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Income Tax Appellate Tribunal, AHMEDABAD ‘D’ BENCH, AHMEDABAD
Per Pramod Kumar AM: This appeal challenges order dated 14th February 2014, passed by the learned 1. CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2010-11, on the following grounds: -
“1. The learned AO and the learned CIT (Appeals) have erred in disallowing contribution to gratuity fund of Rs.5,63,235/- holding that the gratuity fund was not approved on the date of contribution, not appreciating that the approval was in process and hence, the contribution was allowable as a deduction. 2. Without prejudice to the above and if it is held that the same is not allowable u/s 36(1)(v), it is respectfully submitted and claimed that the same be allowed u/s 37 of the Act as business expenditure.”
The issue in appeal lies in a very narrow compass of material facts. During the relevant previous year, the assessee had set up an employees’ gratuity fund, by the name of Prakash Software Solutions Pvt Ltd Employees Group Gratuity Scheme for administering a scheme, which was named as Prakash Software Solutions Pvt Ltd Employees Group Gratuity-cum- Life Assurance Scheme, in collaboration with the Life
ITA No. 1390/Ahd/2014 M/s. Prakash Software Solution Pvt Ltd vs. ITO A.Y. 2010-11 Page 2 of 7 Insurance Corporation of India. This trust was set up on 1st January 2010 and was effective from 1st January 2010. On 03.03.2010, an initial payment of Rs.5,63,235, as premium under this scheme for the period of one year commencing from 1st January 2010, to Pension and Group Schemes Department of the Life Insurance Corporation of India. As the payment was made on behalf of the gratuity fund, this premium paid to the LIC was treated as contribution to the said gratuity fund. The gratuity fund had also applied, vide letter dated 31st March 2010, on 07.04.2010, for approval of the said fund by the Commissioner of Income Tax under rule 2(1) of Part C to the Third Schedule to the Income-tax Act, 1961. It was in this backdrop a deduction of Rs.5,63,235 was made for contribution towards approved gratuity fund. However, this claim was declined by the Assessing Officer on the ground that “the assessee has applied for the approval of gratuity fund, after making payment to Gratuity Fund” and that “hence, as per provisions of Section 36(1)(v), the said contribution to the gratuity fund is not eligible for deduction”. The Assessing Officer also noted that “the assessee has not received any approval from the statutory authority for its gratuity fund till date”. Aggrieved by denial of this deduction of Rs.5,95,485, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A), inter alia, observed that “at the time of making of contribution, the appellant had not filed any application for approval of gratuity fund, and hence the disallowance made by the Assessing Officer is correct”. The assessee is not satisfied and is in further appeal before us. 3. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of applicable legal position. 4. It is important to note that in the meantime, the Commissioner of Income Tax has granted approval to the gratuity fund, vide order dated 11th February 2014, but the approval is granted with effect from 7th April 2010, which, as is evident from the facts set out above, effective from the date on which application was made for approval of the trust – rather than the date on which the trust was created. The approval of the gratuity fund set up by the assessee appellant is thus no longer an issue; the short issue for our consideration, in our considered view, is that when an approval is granted effective subsequent to the date of setting up of a gratuity fund, whether the earlier contributions made to such a trust can be allowed as a deduction, or whether, as we put it to the parties during the course of hearing, it is at all open to the Commissioner to restrict the approval, on the facts of this case, as effective from a date later than the date on which the trust was actually set up and commenced its operations. Learned counsel has an alternative plea as well. He submits that since the expenditure incurred is admittedly in the course of, and in legitimate furtherance of its legitimate business interests, and is not expressed forbidden by any law, it should be allowed as a deduction under section 37. Learned Departmental Representative, of course, has a very different way of looking at things. He firmly believes, and that’s what he emphatically argues before us, is that all that is required to be seen is the situation prevailing as on the point of time when assessee made the contribution to the fund, and since, beyond any dispute or controversy, that contribution was made to a gratuity fund, which was not approved at the relevant point of time, the assessee was clearly hit by the disabling provisions under section 36(1)(v) which categorically provides that only such contribution to the approved gratuity funds, created by the assessee for the exclusive benefits of its employees, are permissible as deduction as are approved. Once it is not in dispute that the gratuity fund
ITA No. 1390/Ahd/2014 M/s. Prakash Software Solution Pvt Ltd vs. ITO A.Y. 2010-11 Page 3 of 7 in question was not an approved gratuity fund at the relevant point of time, according to the learned Departmental Representative, it is end of the road so far as deductibility of the contribution to such a gratuity fund is concerned. The law, according to the learned Departmental Representative, is unambiguous, clear and does not need any creative interpretation contrary to the plain words of the law.
So far as the contribution to the approved gratuity funds are concerned, section 36(1)(v) categorically provides that, in computation of profits and gains from business and profession, deduction shall be allowed in respect of “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”. Section 2(5) defines “approved gratuity fund” as “a gratuity fund which has been, and continues to be, approved by the Principal Chief Commissioner, Chief Commissioner, Principal Commissioner or Commissioner of Income Tax in accordance with the rules contained in Part C of Third Schedule to the Income Tax Act”. Rule 3 of Part C of Third Schedule deals with the conditions for the approval, which, for ready reference, are reproduced below:
“Conditions for approval. 3. In order that a gratuity fund may receive and retain approval, it shall satisfy the conditions set out below and any other conditions which the Board may, by rules, prescribe— (a) the fund shall be a fund established under an irrevocable trust in connection with a trade or undertaking carried on in India, and not less than ninety per cent of the employees shall be employed in India ; (b) the fund shall have for its sole purpose the provision of a gratuity to employees in the trade or undertaking on their retirement at or after a specified age or on their becoming incapacitated prior to such retirement or on termination of their employment after a minimum period of service specified in the rules of the fund or to the widows, children or dependants of such employees on their death; (c) the employer in the trade or undertaking shall be a contributor to the fund ; and (d) all benefits granted by the fund shall be payable only in India.”
There is no dispute that these conditions are satisfied in the present case, and that is the reason as to why the approval is granted by the Commissioner. The dispute is confined to the question as to the date from which the approval must be deemed to have taken effect. No doubt, rule 2(2) provides that the Commissioner shall “communicate, in writing to the trustees of the fund the grant of such approval with the date from which the approval is to take effect and where the approval is granted subject to conditions, those conditions”. While these provisions do not offer any guidance about the date from which the approval is to be granted, there is some hint about the guiding principles governing the date from which the withdrawal of approval is to take effect under rule 4(2) by specifically providing that “if any alteration
ITA No. 1390/Ahd/2014 M/s. Prakash Software Solution Pvt Ltd vs. ITO A.Y. 2010-11 Page 4 of 7 in the rules, constitution, objects or conditions of the fund is made at any point of time after the date of application for approval……..any approval given shall, unless the Principal Chief Commissioner, Chief Commissioner, Principal Commissioner or Commissioner otherwise orders, be deemed to have been withdrawn from the date on which the alteration took effect”. Quite clearly, it is the point of time when content of the rules, constitution, objects or conditions of the fund, or alteration thereto, are made which is relevant for the purpose of withdrawing, and as a corollary thereto, granting the approval to the gratuity fund. That approach is quite justified on the first principles as well. It cannot even be seriously argued by anyone that underlying principles for withdrawal of vis-à-vis grant of approval can be different. The thrust and the underlying principle on which the date of approval of the trust and the withdrawal of such an approval is based is thus clear, unambiguous and beyond controversy. The powers vested in the Commissioner of “communicating the date in which the approval is to take effect”, under rule 2(2) of Part C of Third Schedule to the Income Tax Act, are required to be viewed in this context. Such a power can rationally be exercised only with reference to the date on which the fund was created or on which the alteration in the rules, constitution, objects or conditions of the fund was made so as to bring the same in conformity with the requirements of rule 3 set out earlier in this order. Learned Departmental Representative’s suggestion that it is exclusive domain of discretion of the Commissioner to set out the date from which approval is to take effect, on such reasonable basis as he deems fit, is not sustainable in law in the light of well settled legal position that when a public authority has the powers to do something, he has a corresponding duty to exercise such powers when circumstances so justify or warrant. There is no dispute that the Commissioner has the powers to decide the date from which the approval is to take effect. As a corollary to this power, the Commissioner has the duty to do exercise this power as the circumstances so justify and warrant, by making eligible for deduction of contribution to a gratuity fund set up in accordance with the requirements of Part C of Third Schedule to the Income Tax Act, and to prevent unjustified hardship to the assessee. As observed by a coordinate bench in the case of Sabnis Ashok Anant Vs ACIT [(2008) 117 TTJ 96 (Pune)], “An Assessing Officer, as indeed any other authority in the Income Tax Act, cannot turn to the assessee and say that although he has authority to do something for the good of the assessee, it is not necessary that he must exercise that authority”. Once a statutory authority has the power to do something for a public good and when circumstances so justify and warrant, he has to essentially exercise such powers in accordance with the scheme of law. The statutory powers are exercised on the basis of sound conceptual justifications and not whims or fancies.
Having observed so, we may also mention that quite interestingly, under rule 8(1), while the trustees may appeal against the approval being declined or approved being withdrawn, there is no appellate remedy against the date from which the approval is to take effect, even though, as evident from the facts of this case, serious prejudice may be caused to the assessee employer on account of grant of approval with effect from a date later than the date on which the trust is created. To quote the oft quoted words of Lord Justice Denning in the case of Seaford Court Estates Ltd. vs. Asher (1949) 2 All ER 155 at p. 164 : "......when a defect appears, a Judge cannot simply fold his hands and blame the draftsmanship. He must set out to work on the constructive task of finding the intention of Parliament..... and then he must
ITA No. 1390/Ahd/2014 M/s. Prakash Software Solution Pvt Ltd vs. ITO A.Y. 2010-11 Page 5 of 7 supplement the written word so as to give "force and life" to the intent of legislature...... A Judge should ask himself the question how, if the makers of the Act had themselves came across this ruck in the texture of it they would have straightened it out? He must do as they would have done. A Judge must not alter the material of which the Act is woven, but he can and should iron out the creases." In many cases, embarking upon such a voyage to discover the legislative intent may not really be workable for a variety of reasons but given the fact that it is a non-appealable decision of the Commissioner and it is not only contrary to the scheme of the Act but is causing wholly unjust prejudice to the taxpayer, we have, on these facts, no hesitation in holding that the date on which approval is to take effect can only be the date on which fund is created or the date on which the terms of funds are altered to meet the requirements of rule 3- which does not apply to this fact situation. One can understand that such a denial of deduction for contribution to the gratuity fund to the employer assessee is inevitable, and is on account of the lapses of trustees, when terms and conditions of the gratuity fund are altered, to meet the requirements of Part C to Third Schedule to the Income Tax Act, and such situation fully justify the approval being granted effective from the date on which the conditions are so altered. In our humble understanding, it is mainly this eventuality which justifies the date of approval being later than the date on which the fund is created. In a situation in which the terms and conditions of the fund, established under the irrevocable trust, are the same as the terms and conditions on the basis of which such a fund was set up, there cannot be, in our humble understanding, any justification for the effective date of approval being a date later than the date on which the said fund was set up. In any case, no such justification has been set out in the order nor made out by the learned Departmental Representative. 8. As for the contention that it is the date of application which is the only relevant date for giving effect to the approval, such a contention is only fit to be noted and rejected. Inherently, an approval for a fund which is already set up is in the nature of post facto approval and it relates back to the date on which it is set up in accordance with the scheme of the law. This legal position is accepted under the scheme of the Income Tax Act itself adequate demonstrates it. It is in this context that we may take note of the first proviso to Section 12AA(2) which is as follows:
“(2) Where an application has been made on or after the 1st day of June, 2007, the provisions of sections 11 and 12 shall apply in relation to the income of such trust or institution from the assessment year immediately following the financial year in which such application is made: Provided that where registration has been granted to the trust or institution under section 12AA, then, the provisions of sections 11 and 12 shall apply in respect of any income derived from property held under trust of any assessment year preceding the aforesaid assessment year, for which assessment proceedings are pending before the Assessing Officer as on the date of such registration and the objects and activities of such trust or institution remain the same for such preceding assessment year:”
ITA No. 1390/Ahd/2014 M/s. Prakash Software Solution Pvt Ltd vs. ITO A.Y. 2010-11 Page 6 of 7
Clearly, the grant of approval under section 12AA not only applies to the current assessment year but also in respect of preceding assessment years, in respect of which assessment proceedings are pending, as long as the material factors qualifying for such registration remain the same for such preceding assessment year. Undoubtedly, the provisions of Section 12AA have no application in this case, but what is relevant is the approach adopted by the statute itself which is contrary to the stand of the Departmental Representative. That is also the approach adopted by a series of binding judicial precedents granting deduction on the basis of approvals granted subsequent to the claim being made. As a matter of fact, this aspect of the matter is by and large well settled in law, and, there are a large number of judicial precedents, in favour of the assessee, on this point. In the case of CIT Vs Jaipur Grameen Bank [(2016) 388 ITR 228 (Raj)], for example, Hon’ble Rajasthan High Court has observed that “Once the assessee fulfils the condition laid down for approval having created a trust with Life Insurance Corporation of India, and it is not the case of the Revenue that the assessee has not deposited money in terms of creation of the trust, therefore, in our view of the Tribunal on such facts is well justified in holding that the claim is just, proper and allowable. A just and reasonable claim is to be allowed”. In effect thus the payment on a date prior to the date of approval does not come in the way of deduction being allowed. As a matter of fact, even going by the approval itself, the date from which the approval is effective is prior to the date of approval. The argument of the learned Departmental Representative is this contrary to the stand taken in the approval itself. 10. For the detailed reasons set out above, we are of the considered view that notwithstanding the effective date of approval set out by the Commissioner in his approval order, the approval granted to the employees’ gratuity trust must be treated as effective from 1st January 2010, and, on that basis, the contribution made by the assessee to the said trust must be held to be admissible as deduction under section 36(1)(v). The assessee thus succeeds in the appeal. As we have decided the appeal on this short issue, the other issues raised by the assessee are wholly academic and do not call for our adjudication. We may, however, add that the alternate plea of the learned counsel which was so emphatically argued before us, is anyway only fit to be noted and rejected since, as clearly provided by Section 37(1) itself, only such expenses can be considered for deduction under section 37(1) which are not “expenditure of the nature described in sections 30 to 36”. Once the provisions of contribution to gratuity fund are specifically covered by Section 36(1)(v), as is the admitted position on the facts of the case, section 37(1) can obviously not have any application.
In the result, the appeal is allowed in the terms indicated above. Order pronounced in the open Court on this 15th of November, 2017.
Sd/- Sd/-
Mahavir Prasad Pramod Kumar (Judicial Member) (Accountant Member) Ahmedabad, the 15th day of November, 2017 **bt*
ITA No. 1390/Ahd/2014 M/s. Prakash Software Solution Pvt Ltd vs. ITO A.Y. 2010-11 Page 7 of 7
Copies to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File By order TRUE COPY Assistant Registrar Income Tax Appellate Tribunal Ahmedabad benches, Ahmedabad
Date of taking dictation: ....Two pages manuscript of Hon’ble AM are attached with this case file...- 13.11.2017...................... 2. Date of typing & draft order placed before the Dictating Member: .15.11.2017......................... 3. Date on which the approved draft comes to the Sr. P.S./P.S.: .... 15.11.2017... 4. Dt. on which the fair order is placed before the Dictating Member for Pronouncement: 15.11.2017.............. 5. Date on which the file goes to the Bench Clerk: ... 16.11.2017........................ 6. Date on which the file goes to the Head Clerk: ..…………………... 7. The dt. on which the file goes to the Astt. Registrar for signature on the order: ......................... 8. Date of despatch of the Order: .........................