2018 (7) TMI 814 - AT - Income Tax

Disallowance of Contribution of Gratuity Fund - Held that - We find lot of force in the argument of the ld. AR that the actual settlement of gratuity to retired employees during the year in the sum of ₹ 16,95,886/- is to be treated as deduction. Accordingly, we direct the AO to grant deduction of ₹ 16,95,886/- towards actual payment of gratuity made to retired employees. Accordingly, ground nos. 1 to 4 raised by the assessee are partly allowed. Disallowance on account of Contribution to Provident Fund - whether the assessee, being an employees of co-operative bank, would fall within the ambit of applicability of provisions of Employees Provident Fund and Miscellaneous Provision Act, 1952? - Held that - We find no finding is recorded by the ld. AO in this regard. Without such finding, it cannot be decided that whether the provisions of section 2(24)(x) and 40A(9) of the Act could be invoked on the assessee. Accordingly, we deem it fit and appropriate, to remand this issue to the file of the AO for de novo adjudication in the light of directions contained herein above. Accordingly, ground nos. 5 to 9 of the assessee appeal for assessment year 2011-12 and ground nos. 1 to 5 for assessment year 2012-13 are allowed for statistical purposes. Disallowance of Contribution to Employees Pension Fund paid to Aviva Life Insurance Ltd. - allowable business expenditure - Held that - The payment of insurance premium paid by the assessee was made on behalf of its employee. Hence it squarely falls as an expenditure incurred for the welfare of its employees. It is not in dispute that the proceeds of the insurance policy does not fall back on the assessee and that the assessee would have no control over those funds and the said funds cannot be utilized by the assessee for its business purposes. In other words, the said funds exclusively belongs only to the employees. In this scenario, the payment made towards insurance premium would have to be construed as an expenditure incurred wholly and exclusively for the purpose of business and squarely allowable u/s 37(1) Disallowance of Interest paid on Members Welfare Funds - Held that - We find that the assessee had made specific earmarked investment in fixed deposits maintained for members welfare fund and had derived interest income thereon at the average rate of 11.34% which has been duly offered to tax. In any case, the members welfare fund has been utilized for the purpose of business which is not in dispute and the said funds were also deployed by way of earmarked investment in fixed deposit deriving taxable interest income. This fact has not been verified by the ld. AO as no finding to this effect is available in the record. Hence we deem it fit and appropriate, to remand this issue to the file of ld. AO for de novo adjudication, uninfluenced by earlier decision taken either by him or by the CIT(A) in this regard Disallowance of Interest paid on Staff Provident Fund - Held that - We find that the assessee had made specific earmarked investment in fixed deposits maintained for staff provident fund to the tune of ₹ 1,98,93,000/- and had derived interest income thereon at the average rate of 9.57% which has been duly offered to tax. In any case, the staff provident fund has been utilized for the purpose of business which is not in dispute and the said funds were also deployed by way of earmarked investment in fixed deposits deriving taxable interest income. This fact has not been verified by the AO as no finding to this effect is available in the record. Hence we deem it fit and appropriate, to remand this issue to the file of ld. AO for de novo adjudication Appeals of the assessee are allowed for statistical purposes.

Issues Involved:
1. Disallowance of Contribution of Gratuity Fund
2. Disallowance on account of Contribution to Provident Fund
3. Disallowance of Contribution to Employees Pension Fund paid to Aviva Life Insurance Ltd.
4. Disallowance of Interest paid on Members’ Welfare Funds
5. Disallowance of Interest paid on Staff Provident Fund

Detailed Analysis:

1. Disallowance of Contribution of Gratuity Fund:
The assessee, a registered Co-operative Bank, made a provision for gratuity of ?22 lacs, which was disallowed by the AO under section 40A(7) of the Income Tax Act. The actual payment of gratuity during the year was ?16,95,886/-. The Tribunal found merit in the assessee's argument that the actual settlement of gratuity should be treated as a deduction. Consequently, the AO was directed to grant a deduction of ?16,95,886/- towards the actual payment of gratuity. Thus, the assessee's grounds were partly allowed.

2. Disallowance on account of Contribution to Provident Fund:
The AO observed that the bank collected provident fund contributions from employees amounting to ?4,04,636/- and invested it with the West Bengal State Co-operative Bank. The AO invoked section 2(24)(x) read with section 36(1)(va) and section 40A(9) of the Act, disallowing the sum. The Tribunal noted the lack of findings on whether the assessee falls under the Employees’ Provident Fund and Miscellaneous Provision Act, 1952. The issue was remanded back to the AO for de novo adjudication.

3. Disallowance of Contribution to Employees Pension Fund paid to Aviva Life Insurance Ltd.:
The assessee contributed ?2,34,000/- towards employees' pension policy with Aviva Life Insurance, which was disallowed by the AO under section 80CCD for lack of evidence of approval by the Central Government. The Tribunal found that the contribution was for the welfare of employees and should be allowed as an expenditure under section 37(1) of the Act. Therefore, the grounds for both assessment years were allowed.

4. Disallowance of Interest paid on Members’ Welfare Funds:
The AO disallowed ?25,20,700/- interest on members' welfare fund, arguing that the members, being owners, cannot be considered as an expenditure incurred wholly and exclusively for business purposes. The Tribunal found that the members' welfare fund was utilized for business and derived taxable interest income. The issue was remanded back to the AO for de novo adjudication, considering the specific earmarked investments and their utilization.

5. Disallowance of Interest paid on Staff Provident Fund:
The AO disallowed ?18,38,333/- interest on staff provident fund, noting that the employer kept the fund and claimed the deduction. The Tribunal observed that the staff provident fund was utilized for business and derived taxable interest income. The issue was remanded back to the AO for de novo adjudication, considering the specific earmarked investments and their utilization.

Conclusion:
The Tribunal allowed the appeals of the assessee for statistical purposes, remanding several issues back to the AO for fresh adjudication with specific directions. The order was pronounced on 04.07.2018.

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