2021 (12) TMI 590 - AT - Income Tax

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

Bank of India Versus The Pr. Commissioner of Income Tax-2, Mumbai

The Tribunal partly allowed the assessee's appeal, holding that the contribution to the superannuation fund based on actuarial valuation was allowable ... Revision u/s 263 by CIT - Allowability of provision for pension and provision for leave encashment - HELD THAT:- Pr. CIT came through the audit objections raised by the statutory auditors of the company in which statutory auditors have flagged the expenditure claimed by the assessee on provisions of contribution to pension and provision of leave encashment. It is fact on record that the Assessing Officer has asked for several information through notice u/s 142(1) specifically on provision for pensions, the assessee has filed relevant information which was available on the published financial statement and assessee has specifically submitted a note on provision for pension explaining the necessity of creating the provisions based on the actuarial report. This has necessitated due to the fact that the assessee has moved from the existing LIC 94-96 mortality table to adopt IALM 2006-08 mortality table because of which the contribution to approved superannuation was short to the extent of ₹ 1391.25 crores. As per case of GLAXO SMITHKLINE PHARMACEUTICALS, MUMBAI [2011 (1) TMI 1530 - ITAT MUMBAI] we noticed that even in the given case there was a shortage of contribution to the fund based on the actuarial valuation report and even assessee has contributed to the above fund based on the above said report. Therefore, the expenditure claimed by the assessee is allowable under Income Tax Act u/s 37 of the Act. Hence, we are in agreement with the submissions of the Ld. AR on this aspect. Provision for leave encashment - Assessee has claimed an amount on account of provision for leave encashment. Based on the fact on record, we noticed that the assessee has not made the payment during this year and rightly statutory auditor has flagged this expenditure which is not allowable u/s 43B. AR heavily relied on the case of Glaxo Smithkline Pharmaceuticals (supra) and we observed that the Hon’ble Supreme Court upheld the constitutional validity of section 43B(1) of the Act and wherein it has accepted the decision of Hon’ble Calcutta High Court. Therefore, as far as this issue is concerned which is against the assessee and the Assessing Officer should have verified the issue in detail. We do not see any submission or any inquiry made by the Assessing Officer on this aspect. Therefore, in our considered view, to the extent of this issue which is against the assessee, we uphold the observations of the Ld. Pr. CIT in this regard and the order passed by the Pr. CIT u/s 263 is stayed to this expenditure. Appeal filed by the assessee is partly allowed. 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.