2017 (3) TMI 954 - AT - Income Tax

Reversal of provision for gratuity and leave encashment - Held that - CIT(A) has taken into consideration that the assessee had a balance of ₹ 19,67,294/- in the gratuity account as on 01.04.09. The assessee had to get the actuarial valuation done as on 31.03.10 therefore, the assessee had to make a provision for gratuity of ₹ 24,05,938 resulting in additional provision of ₹ 4,38,641/- to be made during the year to arrive at a total provision of ₹ 24,05,938/-. The Ld. CIT(A) has also considered that the assessee had the balance of ₹ 6,81,416/- in respect of provision for leave encashment as on 01.04.09 and in this way, during the year, the total provision as worked out towards leave encashment as on 31.03.10 was ₹ 3,81,466/- thereby resulting in excess provision of ₹ 2,99,950/-. The Ld. CIT(A) after considering the facts of the case had correctly find that the excess provision has been rightly added back by the assessee company to the total income in the computation of income, therefore the additions made by AO were deleted - Decided against revenue Difference between the foreman commission receivable and the foreman commission actually received - Held that - CIT(A) has taken into consideration that the assessee earned commission of 5% on the total chit fund collection. The said commission is spread over the total period of scheme and in this way the assessee earns commission on a month to month basis on the monthly collection made and on the successful biding by the subscribers. As per the facts, the agents are paid a commission of 1% of the total chit fund value in respect of each subscriber enlisted by him provided such subscribers pays at least 4 months installment, immediately on receipt of 4 such installments and in this way there is no definite co-relation between the foremen commission earned and the agency commission paid. After appreciating the facts, the Ld. CIT(A) had rightly decided that the addition made by the AO in computing the income of the assessee by applying five times of the payment of the commission to the agents is not based on any objective yardsticks, therefore deleted the said additions.- Decided against revenue

Summary

Issues:
1. Allowance of claim for reversal of provision for gratuity and leave encashment.
2. Disallowance of deduction for the difference in foreman commission receivable and received.

Issue 1 - Allowance of claim for reversal of provision for gratuity and leave encashment:
The Appellant, a Chit Fund business, filed an appeal against the Commissioner of Income Tax (Appeals) order for AY 2010-11. The AO had made additions/disallowances regarding gratuity, leave encashment, and service tax. The CIT(A) partly allowed the appeal. The Revenue appealed against this decision. The first ground of appeal focused on the reversal of provision for gratuity and leave encashment. The Revenue argued that the CIT(A) erred in allowing the claim as the Tax Audit Report showed unpaid liabilities for gratuity and leave encashment. However, the CIT(A) considered the balance in the gratuity account and the provision for leave encashment, leading to the deletion of the additions made by the AO. The ITAT upheld the CIT(A)'s decision, stating that the findings were well-reasoned and judicious. The Revenue failed to provide new facts or contrary judgments to challenge the CIT(A)'s decision.

Issue 2 - Disallowance of deduction for the difference in foreman commission receivable and received:
The second ground of appeal concerned the disallowance of a deduction for the difference in foreman commission receivable and received. The Revenue contended that the CIT(A) erred in disregarding the correlation between foreman commission earned and agency commission paid. The CIT(A) noted that the commission earned by the Appellant was spread over the chit fund scheme's duration, and there was no direct correlation between foreman and agency commissions. The CIT(A) deleted the addition made by the AO, stating that it lacked an objective basis. The ITAT upheld this decision, emphasizing that the addition made by the AO was not supported by any objective yardstick. The Revenue did not present new facts or contrary judgments to challenge the CIT(A)'s decision.

General Grounds:
The third and fourth grounds of appeal were deemed general in nature and did not require specific adjudication. The ITAT pronounced the order on 17th March 2017, dismissing the appeal filed by the Revenue.

This detailed analysis of the judgment highlights the key issues, arguments presented by both parties, the reasoning of the CIT(A), and the final decision of the ITAT for each issue involved in the case.