ACIT (E), NEW DELHI vs. M/S GOODEARTH FOUNDATION, NEW DELHI

Brief facts of the case are that the assessee is a society established with the object of setting up or acquiring and running an institution or institutions for 2 education for the benefit of the public. It is registered u/s 12A of the Act by order dated 17.6.2004 and was also approved u/s 80G by order dated 15.7.2009 valid from the Asstt. Year 2010-11 to 2012-13 and it was validated by order dated 6.8.2012 from Asstt. Year 2013-14 till it is rescinded.

For the Asstt. Year 2012-13, they have filed their return of income on 28.9.2012 declaring nil income. Learned AO observed that the assessee had claimed the provisions for gratuity and leave encashment to the tune of Rs.54,40,053/- in the application of income. According to the learned AO, Section 11 of the Act allows the application of money which is applied during the year and assessee is not allowed to make provisions which can’t be ascertained without their actual payment. Learned AO further observed that the commercial sense applies in case of charitable institutions as business principles are not applicable; whereas provisions of gratuity and leave encashment are not allowed as per Section 43B of the Act. On this premise, learned AO disallowed the provisions of gratuity and leave encashment to the tune of Rs.54,40,053/- and added it back to the income of the assessee.

Aggrieved by such an addition, assessee preferred an appeal before the learned CIT(A). It was submitted by the assessee before the learned CIT(A) that the provisions for gratuity and leave encashment represents the liabilities accrued during the year in respect of employees working in the schools being run by the assessee and it is mandatory to make provisions for all the retirement benefits in the accounts as per the generally accepted accounting principles (Indian GAAP), so that income and expenditure account can disclose true and fair surplus for the year. Assessee further submitted that the provision for gratuity and leave encashment was quantified on scientific basis year to year and in the earlier years also, it was done and was accepted by the department as application of income.

3 5. Assessee further submitted before the learned CIT(A) that the provisions u/s 28 to 44 relating to computation of business income are not applicable to the assessee and in view of Circular No.5.P(LXX-6)/1968 dated 19th June 1968 issued by CBDT, the income should be understood in its commercial sense i.e. the book income. Assessee placed reliance on the decisions of the Hon’ble Apex court in the case of Bharat Earth Movers Ltd. Vs CIT, 245 ITR 428 for the principle that under the mercantile system of accounting, provisions for leave encashment is an allowable deduction in the year of accrual. Further, reliance was placed on the decision of the Hon’ble Apex Court in the case of CIT vs Garware Synthetics Bristles, 205 ITR 426 for the principle that the provision made for payment of gratuity to employees is also an allowable deduction under the mercantile system of accounting.

Learned CIT(A) considered the submissions of the assessee in the light of the case law and also the circular of the CBDT. He accepted the contention of the assessee that the provisions of Section 43B have no application to the case of the assessee as the income of assessee is not computed under the head “business income” and the income of the assessee was computed on commercial principles u/s 11 of the Act. He further recorded that a similar question had arisen in the earlier years also, namely, Asstt. Years 2009-10 and 2010-11 and the issue were decided in favour of the assessee by the first appellate authority. Following the rule of consistency as approved in the decision of the Hon’ble Apex court in the case of Radhasoami Satsang vs. CIT 193 ITR 321 (SC), learned CIT(A) allowed the appeal and directed the deletion of the addition.

Challenging the finding of the learned CIT(A), revenue is in this appeal before us stating that the learned CIT(A) erred in granting relief to the assessee on 4 the provisions of leave encashment and gratuity as deductions on account of these provisions are not allowable under Chapter IV of the Act.

Learned DR submitted that any provision whatever name it is called is not allowable as expenditure unless it is crystallized and in this matter; and that the assessee had not made any payment during the year but made a provision for gratuity and leave encashment to the tune of Rs.54,40,053/-. Learned DR heavily relied upon the order of assessment and the observations of the learned AO to the effect that Section 11 of the Act allows application of the money which is applied during the year and inasmuch as the assessee has not made the actual payment, they cannot be allowed to make provision which cannot be ascertained with reference to the payment.

None appeared for the assessee. We have gone through the record. It cannot be denied that Section 43B of the Act has no application to the facts of the present case inasmuch as the case of the assessee has to be computed on commercial principles u/s 11 of the Act whereas provisions of Section 43B applicable only when the income has to be computed under the head “Business Income”.

There is nothing contrary to the submission of the assessee before the learned CIT(A) that the provision for gratuity and leave encashment was quantified on scientific basis year to year and in the earlier years, it was accepted as application of income. Learned CIT(A) followed the decision on this issue in respect of the earlier years, namely, AYs 2009-10 and 2010-11. Rule of consistency demands that a diametric opposite view cannot be taken in a particular year deviating from the consistent view taken in earlier years. The decision of the Hon’ble Apex court in the case of Radhasoami Satsang (supra), equally binds this 5 Tribunal also. We, therefore, in this set of facts and circumstances, while respectfully following the decision of the Hon’ble Apex court in the case of Radhasoami Satsang (supra), hold that a scientific and quantified provision for gratuity and leave encashment as amended by the Indian Government cannot be disallowed by the AO in this year. We accordingly find the impugned order justified and it does not warrant any interference.

In the result, appeal of the revenue is dismissed. Order pronounced in the Open Court on 29th November, 2018. Sd/- sd/- (PRASHANT MAHARISHI) (K. NARASIMHA CHARY) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 29th November, 2018 VJ Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI 6 Draft dictated on 27.11.2018 Draft placed before author 28.11.2018 Draft proposed & placed before the second member Draft discussed/approved by Second Member. Approved Draft comes to the Sr.PS/PS Kept for pronouncement on Date of uploading order on the website File sent to the Bench Clerk Date on which file goes to the AR Date on which file goes to the Head Clerk. Date of dispatch of Order.