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2020 (8) TMI 471 - AT - Income TaxRevision u/s 263 - payment made to gratuity fund u/s 40A(7) disallowed - HELD THAT - Payment made to LIC of India is not a provision but it is actual expenditure claimed under the gratuity contribution, which needs to be allowed as deduction. Therefore, the order passed by the AO u/s.143(3) was not erroneous and prejudicial to the interest of Revenue. In our opinion, the Pr.CIT is not justified in directing the AO to disallow the payment made to gratuity fund u/s.40A(7) of the Act, hence, the order passed by the Pr.CIT u/s.263 of the Act is hereby quashed. - Appeal of the assessee is allowed.
Issues Involved:
1. Legality and jurisdiction of the order passed under Section 263 of the Income Tax Act. 2. Disallowance of payment made to Gratuity fund under Section 40A(7) of the Income Tax Act. 3. Whether the payment to an unapproved Gratuity fund can be allowed as a business expenditure under Section 37(1) of the Income Tax Act. 4. Examination of whether the order passed under Section 263 represents a mere change of opinion without proper application of mind. Issue-wise Detailed Analysis: 1. Legality and Jurisdiction of the Order Passed under Section 263 of the Income Tax Act: The assessee challenged the order passed by the Principal Commissioner of Income Tax (Pr. CIT) under Section 263 of the Income Tax Act, arguing that it was illegal, arbitrary, and an excessive exercise of jurisdiction. The Pr. CIT had invoked revisionary powers to modify the assessment order made by the Assessing Officer (AO), contending that the AO's order was erroneous and prejudicial to the interest of the revenue due to the allowance of deductions towards an unapproved gratuity fund. 2. Disallowance of Payment Made to Gratuity Fund under Section 40A(7) of the Income Tax Act: The Pr. CIT directed the AO to disallow the payment made to the gratuity fund under Section 40A(7) of the Act, as the gratuity fund was not approved by the competent authority. The assessee argued that the gratuity fund was created by a trust deed and a Group Gratuity Scheme was floated in collaboration with LIC of India. The assessee deposited the premium calculated by LIC annually and considered it in the Profit & Loss account. The Pr. CIT, however, observed that no approval for the gratuity fund had been obtained from the competent authority, making the contribution ineligible for deduction under Section 40A(7). 3. Whether the Payment to an Unapproved Gratuity Fund can be Allowed as a Business Expenditure under Section 37(1) of the Income Tax Act: The assessee contended that the payment to the LIC Group Gratuity Scheme should be allowed as a business expenditure under Section 37(1) of the Act, even though the fund was not approved. The assessee cited several case laws where courts had held that actual payments to LIC Group Gratuity Schemes, even if unapproved, were deductible as business expenditures under Section 37(1). The Tribunal reviewed these precedents, including decisions from the ITAT Hyderabad, Delhi, and Ahmedabad benches, which consistently held that actual payments to such schemes are allowable as business expenditures under Section 37(1), not being mere provisions under Section 40A(7). 4. Examination of Whether the Order Passed under Section 263 Represents a Mere Change of Opinion without Proper Application of Mind: The assessee argued that the Pr. CIT's order under Section 263 was a mere change of opinion without proper application of mind. The Tribunal found that the AO had allowed the payment after examining the relevant documents, including the trust deed, agreement with LIC, and evidence of payment. The Tribunal noted that the AO's order was not erroneous, as it was based on the actual payment made to LIC under a collaboration agreement. The Tribunal held that the Pr. CIT's direction to disallow the payment under Section 40A(7) was unjustified and quashed the order passed under Section 263. Conclusion: The Tribunal allowed the appeal of the assessee, holding that the payment made to the LIC Group Gratuity Scheme was an actual expenditure and deductible under Section 37(1) of the Income Tax Act. The Tribunal quashed the Pr. CIT's order under Section 263, finding it to be an unjustified exercise of revisionary powers. The Tribunal concluded that the AO's original order was neither erroneous nor prejudicial to the interest of the revenue.
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