2014 (4) TMI 248 - HC - Income Tax

Court disallows company's deduction for employee service weightage provision, not qualifying as fund

The court disallowed the deduction claimed by the company for a provision made for service weightage of employees, ruling that it did not qualify as a ... Allowability of deduction u/s 40A(9) r.w.s 40A(7) - Provision for gratuity or not - Provision for service weightage of employees at the time of retirement - Revenue contended that it was neither a gratuity nor a payment made to any welfare fund and would constitute only a provision - setting up or formation of, or as a contribution to, any fund, trust etc. - Held that:- The expression 'fund' denotes the particular category/head and the expression 'payment' is explained on cash payment or debiting to the head of account, which is in contradistinction to actual method of payment - In either case, be it cash or debiting for the account, the crediting has to be to the particular head - in order to be a fund, apart from systematic accumulation of cash, there must be an identified earmarked head, which would represent the liability that the company has to meet and that a mere provision made in the accounts for an ascertained liability, per se without any identifiable setting apart for the particular purpose, cannot constitute a fund. Even if there be an actuarial valuation, the charging of the profit as by way of a provision made, no doubt, satisfies the requirement on the declaration of a dividend, but then, the actuarial valuation charged on the profits must find its place in the form of a creation of a separate fund identified for such purpose with systematic accumulation - The sum of money set apart to meet the scheme has to be there visibly without any probability further, either into the balance sheet entries/or the Profit and Loss account, to call it as a fund. The scheme is not a recognised one, but one reached as per the agreement between the parties - It is not denied by the assessee that a provision was made in the accounts as regards the gratuity payable based on the service weightage - Being a provision made for payment of gratuity to the employees on the retirement or termination of their employment, the claim stands clearly hit by Section 40A(7)(a) of the Income Tax Act. What was created was only a provision in the books of accounts, hence, not a fund or a contribution to a fund to be considered u/s 40A(9) of the Act - the only other provision, which would hit the claim of the assessee herein would be Section 40A(7) of the Income Tax Act - the assessee's claim for deduction is hit by Section 40A(7) of the Act - The provision had been in the statute book with effect from 01.04.1973, inserted by Finance Act 1975, subsequently substituted by Finance Act, 1999, with effect from 1.4.2000 - The provision as is relevant to the assessment year is one what prevailed prior to the substitution by Finance Act, 1999, effective from 1.4.2000. Even though the assessee succeeds on the applicability of Section 40A(9) of the Income Tax Act, the case of the assessee fails in view of Section 40A(7) of the Income Tax Act – thus, the order of the Tribunal is set aside – Decided in favour of Revenue. Power of High Court to decide an issue which was not formulated - Held that:- provisions of section 260A would not take take away or abridge the power of the Court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is satisfied that the case involves such question. - the grounds taken by itself automatically cannot stand in the way of this Court considering the legal issue on the claim of deduction on the provision made by the assessee as to whether it would be covered by Section 40A(9) or under any other provisions of the Act, which includes Section 40A(7) too. - Decision in the case of Commissioner of Income -Tax V. Mastex Ltd. [2013 (3) TMI 309 - SUPREME COURT] relied upon - Decided in favor of revenue. Issues Involved:1. Allowability of deduction for provision for service weightage of employees.2. Nature of the service weightage provision as contingent liability.3. Applicability of Section 40A(9) of the Income Tax Act.4. Applicability of Section 40A(10) of the Income Tax Act.5. Applicability of Section 40A(7) of the Income Tax Act.Detailed Analysis:1. Allowability of Deduction for Provision for Service Weightage of Employees:The assessee, a company, claimed a deduction for a provision made for retirement benefits based on service weightage of employees. The provision was based on an actuarial valuation, which the assessee argued was a scientific method of determining liability, thus making it an allowable deduction.2. Nature of the Service Weightage Provision as Contingent Liability:The Assessing Officer disallowed the deduction, viewing the service weightage as neither a gratuity nor a payment to any welfare fund, and merely a provision, hence not allowable. The Commissioner of Income Tax (Appeals) allowed the appeal, considering the provision was based on actuarial valuation and not a contingent liability. The Tribunal affirmed this view, leading to the Revenue's appeal.3. Applicability of Section 40A(9) of the Income Tax Act:The Revenue contended that the Tribunal failed to consider the applicability of Section 40A(9), which prohibits deductions for contributions to any fund, trust, etc., except for certain specified funds. The Revenue argued that the provision made for service weightage was a contribution to a fund and hence disallowed under Section 40A(9).Court's Analysis:The court examined the meaning of 'contribution' and 'fund' and concluded that a mere provision in the accounts does not constitute a fund. The court referenced the Supreme Court's decision in Commissioner of Income Tax (Appeals) V. Duncan Brothers & Co. Ltd., which distinguished between a provision and a fund. The court held that without a specific head indicating the purpose, a mere provision does not satisfy the requirements of Section 40A(9).4. Applicability of Section 40A(10) of the Income Tax Act:The Revenue also argued that Section 40A(10) should be considered, which is an exception to Section 40A(9). However, the court found that the Tribunal's decision was not hit by Section 40A(9) and thus did not need to delve into Section 40A(10).5. Applicability of Section 40A(7) of the Income Tax Act:The court considered whether the provision for service weightage could be treated as a gratuity under Section 40A(7), which disallows any provision for payment of gratuity except for contributions to an approved gratuity fund or actual gratuity payable during the previous year.Court's Analysis:The court noted that the service weightage scheme was akin to gratuity, as it provided a monetary benefit based on the length of service, payable at retirement or termination. The court held that the provision made by the assessee was hit by Section 40A(7), which disallows provisions for gratuity unless paid into an approved fund or actually payable during the year.Conclusion:The court concluded that while the assessee's claim was not hit by Section 40A(9), it was disallowed under Section 40A(7). The court set aside the Tribunal's order and allowed the Revenue's appeal, disallowing the deduction for the provision for service weightage.