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Facts
The Revenue appealed against the CIT(A)'s order deleting the disallowance of provisions for gratuity and leave encashment. The assessee, a charitable trust, claimed exemption under Section 11 of the Income-tax Act, 1961. The Assessing Officer disallowed the provisions as not being actual expenditure but contingent liabilities.
Held
The Tribunal held that provisions for gratuity and leave encashment, made based on actuarial valuation and in compliance with statutory and employment obligations, constitute application of income for the trust's objects. The meaning of 'applied' in Section 11 is not limited to 'actually spent' but includes necessary statutory provisions. The disallowance made by the AO was therefore incorrect.
Key Issues
Whether provisions for gratuity and leave encashment constitute application of income for charitable objects under Section 11, and whether such provisions can be disallowed if not an actual outflow of cash.
Sections Cited
143(3), 11, 12, 12A
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Income Tax Appellate Tribunal, ‘A’ BENCH
आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the Revenue against the order dated 17/03/2025 passed by the learned CIT(A)-47, Mumbai, for the quantum of assessment framed under section 143(3) of the Income-tax Act, 1961, for the Assessment Year 2015-16.
Anandilal and Ganesh Podar Society 2. In the grounds of appeal
, the Revenue has raised the following grounds: (i) Whether on the facts and in the circumstances of the case, the learned CIT(A) erred in deleting the disallowance of provisions for gratuity and leave encashment, without appreciating that such provisions do not constitute “utilization of funds” under sections 11 and 12 of the Act? (ii) Whether on the facts and in the circumstances of the case, the learned CIT(A) erred in deleting the disallowance of provisions for gratuity and leave encashment, without considering that such allowances are deductible only on actual payment within the prescribed due date, as held by the Hon’ble Supreme Court in Union of India & Ors. vs. Exide Industries Ltd. and others?
3. The brief facts are that the assessee is a charitable trust registered under section 12A of the Act and is engaged solely in educational activities, running schools under the name of Podar International School, Lilavati Podar High School, R.N. Podar School, etc. The assessee had e-filed its return of income for Assessment Year 2015-16 on 21.09.2015 declaring total income at Nil and claiming exemption under section 11 of the Act. During the course of assessment proceedings, the Assessing Officer noted that the assessee had made provisions on account of leave encashment and gratuity, which had increased to Rs. 3,34,50,281 and Rs. 5,75,87,027 respectively from the opening provisions of Rs. 1,46,84,315 and Rs. 4,60,78,354. The differential provisions of Rs.
Anandilal and Ganesh Podar Society 1,87,65,966 towards leave encashment and Rs. 1,15,08,673 towards gratuity, aggregating to Rs. 3,02,74,639, were treated by the Assessing Officer as mere provisions in the nature of contingent liabilities and not as actual expenditure or utilization of income for the objects of the trust. Accordingly, the said amount was disallowed from the expenditure claimed as application of income under section 11.
Before the learned CIT(A), the assessee submitted that the provisions had been made in accordance with consistent accounting practices and in compliance with Accounting Standard 15 issued by the Institute of Chartered Accountants of India, based on statutory provisions and the terms of employment governing post-retirement benefits of employees. It was submitted that as per the Leave Policy, employees were entitled to encash earned leave subject to conditions, and as per the Payment of Gratuity Act, 1972, the assessee trust was statutorily obligated to pay gratuity to employees completing five years of service. The liability in respect of both leave encashment and gratuity had already crystallized as on 31st March 2015, and the quantification thereof was based on actuarial valuation as mandated by Accounting Standard 15. It was further submitted that similar disallowances had been made in earlier years in the assessee’s own case, which had been deleted by the Tribunal, and that the issue stood squarely covered in favour of the assessee.
The learned CIT(A), after considering the submissions and examining the judicial precedents in the assessee’s own case for earlier years, deleted the disallowance. The learned Anandilal and Ganesh Podar Society CIT(A) observed that the provisions represented accrued and crystallized liabilities incurred in the course of carrying out the objects of the trust, that they were mandated by law and accounting standards, and that without making such provisions the books of account would not reflect a true and fair view of the financial position of the trust. The learned CIT(A) further relied upon the decisions of the co-ordinate Benches of the Tribunal in the assessee’s own case for Assessment Years 2014-15 and 2012-13 and connected years, wherein identical disallowances had been deleted.
We have heard the rival submissions and perused the material placed on record. At the outset, it is pertinent to note that the solitary issue raised by the Revenue in the present appeal, namely, the allowability of provision for gratuity and leave encashment as application of income in the hands of a charitable trust registered under section 12A and claiming exemption under section 11, is no longer res integra. The learned counsel for the assessee as well as the learned Senior Departmental Representative have fairly admitted that the controversy stands squarely covered by a series of decisions rendered by the co-ordinate Benches of this Tribunal in the assessee’s own case for the earlier assessment years, on identical facts and on the same point of law. The learned CIT(A), while granting relief to the assessee, has exhaustively referred to and relied upon those binding precedents, including the decision of the Tribunal for Assessment Year 2014-15 in dated 03.08.2021 and the subsequent decision for Assessment Year 2012-13 and Anandilal and Ganesh Podar Society connected years, wherein the Tribunal has consistently held that provision for gratuity and leave encashment, made on the basis of actuarial valuation in accordance with Accounting Standard 15 and in compliance with statutory and employment obligations, constitutes application of income for the objects of the trust and cannot be disallowed merely on the ground that there is no immediate cash outflow.
The co-ordinate Bench, while adjudicating the issue in the assessee’s own case, has categorically observed that such provisions are mandated by law, that the liability has already crystallized as on the balance sheet date, and that without making such provisions the books of account would not present a true and fair view of the state of affairs. The Tribunal has further drawn a clear and cogent analogy with depreciation, observing that although depreciation is also a book entry without actual flow of funds, it is nonetheless required to be provided for to reflect the correct profits of the entity. It has been held that in the context of section 11, the expression “applied” cannot be construed in a narrow sense as “actually spent” alone, but must be understood in its commercial sense to include necessary statutory provisions representing accrued and crystallized liabilities incurred in the course of carrying out the objects of the trust. In that view of the matter, the Tribunal had directed the Assessing Officer to allow the provision for gratuity and leave encashment as application of income for the objects of the trust and had dismissed the grounds raised by the Revenue on this issue.
Considered the rival submissions and material on record. We are 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 assumption that the expenditure should necessarily involve actual 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. 14 If depreciation is not provided for, the books will not contain a true 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.
Anandilal and Ganesh Podar Society Without being such provisions made, the balance sheet will not presen a true and fair view of the state of affairs.
In CIT v. Indian Jute Mills Association [1982] 134 ITR 68 t Calcutta High Court while constructing the expression 'expenditure 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 '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.
17. Coming to the additional ground of appeal raised by the assessee, 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.
18. The Id. AR submitted that there was excess of expenditure over 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 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."
19. It was held that.
"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 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 ie., in favour of the assessee and against the Department."
Anandilal and Ganesh Podar Society 20 We find the facts of the present case is identical to the facts of the 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 Industria Development Corporation (MIDC) (ITA No 2652 of 2011). Therefore respectfully following the decision of jurisdictional High Court an Hon'ble Supreme Court, the present additional ground raised by t assessee is allowed. Since, we have deleted the disallowance made AO In respect of provision for gratuity and leave encashment, assessed deficit will increase to 2,91,79,405/- and thus, we direct AO to allow the carry forward of the deficit amount of 2,91,79,405 to subsequent assessment years. Thus, the additional ground raised by the assessee is allowed.”
8. Respectfully following the aforesaid binding precedents of the co-ordinate Benches of this Tribunal in the assessee’s own case, which have been rendered on identical facts and on the same legal issue, and there being no material brought on record by the Revenue to demonstrate any distinguishing feature in the present year or any change either in the factual matrix or in the statutory position, we find no infirmity whatsoever in the order passed by the learned CIT(A). The learned CIT(A) has rightly applied the settled principles and has correctly deleted the disallowance made by the Assessing Officer on account of provision for gratuity and leave encashment.
9. In view of the foregoing discussion, and in respectful adherence to the rule of judicial consistency and the doctrine of precedent, we hold that the issue is squarely covered in favour of the assessee by the earlier decisions of this Tribunal Anandilal and Ganesh Podar Society in the assessee’s own case. Consequently, the order of the learned CIT(A) is affirmed and the grounds raised by the Revenue are dismissed.
10. In the result, the appeal filed by the Revenue stands dismissed.
Order pronounced on 27th January, 2026.
Sd/- Sd/- (MAKARAND VASANT (AMIT SHUKLA) MAHADEOKAR) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 27/01/2026 KARUNA, sr.ps Copy of the Order forwarded to :