2017 (3) TMI 1914 - AT - Income Tax

Tribunal upholds CIT-A decisions, dismissing revenue's appeal. Interpretations of relevant sections crucial.

The Tribunal upheld the CIT-A's decisions in both issues, dismissing the revenue's appeal in its entirety. The deletion of gratuity liability disallowance ... Gratuity liability - Accrual of liability - assessee was following mercantile system of accounting - whether there was no accrual of such liability during the year under consideration? - As per CIT-A accrued gratuity liability was not disallowable u/s. 36(1)(v), 43B and 40A(7)(a) or Rule 103 and 104 of the IT Rules, thus deleted the addition - HELD THAT:- We find that the issue is covered by order of this Tribunal in assessee’s own case for A.Y 2004-05 held that section 36(1)(v) nowhere speaks of the actual liability incurred during the year on account of retirement of the employees during the year itself. Such liability accrued during the year is taken care of in section 40A(7)(b) and the operation of section 40A(7)(a) is subject to section 40A(7)(b) Section 40A(7)(b) that provision made by the assessee for the purpose of payment of any gratuity, that has become payable during the year is allowable which means that the liability which has actually accrued during the year is allowable. CBDT has also clarified the introduction of section 40A(7) that the provision made for payment of gratuity that has become payable during previous year is allowable. Therefore the liability accrued on account of the gratuity which became payable during the year on account of the employees who retired during the year itself is allowable. Section 43B also speaks of the contribution of any gratuity or other fund and not to the liability accrued as above. Rule 103 and 104 also speaks of the contribution or initial contribution to any gratuity fund and not for the actual liability accrued during the year. As relying on principles laid down in Kedarnath case [1971 (8) TMI 10 - SUPREME COURT] mentioned above are fully applicable and the assessee is entitled to the deduction of the accrued liability as claimed by it in the computation of the income. - Decided in favour of assessee. Disallowance of Employees’ contribution to the “Labour Welfare Board” and PF - AR submits that though payments were not made in due date, but paid within grace period - CIT-A deleted the addition - HELD THAT:- We find support from the decision of Ganapathy Mills [1999 (2) TMI 26 - MADRAS HIGH COURT] wherein it held that the deduction can be allowed if the payments are made within the grace period. - Decided in favour of assessee. Issues:1. Deletion of gratuity liability disallowance.2. Deletion of disallowance of Employees' contribution to Labour Welfare Board and PF.Issue 1: Deletion of Gratuity Liability Disallowance:The appeal by the revenue challenged the deletion of gratuity liability disallowance of Rs.2,54,03,464 for the assessment year 2008-09. The AO disallowed the amount citing provisions of section 36(1)(iv), 43B & 40A(7) of the Act. However, the CIT-A, following an earlier Tribunal order, held that the accrued gratuity liability was not disallowable under the mentioned sections. The AR contended that the issue was covered by a Co-ordinate Bench's order and relied on the same, while the DR supported the AO's order. The Tribunal noted that section 36(1)(v) deals with contribution towards an approved gratuity fund, not the liability incurred during the year. Section 40A(7)(a) excludes provisions for future gratuity payments, allowing accrued liabilities for employees who retired during the year. Similarly, section 43B pertains to contributions, not accrued liabilities. The Tribunal upheld the CIT-A's decision based on these interpretations, dismissing the revenue's appeal.Issue 2: Deletion of Disallowance of Employees' Contribution to Labour Welfare Board and PF:The revenue contested the deletion of disallowance of Rs.15,951 for Labour Welfare Board and Rs.32,62,654 for PF contributions due to delayed payments. The AO disallowed the amounts under section 36(1)(va) r.w.s 2(24)(x) of the Act. The CIT-A, relying on a Calcutta High Court decision, annulled the additions. The AR argued that payments, though delayed, were within the grace period, citing a Madras High Court ruling. The Tribunal found support in the Madras High Court's decision, allowing deductions for payments made within the grace period. Consequently, the Tribunal upheld the CIT-A's decision, dismissing the revenue's appeal.In conclusion, the Tribunal upheld the CIT-A's decisions in both issues, dismissing the revenue's appeal in its entirety.