2016 (7) TMI 1512 - HC - Income Tax

Disallowance of deduction of actual payment made to Life Insurance Corporation of India under Group Gratuity Insurance Scheme - such scheme was not specifically approved by concerned Commissioner of Income Tax though carried under general approval of Central Government - liable to be treated as payment made to a fund which is deemed to have been approved by the CIT by the reason of efflux of time - As argued that premium claimed as deduction was an actual payment and not provisional, therefore, Section 40A(7) was not applicable - HELD THAT - It is admitted by Revenue that the amount claimed to be paid by Assessee under Group Gratuity Insurance Scheme is the actual payment made to LIC and not something which can be said to be a provision made by Assessee for payment of gratuity. Deduction towards gratuity fund is permitted under Section 36(1)(v) which reads as under - any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust; Other authorities have committed manifest error in treating the fund as non approved on the basis of order dated 25.6.2012 passed by Commissioner and disregarding specific requirement of law under Section 12AA(2) of Act, 1961. Gratuity fund of Assessee stood deemed to have been registered and that being so subsequent order passed by CIT(Appeals) had no consequence or illegal effect. Hence, Assessee was entitled to claim deduction under Section 36(v). The view taken otherwise in impugned orders, therefore, is illegal, and contrary to law and observing to be set aside. 5% income in term of premium received during concerned assessment years and deduction under Section 80IA and applicability of provision - HELD THAT - There is no justification for presuming income of 5% as total premium received by Assessee, for the reason that premium received is nothing but allotment of land to entrepreneur and facility of returning expenses incurred by Assessee for development of such industrial land and there is no concept of profit or loss in such determination. Amount paid by allottees represents lease rent etc. and hence assumption of 5% income on such premium is without any basis. Similarly for interest received by Assessee on delayed payment of installment of premium or lease rent etc Tribunal has completely erred in law inasmuch as a finding of fact was recorded by CIT that interest earned by Assessee on installments granted in respect of premium payable, and other income etc. receipts may have some link with the business of appellant and having said so, still it has reversed order of Assessing Authority to the extent, it has allowed deduction under Section 80IA on such 'interest' and Tribunal has erred in law in failing to appreciate this finding of Commissioner of Income Tax ( Appeals) and without reversing the same, has dismissed Assessee's appeal. Thus Assessee was entitled for deduction towards payment of group gratuity insurance paid to LIC by treating fund as any approved fund. 5% of premium collected by Assessee and forfeiture of earnest money/premium has been added illegally based on conjuncture and surmises. Since the nature of functioning of Assessee has not been examined looking to the public nature of its functioning for development of industries in the State, such addition, therefore, is not justified in law. Applicability of Section 80IA, without reversing findings of CIT(Appeals), that such interest received may have some link with the business of appellant and once that is so, to hold that deduction under Section 80IA is not admissible is per se contradictory and hence is not correct and in accordance with Law.

Issues Involved:
1. Disallowance of deduction for payment to LIC under Group Gratuity Insurance Scheme.
2. Treatment of payment to LIC as payment to an approved fund by CIT.
3. Deduction under Section 37 read with Section 43B for actual payment to retiring employees.
4. Addition of 5% premium collected by Assessee and forfeiture of earnest money/premium.
5. Taxability of 5% premium collected by Assessee without considering overriding obligations/liabilities.
6. Deduction under Section 80IA for premium treated as taxable.
7. Inclusion of interest on premium payable by allottees for exemption under Section 80IA.

Detailed Analysis:

1. Disallowance of Deduction for Payment to LIC under Group Gratuity Insurance Scheme:
The Tribunal disallowed the deduction of actual payment made to LIC under the Group Gratuity Insurance Scheme because the scheme was not specifically approved by the Commissioner of Income Tax (CIT). The authorities held that since the scheme was not approved as required under Section 36(1)(v), Section 37(1) could not be applied. The amount was paid directly to LIC and not to an approved fund, hence the deduction was not allowable.

2. Treatment of Payment to LIC as Payment to an Approved Fund by CIT:
The court noted that the premium claimed as deduction was an actual payment and not provisional, so Section 40A(7) was not applicable. The deduction towards gratuity fund is permitted under Section 36(1)(v) for contributions to an approved gratuity fund. The term "approved gratuity fund" means a fund approved by the Principal Chief Commissioner or Commissioner. It was found that the amount towards gratuity payable to employees was deposited with LIC, and thus, should have been allowed under Section 37 if not under Section 36(v).

3. Deduction Under Section 37 Read with Section 43B for Actual Payment to Retiring Employees:
The court determined that the expenditure incurred by the Assessee for the benefit of its employees should be allowed under Section 37, as it was not in the nature of capital expenditure or personal expenses. The Tribunal should have considered the review application pending with the Commissioner for approval, which would have made the fund deemed approved, thus qualifying for deduction under Section 36(v).

4. Addition of 5% Premium Collected by Assessee and Forfeiture of Earnest Money/Premium:
The court found that the authorities erred in treating the fund as non-approved based on the Commissioner's order dated 25.6.2012. The application for registration was submitted on 16.6.2011, and no order was passed within the six-month period, resulting in deemed approval under Section 12AA. The addition of 5% premium collected by the Assessee was deemed illegal, based on conjecture and surmises.

5. Taxability of 5% Premium Collected by Assessee Without Considering Overriding Obligations/Liabilities:
The court held that the assumption of 5% income on the premium received was without basis, as the premium represented lease rent and expenses for developing industrial land, not profit or loss. The Tribunal failed to consider the public nature of the Assessee’s functioning in developing industries.

6. Deduction Under Section 80IA for Premium Treated as Taxable:
The Tribunal was found to have erred in law by not allowing deduction under Section 80IA for the interest earned on installments granted in respect of premium payable. The CIT had found a link between the interest earned and the business of the Assessee, and the Tribunal's dismissal of the Assessee’s appeal without reversing this finding was incorrect.

7. Inclusion of Interest on Premium Payable by Allottees for Exemption Under Section 80IA:
The court noted that the interest earned by the Assessee on delayed payment of installments should be considered part of the income qualifying for exemption under Section 80IA, as it was linked to the business of the Assessee.

Conclusion:
The court set aside the Tribunal's judgment dated 24.7.2014 and remanded the matter back for a fresh order in light of the discussed legal principles. The Assessee was entitled to deductions for the payment made to LIC under the Group Gratuity Insurance Scheme, and the addition of 5% premium and forfeiture of earnest money/premium was deemed illegal. The Tribunal was directed to reconsider the applicability of Section 80IA for interest received on delayed payments.

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