2014 (4) TMI 1328 - AT - Income Tax

LIC premium for Gratuity Fund and security fund for managers' salaries allowed as deductions under Section 36(1)(v)

The Jalore Central Co-operative Bank Ltd. Versus ACIT, Circle, Barmer

The ITAT Jodhpur allowed the assessee's appeal regarding two additions. First, premium paid to LIC for Gratuity Fund was held deductible under Section ... Addition made on account of premium paid to the LIC for Gratuity Fund - HELD THAT:- This issue is covered in favour of the assessee vide judgment of CIT Vs. Textool Co Ltd. [2009 (9) TMI 66 - SUPREME COURT] a bare reading of Section 36(1)(v) of the Act, it is manifest that the real intention behind the provision is that the employer should not have any control over the funds of the irrevocable trust created exclusively for the benefit of the employees. In the instant case, it is evident from the findings recorded by the Commissioner and affirmed by the Tribunal that the assessee had absolutely no control over the fund created by the LIC for the benefit of the employees of the assessee and further all the contribution made by the assessee in the said fund ultimately came back to the Textool Employees Gratuity Fund, approved by the Commissioner with effect from the following previous year. Thus, the conditions stipulated in Section 36(l)(v) of the Act were satisfied. Addition made being fund set apart for the security of the salary of the managers of the primary agricultural societies - HELD THAT:- This issue is squarely covered in favour of the assessee in the case of The Barmer Central Cooperative Bank Ltd. [2013 (8) TMI 763 - ITAT JODHPUR] held that the amount is to be contributed to a fund and the fund is not being managed by the assessee. The assessee may be trustee of that fund but it cannot apply the fund as per his own will. The interest, if any, earned on this fund is also to be credited to that fund, it is therefore, clear that funds stand diverted at the source and therefore, this cannot be considered as an appropriation of income but it is an expenditure. Thus the CIT(A) was justified in deleting the addition. Appeal of the assessee is allowed. 1. ISSUES PRESENTED and CONSIDEREDThe legal judgment addresses the following core issues:Issue 1: Whether the addition made by the Assessing Officer concerning the premium paid to the Life Insurance Corporation (LIC) for the Gratuity Fund was justified.Issue 2: Whether the addition made by the Assessing Officer regarding the fund set apart for the security of the salary of the managers of primary agricultural societies was justified.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Premium Paid to LIC for Gratuity FundRelevant Legal Framework and Precedents: The relevant legal provision is Section 36(1)(v) of the Income Tax Act, which pertains to deductions for contributions to approved gratuity funds. The judgment references the Supreme Court case of CIT Vs. Textool Co. Ltd., which clarified that contributions to an irrevocable trust for employee benefits are deductible if the employer has no control over the fund.Court's Interpretation and Reasoning: The Tribunal found that the conditions of Section 36(1)(v) were satisfied because the employer (assessee) had no control over the gratuity fund managed by LIC. The Supreme Court precedent in Textool Co. Ltd. was pivotal in reaching this conclusion.Key Evidence and Findings: The Tribunal relied on the findings of the Commissioner and the Tribunal's previous affirmation that the assessee had no control over the fund, and contributions were made to an approved gratuity fund.Application of Law to Facts: The Tribunal applied the principles from the Textool Co. Ltd. case, concluding that the conditions for deduction under Section 36(1)(v) were met.Treatment of Competing Arguments: The Department's representative could not counter the assessee's reliance on the Supreme Court precedent, leading to the Tribunal's decision to favor the assessee.Conclusions: The Tribunal deleted the addition made by the Assessing Officer and sustained by the CIT(A), allowing the deduction for the premium paid to LIC for the Gratuity Fund.Issue 2: Fund for Security of Salary of ManagersRelevant Legal Framework and Precedents: The issue involves the treatment of funds set aside for specific purposes, with reference to the statutory obligations and commercial expediency principles. Precedents include cases like CIT Vs. Bombay State Road Transport Corporation and Amalgamated Electricity Co. Ltd. Vs. CIT.Court's Interpretation and Reasoning: The Tribunal considered the statutory obligation imposed by the Registrar of Cooperative Societies, Rajasthan, which required setting apart a Salary Security Fund. The Tribunal referenced prior decisions where similar contributions were deemed allowable expenses.Key Evidence and Findings: The Tribunal noted the statutory nature of the obligation to set aside the fund, as directed by the Registrar, and the lack of control by the assessee over the fund's use.Application of Law to Facts: The Tribunal applied the principle that statutory liabilities crystallized at year-end are deductible, as established in previous judgments.Treatment of Competing Arguments: The CIT(A) had argued that the fund was an application of income and not a charge on business, but the Tribunal found this reasoning inconsistent with established precedents.Conclusions: The Tribunal deleted the addition made by the Assessing Officer and sustained by the CIT(A), allowing the deduction for the fund set apart for the security of the salary of managers.3. SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning:The Tribunal quoted the Supreme Court's reasoning in the Textool Co. Ltd. case: 'From a bare reading of Section 36(1)(v) of the Act, it is manifest that the real intention behind the provision is that the employer should not have any control over the funds of the irrevocable trust created exclusively for the benefit of the employees.'Core Principles Established:The judgment reinforces the principle that contributions to irrevocable trusts for employee benefits are deductible if the employer lacks control over the fund, as per Section 36(1)(v) of the Income Tax Act. It also upholds that statutory obligations to set aside funds for specific purposes are deductible if they are crystallized liabilities at year-end.Final Determinations on Each Issue:For Issue 1, the Tribunal allowed the deduction for the premium paid to LIC for the Gratuity Fund, deleting the addition made by the Assessing Officer.For Issue 2, the Tribunal allowed the deduction for the fund set apart for the security of the salary of managers, deleting the addition made by the Assessing Officer.In conclusion, the appeal by the assessee was allowed, with the Tribunal ruling in favor of the assessee on both issues.