Superannuation fund contribution allowed, leave encashment provision disallowed under tax law

The Tribunal partly allowed the assessee's appeal, holding that the contribution to the superannuation fund based on actuarial valuation was allowable under Section 37. However, the provision for leave encashment was not allowable under Section 43B. The Tribunal directed the Assessing Officer to conduct necessary inquiries and verification accordingly.

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Issues Involved:
1. Allowability of contribution to the approved superannuation fund.
2. Allowability of provision for leave encashment.

Issue-wise Detailed Analysis:

1. Allowability of Contribution to Approved Superannuation Fund:

The Pr. CIT observed that the assessee's assessment order was erroneous and prejudicial to the revenue's interest because the assessee did not disallow an amount of Rs. 1421.53 crores, which exceeded the 27% limit of salary contributions to the approved superannuation fund as per Rule 87. The Pr. CIT noted that the assessee bank had switched from the LIC 1994-96 mortality table to the IALM 2006-08 table, resulting in an increased pension liability. This increase was considered non-recurring in nature and should have been disallowed.

The assessee argued that the contribution was based on actuarial valuation and that Rule 87's 27% limit did not apply to defined benefit schemes. The assessee cited the Bombay High Court's decision in CIT vs. Glaxo Smithkline Pharmaceuticals Ltd. and the ITAT Hyderabad's decision in Andhra Bank to support its position.

The Pr. CIT rejected these contentions, stating that the deductibility of expenses is determined by the Income Tax Act, not accounting standards. The Pr. CIT distinguished the Glaxo Smithkline case, noting that it involved a different context and that the assessee's claim was partly under Section 36(1)(iv) and partly under Section 37, unlike the cited case.

The Tribunal, however, found merit in the assessee's argument, noting that the contribution was based on actuarial valuation and was a one-time exceptional payment to make good the shortfall in the superannuation fund. Citing the decision in Glaxo Smithkline Pharmaceuticals, the Tribunal held that the disallowance under Section 36(1)(iv) read with Rule 87 did not apply to such payments. Therefore, the Tribunal allowed the assessee's claim for the contribution to the superannuation fund.

2. Allowability of Provision for Leave Encashment:

The Pr. CIT noted that the Tax Audit Report indicated that an amount of Rs. 47.92 crores for leave encashment was not allowable under Section 43B, as it was not paid before the due date for filing the return. The assessee argued that the provision was based on actuarial valuation and should be allowed.

The Pr. CIT rejected this argument, stating that the provision for leave encashment was covered by Section 43B(f), which requires actual payment for the deduction to be allowed. The Pr. CIT noted that the Supreme Court had stayed the Calcutta High Court's decision that struck down Section 43B(f), meaning the provision still stood.

The Tribunal agreed with the Pr. CIT on this issue, noting that the statutory auditor had flagged the expenditure, and the Assessing Officer had not made any inquiries into this aspect. The Tribunal upheld the Pr. CIT's observation that the provision for leave encashment was not allowable under Section 43B.

Conclusion:

The Tribunal partly allowed the assessee's appeal. It held that the contribution to the superannuation fund based on actuarial valuation was allowable under Section 37, but the provision for leave encashment was not allowable under Section 43B. The Tribunal directed the Assessing Officer to make due inquiries and verification in line with these findings.

Order Pronounced:

The appeal filed by the assessee was partly allowed, and the order was pronounced in the open court on 22/11/2021.

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