2025 (11) TMI 1415 - AT - Income Tax

Actuarial gratuity gain in OCI not added under s.143(1)(a); interest recomputed under s.244A till refund

Reliance Commercial Dealers Limited Versus Deputy Commissioner of Income Tax, Circle-8 (1) (1), Mumbai

ITAT held that the gain on actuarial valuation of gratuity liability routed through Other Comprehensive Income, being below the line of net profit before ... Adjustments proposed u/s. 143(1)(a) - addition on account of mismatch with tax audit report being gain on actuarial valuation of gratuity liability routed through 'Other Comprehensive Income', which is below the line item of Net Profit before tax and thus does not have any impact on the tax computation - HELD THAT:- On perusal of AS-19, it is noted that changes to actuarial valuation can be because of changes in the assumption for such valuation like average age of the employees, period of service etc. Therefore, this falls under the category of “Other Comprehensive Income” which does not impact the real income of the assessee. In any event, the assessee is claiming deduction on payment basis only and, therefore, any increase or decrease in the amount of gratuity as per actuarial valuation which is not routed through P&L A/c, cannot have any impact on the taxable income of the assessee. We, therefore, we do not find any basis for the addition to be sustained. Short grant of interest u/s 244A till the actual date of grant of refund - We direct the AO to re-compute interest u/s 244A of the Act till the date of payment of refund as relying on NOKIA SOLUTIONS [2024 (9) TMI 1683 - DELHI HIGH COURT] and GROUP M MEDIA INDIA PRIVATE LIMITED [2023 (12) TMI 1045 - BOMBAY HIGH COURT] ISSUES PRESENTED AND CONSIDERED 1. Whether an intimation under section 143(1)/(1)(a) that makes an adjustment based on a tax-audit mismatch, without providing a prior opportunity to the assessee, is beyond jurisdiction or unsustainable where the adjustment concerns actuarial gain on gratuity routed through Other Comprehensive Income (OCI). 2. Whether actuarial gains/losses on gratuity liability recognized under Ind AS as Other Comprehensive Income (OCI) and reflected in the tax-audit report under clause 16(d) as 'Amount not credited to Profit & Loss account - any other item of income' form part of taxable business income for computation under 'Profits and gains of business or profession'. 3. Whether prior inconsistent treatment (inclusion for MAT computation u/s 115JB in earlier years) is determinative to treat the actuarial gain as taxable in the current year when the assessee follows Ind AS and claims deduction on actual payment basis. 4. Whether interest under section 244A is payable up to the actual date of grant of refund (and requires recomputation) where the Central Processing Centre (CPC) computed refund only up to the date of intimation u/s 143(1). ISSUE-WISE DETAILED ANALYSIS Issue 1: Jurisdictional validity of section 143(1) intimation adjustment without opportunity Legal framework: Section 143(1)/(1)(a) permits processing of returns and certain adjustments based on prescribed data and tax-audit particulars; principles of natural justice and jurisdictional limits constrain adjustments that change declared total income without an opportunity to explain. Interpretation and reasoning: The Tribunal examined the nature of the adjustment (actuarial gain on gratuity reflected in tax-audit report) and the statutory processing by CPC. It held that while CPC issued an intimation effecting an adjustment, the substantive question was whether the adjustment rightly formed part of taxable income. The Tribunal did not rest its decision on a procedural defect alone but considered substantive accounting and tax principles to determine whether the adjustment could be sustained. Precedent treatment: No specific authority was overruled or distinguished on the jurisdictional point; the Tribunal resolved the issue on merits rather than invalidating the intimation solely for lack of opportunity. Ratio vs. Obiter: Ratio - an intimation under section 143(1) that adjusts income must be supportable on legal and accounting principles; if the underlying addition is unsustainable on merits, intimation-based addition cannot be upheld. Conclusion: The challenge to the intimation succeeds on merits; the addition made by CPC under section 143(1) is not sustained because the actuarial gain routed through OCI does not impact taxable income computation. Issue 2: Taxability of actuarial gain/loss on gratuity routed through OCI under Ind AS (AS-19/Ind AS-19 considerations) Legal framework: Ind AS/Accounting Standards classify actuarial gains/losses on employee benefits and may route them to Other Comprehensive Income (OCI). Income-tax computation for business income commences from 'net profit before tax' as per usual practice, followed by specified adjustments; deductible treatment of gratuity under section 43B is on actual payment basis. Interpretation and reasoning: The Tribunal noted that actuarial valuation changes arise from changes in actuarial assumptions (age, service period etc.) and are accounting entries reflecting notional adjustments; when routed to OCI (below net profit before tax) they do not form part of profit and loss for computing taxable business income. Further, as the assessee claims deduction for gratuity on actual payment basis, actuarial fluctuations not credited to P&L cannot impact taxable income. The Tribunal examined year-wise treatment showing earlier years' increases paid to fund and earlier decreases not separately offered to tax, establishing a consistent accounting policy under Ind AS-19. Precedent treatment: The Tribunal relied on the substance of AS/Ind AS guidance rather than invoking contrary judicial precedents; lower authorities' reliance on the CPC adjustment was not followed. Ratio vs. Obiter: Ratio - actuarial gains/losses recognized in OCI under Ind AS do not constitute taxable income for computation under 'profits and gains of business or profession' where (i) they are not routed through P&L, and (ii) deduction for gratuity is governed by actual payment principles (section 43B), so notional actuarial changes are not taxable. Conclusion: The actuarial gain of Rs. 37,21,235 (not credited to P&L but shown in OCI and disclosed under clause 16(d) of Form 3CD) cannot be added to taxable income; the Tribunal allowed the grounds challenging the addition. Issue 3: Effect of earlier inclusion for MAT (section 115JB) on current-year taxability Legal framework: MAT under section 115JB can require certain book adjustments for computing alternate minimum tax; however, MAT treatment does not necessarily determine taxable income under the normal provisions where the assessee has adopted Ind AS and follows payment-based deduction rules. Interpretation and reasoning: The Tribunal acknowledged that the assessee had considered actuarial items for MAT computation in earlier years but observed that the assessee had consistently followed an Ind AS-based policy of routing actuarial gains/losses to OCI and not including them in normal income computation. The fact that the item was considered for MAT in years when MAT applied, and is not applicable under the opted tax regime (115BAA) in the year under consideration, does not automatically convert OCI items into taxable income under the normal provisions. Precedent treatment: The Tribunal treated earlier MAT treatment as evidencing accounting consistency rather than as a binding estoppel converting OCI items into taxable income for normal assessment. Ratio vs. Obiter: Ratio - prior inclusion for MAT does not by itself mandate inclusion of Ind AS-OCI actuarial gains in taxable income under normal provisions when the assessee follows payment-based deduction rules and the gains are not credited to P&L. Conclusion: Earlier MAT treatment is not determinative to sustain the addition; the actuarial gain was correctly excluded from taxable income in the assessment and must remain excluded. Issue 4: Computation of interest under section 244A on refund - extent and direction for recomputation Legal framework: Section 244A entitles an assessee to interest on refunds from the first day of April of the assessment year to the date of actual payment of the refund, at the prescribed monthly rate; this is a statutory entitlement independent of CPC intimation dates. Interpretation and reasoning: The Tribunal held that where CPC determined refund amount only up to the date of intimation under section 143(1), statutory interest must nonetheless be computed up to the actual date of payment of refund. The Tribunal directed the Assessing Officer to recompute interest under section 244A accordingly. Precedent treatment: The Tribunal expressly directed recomputation based on the ratio of decisions of higher courts addressing entitlement to interest till actual refund payment; those authorities were relied upon to support broader interest computation (though specific citations are not reproduced here per instructions). Ratio vs. Obiter: Ratio - interest under section 244A must be computed up to the date of actual refund payment; where initial processing/intimation dates are used by CPC, the Assessing Officer must recompute interest to reflect statutory entitlement. Conclusion: The Tribunal allowed the ground relating to interest and directed recomputation of interest under section 244A up to the date of payment of refund.