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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI JASON P. BOAZ
Date of hearing : 05.07.2018 Date of Pronouncement : 08.08.2018 O R D E R Per N.V. Vasudevan, Judicial Member
This is an appeal by the Assessee against the order of the CIT(Appeals)-1, Bangalore relating to assessment year 2012-13.
The Assessee is a company engaged in the business of manufacturing of pressed components. In the course of assessment proceedings, the A.O. noticed that the assessee has debited a sum of Rs.10,41,560/- to the Profit & Loss account towards the gratuity premium paid/payable to LIC. The A.O. was of the view that the assessee has not satisfied the conditions section 40A(7) of the Income Tax Act, 1961 (Act) in as much as the Trust created by the Assessee viz., “Associated Hydro Pressings Pvt. Ltd. Employees Gratuity Fund Trust” was not registered with the Commissioner of Income Tax and therefore the Assessee was not eligible for deduction. The fund was not approved by the CIT though an application had been made by the Assessee for grant of registration. The A.O. was of the view that as per section 40A(7) of the Act, unless the assessee makes the payment to the approved gratuity fund, the deduction is not allowable. Accordingly, the deduction claimed was not allowed by the AO.
On appeal by the Assessee, the CIT(A) confirmed the order of the AO. Before CIT(A) the Assessee submitted that it had made actual payment to LIC in the relevant Gratuity Fund for welfare of employees and the LIC would meet obligation of the Assessee to pay gratuity as and when it arises. The Assessee pointed out that Sec.40A(7) of the Act is applicable only when a provision is made and not in a case where there is actual payment. This argument was not dealt with by the CIT(A) but he confirmed the order of the AO for the reason that the fund in question was not approved by the CIT. Aggrieved by the order of the CIT(A), the Assessee has preferred the present appeal before the Tribunal.
We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The assessee created group gratuity fund/trust known as “Associated Hydro Pressings Pvt.Ltd. employees Gratuity Fund Trust”, but the same was not approved by the CIT though an application was made for grant of approval. Pending receipt of approval, the assessee had made application to LIC of India under pension and group schemes, and taken policy under Master proposal for group for payment of gratuity and is contributing sums to the LIC of India towards the group gratuity on actuarial basis. The assessee has not made any provision and made the payment before filing the return of income. The assessee gets gratuity payment from the LIC which is being paid to the employee concerned and no further deduction is being claimed by the assessee as expenditure. Thus, no double deduction is claimed.
5. The A.O. disallowed the same since the payment made to LIC of India towards group gratuity scheme is not to an approved fund as contemplated by Section 40A(7) of the Act. The argument of the assessee is that since the payments were made to LIC of India in Master policy scheme, the premiums contributed to the LIC of India is allowable deduction. The learned DR submitted that if deduction is to be allowed on the basis of actual payment, the payment to the employee towards gratuity alone can be allowed and not the payment to LIC towards Master Policy Scheme of group gratuity fund. We find that the issue is squarely covered by the decision of the ITAT, Hyderabad in the case of M/s. Sri Krishna Drugs Ltd. Vs. Department of Income-tax in for AY 2007.08 dated 11.4.2012, The Tribunal in the said case held as follows:-
“3. The second ground raised by the Revenue is as under: "The learned CIT(A) erred in holding that unrecognised gratuity fund is allowable u/s. 37(1), when the case is hit by the provisions of section 40A(9) and especially when the assessee failed to comply with the provisions of section 36(1)(v)."
4. After hearing both the sides, we find this issue is covered in favour of the assessee and against the Revenue in in assessee's own case for A.Y. 2006-07 order dated 16.12.2011 wherein this Tribunal held as follows:-
"3. After hearing both the parties, we are of the opinion that similar issue came up for consideration in assessee's own case for assessment year 2002-03 in I.T.A. No. 349/Hyd/2006. The Tribunal decided the issue in favour of the assessee vide its order dated :15.2.2008 by holding as follows: "4. We have considered rival submissions on either side and also perused the material available on record. Admittedly, the Group Gratuity Scheme was not recognised by the Commissioner of Income-tax. This fact is not in dispute. We have carefully gone through the provisions of sec. 36(1)(v) of the Income- tax Ac. Sec. 36(1)(v) reads as follows: "36. (1) The deductions provided for in the following clauses shall be allow d in respect of the matters dealt with therein, in computing the income referred to in section 28 – (v) any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust". We have also carefully gone through the provisions of sec. 37 of the Income-tax Act. Sec. 37 provides for deduction of expenditure not being in the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenditure of the assessee, but laid out and expended wholly and exclusively for the purposes of the business or profession, while computing income chargeable to tax. The main contention of the Revenue is that under sec. 36(1)(v), the payment made by the assessee as employer could be allowed only in respect of approved gratuity fund. Since the Group Gratuity Scheme is not approved by the CIT, according to the Revenue, it cannot be allowed. However, the contention of the assessee is that in view of the judgement of the Madras High Court in the case of Premier Spinning Mills Ltd. (supra) and the judgement of the jurisdictional High Court in the case of Warner Hindustan Ltd. (supra), it has to be allowed.”
We have carefully gone through the judgement of the jurisdictional High Court in the case of Warner Hindustan Ltd. (supra). In the case before the jurisdictional High Court, the Provident Fund was not approved by the CIT. The Andhra Pradesh High Court after referring to the judgement of the Bombay High Court in Tata Iron & Steel Co. Ltd. v. D. V. Bapat, ITO (1975) 101 ITR 292, and the judgement of the Supreme Court in Metal Box Company of India Ltd. vs. The Workmen (1969) 73 ITR 53, held that the amount paid towards an unapproved gratuity fund can be deducted under sec. 37 of the I.T. Act, though not under sec. 36(1)(v). In view of this judgment of the jurisdictional High Court, in our opinion, even if any payment is made to an unapproved gratuity fund, it has to be allowed under sec.
By respectfully following the binding judgement of Andhra Pradesh High Court in the case of warner Hindustan Ltd. (supra), we uphold the order of the CIT(A).”
The provisions of Sec.40A(7) of the Act will not apply in the present case because what is claimed as a deduction is not provision made in the books of account but was actual payment. The provisions of Sec.40A(7) of the Act will apply only when a provision is made in the books of accounts on account of liability towards payment of gratuity. This argument of the Assessee has not been dealt with by the CIT(A) in his order.
Besides the above, the Hon’ble Karnataka High Court in the case of Chief Commissioner (Admn.) and another Vs. Karnataka Electricity Board 197 ITR 48 (Karn.) and ADIT Vs. Karnataka State Warehousing Corporation 125 ITR 136 (Karn.) has also taken a view that actual payment to gratuity fund of employees is allowable as deduction u/s.37(1) of the Act. The ITAT Bangalore Bench in the case of M/s. Bilagi Pattana Sahakari Vs. CIT in order dated 15.5.2013 has also taken a similar view.
In view of the aforesaid decisions, we are of the view that the deduction claimed by the Assessee should be allowed. We direct accordingly and allow the appeal of the Assessee.
In the result, the appeal by the assessee is allowed.
Pronounced in the open court on this 08th day of August, 2018.