2017 (2) TMI 1296 - HC - Income Tax

Grant received by Assessee from Government of India - accrual of income - Held that - In the case in hand grant/subsidy was forwarded by Government of India to help Assessee in its revival by making payment to employees towards VRS. It was a voluntary remittance fund by Government of India to Assessee. Despite our repeated query learned counsel appearing for appellant could not show anything so as to bring 'grant' or 'subsidy' same within any particular clause of Section 2 (24) of Act, 1961. Sub-clause (xviii) has been inserted in Section 2(24) by Finance Act, 2015 with effect from 01.04.2016 which deals with certain kind of subsidy or grant or cash incentive etc. by Government of India or State Government but that clause has no application in the present case. In view thereof, we answer Questions-(i) and (ii) both in favour of Assessee and against Revenue holding that amount of grant received by Assessee from Government of India could not have been treated as income and that being so, addition made by AO of amount of grant and upheld by Commissioner and Tribunal is not in accordance with law. Both these Questions are answered in favour of Assessee. Payment made to L.I.C. under Gratuity Insurance Scheme by referring to Section 40(A)(vii) - disallowance observing that fund was not recognized by Department - Held that - A similar question was considered in CIT Vs. Textool Co. Ltd. (2009 (9) TMI 66 - SUPREME COURT) where also payment was made to L.I.C. towards group life assurance scheme and this was held to be an approved Scheme and there was no violation of Section 36(1)(v) of Act, 1961. Court held that a narrow interpretation straining language of Sub-Clause (v) so as to deny deduction to Assessee should not be followed since the objective of fund was achieved. - Decided in favour of assessee.

Issues Involved:

1. Addition of government grant to income.
2. Allowance of VRS payment under Section 35DDA.
3. Disallowance of gratuity payment under Section 40A(7).
4. Deductibility of insurance premium paid under 'Group Gratuity Scheme'.
5. Reliance on ex-parte decision and non-consideration of Madras High Court decision.
6. Interpretation of Section 36(1)(v) regarding employer control over funds.
7. Consideration of Supreme Court decision in Commissioner of Income Tax Vs. Textools Co. Ltd.

Issue-wise Detailed Analysis:

1. Addition of Government Grant to Income:

The Tribunal added the grant from the Government of India out of the National Renewable Fund for implementing the Voluntary Retirement Scheme (VRS) amounting to ?1,14,89,040/- to the income of the Assessee. The Court examined whether this grant could be treated as "income" under Section 2(24) of the Income Tax Act, 1961. The Court referred to various precedents, including CIT Vs. Karthikeyan and Emil Webber Vs. Commissioner of Income Tax, which clarified that the definition of "income" is inclusive and not exhaustive. The Court concluded that the grant received by the Assessee from the Government of India for VRS implementation could not be treated as "income" and thus should not be added to the total income of the Assessee.

2. Allowance of VRS Payment under Section 35DDA:

The Tribunal allowed only 1/5th of the VRS payment of ?1,35,47,324/- as a deduction under Section 35DDA, amounting to ?27,09,465/-, whereas the Assessee had debited ?1,14,89,040/- in the profit and loss account. The Court held that since the grant from the Government of India could not be treated as "income," the entire VRS expenditure should be allowable in the year it was incurred, rather than spreading it over five years.

3. Disallowance of Gratuity Payment under Section 40A(7):

The Tribunal disallowed ?1,40,57,860/- on account of gratuity payment under the scheme of LIC by invoking the provisions of Section 40A(7). The Court noted that this issue was covered by the Supreme Court’s judgment in CIT Vs. Textool Co. Ltd., where it was held that payments made to LIC towards a group life assurance scheme were allowable as they did not violate Section 36(1)(v) of the Act.

4. Deductibility of Insurance Premium Paid under 'Group Gratuity Scheme':

The Assessee argued that the premium paid to LIC under the 'Group Gratuity Scheme' should be treated as a deductible business expense. The Court agreed, referencing the Supreme Court’s decision in CIT Vs. Textool Co. Ltd., which supported the deductibility of such payments as they satisfied the conditions stipulated in Section 36(1)(v).

5. Reliance on Ex-Parte Decision and Non-Consideration of Madras High Court Decision:

The Tribunal relied on a decision of the Court decided on an ex-parte basis and did not consider the decision of the Madras High Court in Commissioner of Income Tax vs. Textools Co. Ltd. The Court found that the Tribunal should have considered the relevant precedents, including the Supreme Court’s decision in CIT Vs. Textool Co. Ltd., which was directly applicable.

6. Interpretation of Section 36(1)(v) Regarding Employer Control Over Funds:

The Tribunal did not consider that Section 36(1)(v) of the Act requires that the employer should not have any control over the funds of an irrevocable trust created exclusively for the benefit of the employees. The Court clarified that as long as the employer did not have control over the funds, the deduction should be allowable, as established in CIT Vs. Textool Co. Ltd.

7. Consideration of Supreme Court Decision in Commissioner of Income Tax Vs. Textools Co. Ltd.:

The Court emphasized that the Supreme Court’s decision in CIT Vs. Textool Co. Ltd. was applicable, where it was held that contributions to an approved gratuity fund managed by LIC were deductible. The Tribunal’s failure to apply this precedent was an error.

Conclusion:

The Court answered all the questions in favor of the Assessee and against the Revenue. It set aside the Tribunal's judgment dated 21.08.2014, holding that the government grant could not be treated as "income," and the gratuity payments made under the LIC scheme were deductible. The Court directed that the consequences of this judgment should follow accordingly.

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