2017 (6) TMI 1342 - AT - Income Tax

Disallowance made in respect of payment to unapproved gratuity fund - Assessee paid sum by way of contribution towards gratuity to a trust which was created for the benefit of employees of the assessee company - AO noted that the said gratuity fund scheme was not approved by the CIT - AO and the CIT(A) thus, invoked the provisions of section 36(1)(v) of the Act to disallow the said claim of assessee as the amount was not paid to an approved gratuity fund - HELD THAT - As relying on Tata Iron Steel Co. Ltd. 1975 (2) TMI 22 - BOMBAY HIGH COURT amount which has been paid by the assessee towards an unapproved gratuity fund is duly allowable as deduction under section 37(1) of the Act though the assessee is not entitled to claim the deduction under section 36(1)(v) of the Act. Accordingly, the ground of appeal No.1 raised by the assessee is allowed.

Summary

Issues:
1. Disallowance of payment to unapproved gratuity fund.
2. Disallowance of expenses wrote off to Profit & Loss A/c pertaining to an earlier year.

Issue 1: Disallowance of payment to unapproved gratuity fund:
The appellant contested the disallowance of a payment made to a gratuity fund that was not approved by the Commissioner of Income Tax. The Assessing Officer invoked section 36(1)(v) of the Income-tax Act, disallowing the amount as it was not paid to an approved fund. The CIT(A) upheld this decision, stating that section 40A(7) did not apply, and the amount was not allowable under section 36(1)(v). However, the appellant argued that even if disallowed under section 36(1)(v), the amount should be allowed under section 37(1) of the Act. Citing a Hyderabad Tribunal decision, the appellant contended that unapproved gratuity fund payments are deductible under section 37(1). Relying on precedents, including a Bombay High Court case and a Supreme Court judgment, the tribunal held that the amount paid towards an unapproved gratuity fund is deductible under section 37(1) but not under section 36(1)(v). Consequently, the ground of appeal regarding the disallowance of the payment to the unapproved gratuity fund was allowed.

Issue 2: Disallowance of expenses wrote off to Profit & Loss A/c pertaining to an earlier year:
The appellant also challenged the disallowance of expenses amounting to ?16,88,394 written off to the Profit & Loss A/c, contending that the expenses were capital in nature and related to a previous fiscal year. The appellant requested to capitalize the expenditure in the relevant assessment year and claim depreciation accordingly. However, this ground of appeal was not pressed by the appellant and was dismissed as such. Therefore, the disallowance of expenses pertaining to an earlier year was not further considered by the tribunal.

In conclusion, the appellate tribunal partially allowed the appellant's appeal, permitting the deduction of the payment made to the unapproved gratuity fund under section 37(1) of the Income-tax Act while dismissing the appeal regarding the disallowance of expenses wrote off to Profit & Loss A/c pertaining to an earlier year.