) Service Limited (Formerly known (Jurisdictional AO-DCIT, as Adani Tracks Management Circle-3(1), Gurgaon. Service Pvt. Ltd.) (also formerly known as Surgula Rail Corridor Pvt. Ltd., Plot No. 83, Sector 32 Adani House, \ Institutional Area, Gurgaon, Delhi-110006. (PAN: AAOCS5350A) (APPELLANT) (RESPONDENT) ASSESSEE BY : Dhrunal Bhatt, C.A. REVENUE BY : Shri Ajay Arora, Sr. DR Date of Hearing : 04.11.2025 Date of Order : 21.01.2026 ORDER
PER S. RIFAUR RAHMAN, ACCOUNTANT MEMBER :
The assessee has filed appeal against the order of the Learned Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi [“Ld. CIT(A)”, for short] dated 20.02.2023 for the Assessment Year 2020-21, wherein the assesse has raised following grounds:-
law and in the facts and circumstances of the case, the learned CIT(A) has erred in rejecting the claim of appellant for Rs. 6,51,894/-towards gratuity expense when such claim is duly allowable in view of provisions of section 40A(7) and 43B of the Income Tax Act, 1961. Accordingly, the disallowance made by learned AO is required to be deleted.
The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal.”
2. Since, the assesse has taken single issue of disallowance made by the Assessing Officer invoking provisions of section 43B of the Act, we shall deal with the relevant fact on record, assessee has filed its return of income for assessment year 2020-21 on 28.01.2021 declaring nil income. After adjusting brought forward business losses and unabsorbed depreciation as per normal provisions of the Act and book profit u/s 115JB of the Act. The return of income filed by the assessee was assessed u/s 143(1) of the Act by Central Procession Centre, Bangalore (CPC) and disallowed payment of gratuity u/s 43B of the Act for Rs. 9,27,889/-.
3. Aggrieved with the above order, the assessee preferred an appeal before the Ld. CIT(A) and made detailedsubmissions which is reproduced at page 5 to 14 of the appellate order. After considering the above submissions, Ld. CIT(A) observed that the assesse has created provisions for gratuity.He observed that such provisions has made by the assesse shall not be allowed u/s 40A(7) unless such payments are made to any contribution towards approved gratuity funds orpayment of any gratuity becomes payable during previous years. After considering submissions of the assesse, he observed that the assesse has made a payment of Rs. 2,75,995/- as full and final settlement to Mr. Neelesh Singh who has left the company, further, the assesse has transferred Mr. Ajay Bhatnagar to other concern Gare Pelma III Collieries Ltd. and the relevant gratuity which was claimed to the extent of Rs. 6,51,894/- and the same amount was transferred to the above said company by passing a journal entry in its book. He observed that the amount of Rs. 6,51,894/- no doubt relates to preceding years towards accumulation for gratuity, since the employee was transferred to the other concern, above said employee no more remains with the assesse, therefore, liability in the name of above said employee who was transferred to other entity, which is in the nature of journal entry without actual payment. According to him the assesse has passed just a journal entry and adjusted the same under the head domestic debtors in its book. He observed that without making actual payment, merely passing a journal entry, the claim of the assesse does not fall under the provision 40A(7), therefore, as per provisions of section 43B of the Act the word used is paid which means actual payment or incurred according to the method of accounted adopted by the assessee. Since, there was no actual payment he sustained the addition40A(7) of the Act.
4. Aggrieved with the above order, the assessee preferred an appeal before us.
At the time of hearing, Ld. AR of the assesse brought to our notice page 29 of the paper book and brought to our notice column 10 of intimation passed u/s 143(1) of the Act wherein the above said amount was disallowed by the CPC without giving proper opportunity to the assessee. After he brought to our notice at page 43 of the paper book,he submitted that the assesse has claimed the payment of gratuity of the transferred employee Mr. Ajay Bhatnagar to another concern, as such employee and gratuity liability was transferred to the other entity. Since the assesse has transferred the above said liability to the other concern. As per books of accounts and the relevant liability was transferred with the proper debit note as per which the assesse no doubt not made the direct payment, however, the assesse has created a liability to pay to the other concern, therefore, the claim of the assesse is proper.
On the other hand, Ld. DR objected to the above submission and submitted that he relies on the findings of the lower authorities.
Considered the rival submissions and material placed on record, we observed that the assesse has incurred a certain gratuity expenditure and claimed the same in its profit and loss account. The Assessing Officer disallowed the same as its provision of gratuity which does not fall u/s 40A(7) of the Act.We observed that Ld. CIT(A) has analyzed the gratuity expenditure claimed by the assesse and he has allowed to the extent of actual payment made by the assessee to the employee Mr. Neelesh Singh, however rejected the claim related to otheremployee Mr. Ajay Bhatnagar, who was transferred to another concern. Ld. CIT(A) is of the view that mere transfer of the gratuity liability does not fall under the category of actual payment. It is only a journal entry, therefore, the assesse has not discharged the relevant payment. After considering the submissions, we are of the view that there is a liability relating to the gratuity in relation to Mr. Ajay Bhatnagar he provided the regular services to the assesse till he was transferred. The relevant employee was transferred to another concern and the relevant liability to pay gratuity which was due to the employee was also transferred to the other concern. No doubt the gratuity was not due to such transferred employee however the services of the particular employees were also utilized by the assessee, it was due to the employee, however instead of making payment to the transferred employee, the assesse has transferred the above said gratuity amount due to such employee to the other concern that being the case the liability of the assessee was discharged and accordingly, the assesse has passed the transfer entry in its books of accounts and accordingly, claimed the same as expenditure for such discharge of the liability. In the case of transfer of employee the relevant employee renders services to the new transferred entity along with the services provided by him in the old concern. The gratuity is accordingly accumulated due to continue of the services. Therefore on the part of the assesse, the assesse has to discharge its liability either to make payment directly to the relevant transferred employee or transfer