2026 (1) TMI 1544

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....sallowance of provisions for gratuity and leave encashment, without considering that such allowances are deductible only on actual payment within the prescribed due date, as held by the Hon'ble Supreme Court in Union of India & Ors. vs. Exide Industries Ltd. and others? 3. The brief facts are that the assessee is a charitable trust registered under section 12A of the Act and is engaged solely in educational activities, running schools under the name of Podar International School, Lilavati Podar High School, R.N. Podar School, etc. The assessee had e-filed its return of income for Assessment Year 2015-16 on 21.09.2015 declaring total income at Nil and claiming exemption under section 11 of the Act. During the course of assessment proceedings, the Assessing Officer noted that the assessee had made provisions on account of leave encashment and gratuity, which had increased to Rs. 3,34,50,281 and Rs. 5,75,87,027 respectively from the opening provisions of Rs. 1,46,84,315 and Rs. 4,60,78,354. The differential provisions of Rs. 1,87,65,966 towards leave encashment and Rs. 1,15,08,673 towards gratuity, aggregating to Rs. 3,02,74,639, were treated by the Assessing Officer as mere provis....

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....red under section 12A and claiming exemption under section 11, is no longer res integra. The learned counsel for the assessee as well as the learned Senior Departmental Representative have fairly admitted that the controversy stands squarely covered by a series of decisions rendered by the co-ordinate Benches of this Tribunal in the assessee's own case for the earlier assessment years, on identical facts and on the same point of law. The learned CIT(A), while granting relief to the assessee, has exhaustively referred to and relied upon those binding precedents, including the decision of the Tribunal for Assessment Year 2014-15 in ITA No. 5962/Mum/2019 dated 03.08.2021 and the subsequent decision for Assessment Year 2012-13 and connected years, wherein the Tribunal has consistently held that provision for gratuity and leave encashment, made on the basis of actuarial valuation in accordance with Accounting Standard 15 and in compliance with statutory and employment obligations, constitutes application of income for the objects of the trust and cannot be disallowed merely on the ground that there is no immediate cash outflow. 7. The co-ordinate Bench, while adjudicating the issue i....

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.... parting with the money. It seems to us that it need not necessarily be so. The expenditure should be understood as necessary outgoings. The provisions are necessary to be made for certain purposes like, provision for depreciation is to be made in respect of decrease in value of property through wear and tear, deterioration or obsolescence and allowance is made for this purpose in book-keeping, accountancy, etc. It is the provision made for the loss or expenses incurred through using the asset for earning profits, and should, therefore, be charged against those profits as they are earned. 14 If depreciation is not provided for, the books will not contain a true record of revenue or capital. If the asset were hired instead of purchased, the hiring fee would be charged against the profits, having been purchased, the asset is, in effect, then hired by capital to revenue, and the true profit cannot be ascertained until a suitable charge for the use of the asset has been made. Likewise, the provision for gratuity and leave encashment also required to be provided as mandated by Law. Without being such provisions made, the balance sheet will not presen a true and fair vi....

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....as argued on behalf of the Department that expenditure incurred in the earlier years cannot be met out of the income of the subsequent year and that utilization of such income for meeting the expenditure of earlier years would not amount to application of income for charitable or religious purposes. In the present case, the Assessing Officer did not allow carry forward of the excess of expenditure to be set off against the surplus of the subsequent years on the ground that in the case of a Charitable Trust, their income was assessable under self-contained code mentioned in section 11 to section 13 of the Income tax Act and that the income of the Charitable Trust was not assessable under the head profits and gains of business" under section 28 in which the provision for carry forward of losses was relevant That, in the case of a Charitable Trust, there was no provision for carry forward of the excess of expenditure of earlier years to be adjusted against income of subsequent years. We do not find any merit in this argument of the Department. Income derived from the trust property has also got to be computed on commercial principles and if commercial principles are applied then adjus....