Gratuity payment disallowance overturned as expenditure wasn't flagged in audit report under section 143(1)(a)(iv)

ITAT Pune ruled in favor of the assessee regarding disallowance of gratuity payment under section 143(1)(a)(iv) read with section 43B and 36(1)(v). The tribunal held that ADIT(CPC) lacked jurisdiction to disallow the expenditure since it was not indicated in the audit report for disallowance. Section 143(1)(a)(iv) permits AO to consider only expenditures specifically indicated in audit reports but not disallowed in income computation. Since gratuity expenditure on payment basis was not flagged in the audit report, the disallowance fell outside the provision's scope. The assessee's appeal was allowed.

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Issues Involved:
The issues involved in this case are the disallowance of gratuity payment u/s 43B of the Income Tax Act, 1961 and the authority of the ld.CIT(A) to set aside assessments.

Disallowance of Gratuity Payment u/s 43B:
The appeal and cross objection were directed against the order of the ld. Commissioner of Income Tax(Appeal) u/s. 250 of the Act for A.Y. 2018-19. The Revenue raised grounds of appeal related to the disallowance of gratuity payment of Rs. 6,20,00,000/- u/s. 43B of the Act. The ld.CIT(A) directed the AO to verify if the payment was made during the year and allow the claim based on the outcome of such verification. The Assessee contended that the disallowance was invalid as it did not fall under the provisions of section 143(1)(a)(iv) of the Act.

Authority of ld.CIT(A) to Set Aside Assessments:
The Assessee in the cross objection raised grounds challenging the order of the ld.CIT(A). The ld.CIT(A) allowed the appeal for statistical purposes and directed the AO to verify the gratuity payment. The Assessee argued that the ld.CIT(A) did not set aside the issue for verification but decided it on merits. The Revenue contended that the ld.CIT(A) did not have the power to set aside the order for verification.

Findings & Analysis:
The Tribunal observed that the ld.ADIT had made a disallowance u/s. 143(1)(a)(iv) of the Act, which allows for the disallowance of expenditure indicated in the Audit Report but not considered in the income computation. However, the impugned expenditure was not indicated in the Audit Report for disallowance, rendering the disallowance outside the scope of the provision. Therefore, the disallowance made by the ld.ADIT was held to be without jurisdiction. The Cross Objection appeal by the Assessee was allowed.

Decision:
As the Cross Objection appeal was decided in favor of the Assessee, the Revenue's appeal became academic. The Tribunal dismissed the Revenue's appeal and allowed the Cross Objection filed by the Assessee.

The judgment was pronounced on 7th May, 2024.

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