2016 (7) TMI 940 - HC - Income Tax

Income-tax Act: Contributions distinction upheld. Gratuity provision disallowed due to lack of evidence.

The Court upheld the addition under Section 2(24)(x) read with Section 36(1)(va) of the Income-tax Act, distinguishing between employees' and employer's ... Applicability of Section 43B to employees' and employer's provident fund contributions - Classification of employees' contribution as income under Section 36(1)(va) read with sub-section (2) of Section 24 - Deductibility of provision for gratuity and exceptions under Section 40A(7) for approved gratuity fund or gratuity becoming payable - Admissibility of belated factual pleas on appealApplicability of Section 43B to employees' and employer's provident fund contributions - Classification of employees' contribution as income under Section 36(1)(va) read with sub-section (2) of Section 24 - Whether the addition of the employees' contribution to Provident Fund was rightly upheld by treating it as income under Section 36(1)(va)/Section 24(2) instead of allowing deduction under Section 43B - HELD THAT: - The Court examined the legislative history and the Supreme Court's decision in Alom Extrusions which treated contributions to labour welfare funds and provident funds uniformly after amendments to Section 43B, noting that Alom Extrusions did not distinguish between employer's and employees' contributions. The Court observed that implementation difficulties under the EPF regime apply equally to both types of contributions and that subsequent High Court decisions (Bombay and Punjab & Haryana) construing Alom Extrusions have held that employees' contribution is also covered by the amended Section 43B. On a broader reading of the amendments and parliamentary intent, the Court agreed that there is sufficient justification to treat employees' and employer's contributions on the same footing and that the Tribunal's distinction was not tenable. Consequently the addition under the head of income from other sources / Section 36(1)(va) was not sustainible in the facts of this case.Addition of Rs. 8,32,507/- by treating employees' contribution as income under Section 36(1)(va)/Section 24(2) is not sustainible; benefit of Section 43B applies and the first substantial question is answered in the assessee's favour.Deductibility of provision for gratuity and exceptions under Section 40A(7) for approved gratuity fund or gratuity becoming payable - Admissibility of belated factual pleas on appeal - Whether the provision for gratuity was deductible because it related to an approved gratuity fund or represented gratuity that had become payable during the previous year - HELD THAT: - Section 40A(7) generally disallows provisions for gratuity but permits exceptions where the provision is for contribution to an approved gratuity fund or where gratuity has become payable during the previous year. The authorities below recorded that the assessee did not contend before them that the provision had been made towards an approved gratuity fund or that gratuity had become payable in the relevant year. The assessee attempted for the first time before this Court to rely on letters concerning the LIC Group Gratuity Scheme, but no concluded contract or payment for the relevant previous year was placed on record before the assessing or appellate authorities. Given the absence of such factual foundation before the lower authorities and concurrent findings against the assessee, the Court held that the assessee cannot raise this pure question of fact belatedly. Reliance on Motor Industries (Karnataka HC) was inapposite because that decision related to an established approved fund on the record. The Tribunal's reliance on Shree Sajjan Mills and the concurrent disallowance under Section 40A(7) was accordingly upheld.Assessee is not entitled to deduction of the gratuity provision; the disallowance under Section 40A(7) is affirmed and the re framed question is answered against the assessee.Final Conclusion: The appeal is partly allowed: the addition relating to employees' provident fund contribution is not sustainible and is decided in favour of the assessee, while the disallowance of the provision for gratuity under Section 40A(7) is upheld against the assessee; the concurrent findings below on the gratuity claim are not disturbed. Issues Involved1. Justification of addition under Section 2(24)(x) read with Section 36(1)(va) of the Income-tax Act.2. Deduction of provision for gratuity under Section 40A(7) of the Income-tax Act.Issue-wise Detailed Analysis1. Justification of Addition under Section 2(24)(x) read with Section 36(1)(va) of the Income-tax ActThe Tribunal upheld the addition of Rs. 8,32,507/- made under Section 2(24)(x) read with Section 36(1)(va) of the Income-tax Act. The assessee argued that the Tribunal failed to follow its earlier order in a similar case (M/s. Sintra Ltd. vs. ACIT), where the delay in crediting employees’ contributions was condoned, and the addition was deleted. The assessee contended that both employees' and employer’s contributions should be treated similarly under Section 43B of the Act, citing the Supreme Court's decision in Commissioner of Income-tax vs. Alom Extrusions Ltd., which did not distinguish between the two types of contributions. The Tribunal, however, distinguished between the delayed payments of employees’ and employer’s contributions, holding that only the latter is covered by Section 43B, while the former falls under Section 24(2)(x) read with Section 36(1)(va).The Court agreed with the broader interpretation that both contributions should be treated similarly, referencing decisions from the Bombay High Court and Punjab and Haryana High Court, which supported this view. Thus, the first substantial question of law was decided in favor of the assessee, against the revenue.2. Deduction of Provision for Gratuity under Section 40A(7) of the Income-tax ActThe Tribunal confirmed the disallowance of Rs. 7,64,335/- towards the provision for gratuity under Section 40A(7) of the Act. The assessee claimed that the provision was made towards an approved gratuity fund and based on actuarial valuation. The Tribunal, however, found no evidence that the provision was made towards an approved gratuity fund or for gratuity payable during the financial year. The Tribunal relied on the Supreme Court's decision in Shree Sajjan Mills Ltd. vs. Commissioner of Income Tax, which disallowed similar provisions.The Court noted that the assessee failed to provide a timely response to the Assessing Officer's notice and did not raise the issue of the approved gratuity fund before the lower authorities. The Court found no evidence of a concluded contract with LIC for the Group Gratuity Scheme during the relevant financial year. Consequently, the second substantial question of law was reframed and decided in the affirmative, against the assessee and in favor of the revenue.ConclusionThe appeal was partly allowed. The first substantial question of law was decided in favor of the assessee, while the second was decided against the assessee.