2019 (2) TMI 1359 - AT - Income Tax

ITAT allows deductions for employee benefits provisions under Section 43B

The Thiruvalla East Co-operative Bank Ltd. Versus The Income Tax Officer, Ward-3, Thiruvalla

The ITAT allowed the assessee's appeal, reversing the disallowance of provisions for gratuity, leave salary, bonus, and medical aid for retired staff. The ... Disallowance of provisions made towards gratuity - provision for gratuity as disallowed on the ground that it was not actually paid and also not ascertained - HELD THAT:- Gauhati High Court in the case of George Williamson (Assam) Ltd. vs. CIT [1996 (9) TMI 52 - GAUHATI HIGH COURT] held that there are three modes of payment, namely, (1) having an approved fund, (2) by having a fund though not approved, and (3) when there is no fund but provision is made for payment of gratuity. In the first two cases payment has to be made and in the third case it is not necessary to make payment but a provision has to be made for such payment. U/s. 43B of the Act, the Legislature has specifically mentioned about fund. Therefore, the meaning as given in section 43B cannot be said to be the same as in section 40A(7)(b)(i) of the Act. Thus, in this case, provision was made for payment of gratuity to retiring employees in respect of the previous year, it is not necessary that actual payment has to be made. If such amount is earmarked for payment of gratuity, i.e., provision is made for payment of gratuity, the amount has to be allowed for deduction. In view of this, we are inclined to decide the issue in favour of the assessee Issues Involved:Disallowance of provisions made by the assessee towards gratuity, leave salary, bonus, and medical aid for retired staff.Detailed Analysis:1. Disallowance of Provisions Towards Gratuity:The primary issue in this appeal is the disallowance of provisions made by the assessee towards gratuity. The Assessing Officer disallowed these provisions on the grounds that such sums are allowable only in the year of payment. The CIT(A) upheld this disallowance, noting that the provisions were created to meet RBI guidelines and that the assessee could not produce evidence to prove that these provisions represented ascertained liabilities during the FY 2012-13.Upon appeal, the assessee argued that the provisions for gratuity were actual ascertained liabilities crystallized during the year and not contingent liabilities. The assessee provided certificates showing the names of retired employees, which were produced before the CIT(A) and the Assessing Officer. The ITAT examined the rival submissions and the records, noting that the provision for gratuity was disallowed because it was not actually paid and not ascertained. However, the ITAT referred to Section 43B(b) of the I.T. Act, which allows deductions for sums payable by the assessee as an employer towards gratuity funds, provided the payment is made before the due date for filing the return of income.2. Reference to Case Laws:The assessee relied on the decision of the ITAT, Chennai Bench in the case of Indian Overseas Bank vs. DCIT, which dealt with the allowability of provisions for leave encashment. However, the ITAT noted that this judgment could not be applied to the present case as it specifically dealt with leave encashment and not gratuity.The ITAT also considered the decision of the ITAT, Pune Bench in the case of U.B. Engineering Ltd. vs. DCIT, where it was held that provisions for gratuity premium payable to LIC under a Group Gratuity Scheme were allowable as deductions even if not actually paid during the year, provided the fund was approved under the Income Tax Act. Additionally, the ITAT referred to the judgment of the Gauhati High Court in the case of George Williamson (Assam) Ltd. vs. CIT, which held that provisions made for payment of gratuity to retiring employees were allowable as deductions even if not actually paid, as long as the amount was earmarked for payment.3. Conclusion:Based on these precedents, the ITAT concluded that the provision for gratuity made by the assessee was allowable as a deduction. The ITAT emphasized that Section 43B of the I.T. Act allows for such deductions if the payment is made before the due date for filing the return of income. Consequently, the ITAT decided in favor of the assessee and against the revenue, allowing the ground taken by the assessee.Final Judgment:The appeal of the assessee is allowed, and the disallowance of provisions towards gratuity, leave salary, bonus, and medical aid for retired staff is reversed. The ITAT's decision is based on the interpretation of Section 43B of the I.T. Act and relevant case laws that support the allowability of such provisions as deductions. The order was pronounced in the open Court on February 6, 2019.