2021 (3) TMI 352 - AT - Income Tax

Disallowance of premium paid to not Approved gratuity fund - premium paid to LIC of India to cover the payment of gratuity liability to its employees on death or retirement on the pretext that the Group Gratuity Scheme framed by LIC of India is not an Approved gratuity fund - assessee has not created any approved gratuity fund by forming a trust on its own but merely paying the amount to LIC of India as premium which is treated as expenses to the assessee - CIT(A) was of the opinion that the claim is not an allowable expenditure under section 36(1)(v) of the Act since the scope of section 40A(7) relates to provisions and not the case of actual payment - HELD THAT - Assessee paid to LIC sum of 1 lakh as premium to cover the obligation towards the gratuity payment to employees. The balance 16, 585/- is only a provision. In assessment year 2015-16 contribution to LIC premium was deleted by holding that section 40A(3) cannot be invoked in respect of actual payments made by assessee to LIC. We also perused the decisions relied by the Ld.AR of coordinate benches of this Tribunal wherein it is held that payment made to get gratuity fund maintained with life insurance Corporation created exclusively for the benefit of its employees had to be allowed as deduction. Admittedly during the year under consideration assessee paid sum of 1 lakh to LIC. We agree with the submissions of the Ld.AR that the disallowance could be at the most restricted to 16, 585/- which is shown as provision during the year. Considering order passed by the Ld.CIT(A) in the subsequent year accepting the payment as an allowable expenditure actually made to LIC we hold that assessee is to be granted relief to the extent of 1 lakh being actually made to LIC - Appeal filed by assessee stands partly allowed.

Summary

Issues:
1. Disallowance of premium amount paid to LIC of India for gratuity liability.
2. Whether the premium paid to LIC of India is an allowable expense.
3. Interpretation of Section 36(1)(v) and Section 40A(7) of the Income Tax Act.

Issue 1: Disallowance of premium amount paid to LIC of India for gratuity liability:

The appellant, a manufacturing company, appealed against the disallowance of expenses related to the premium paid to LIC of India for gratuity liability. The Assessing Officer (AO) disallowed the expenses as the appellant had not created an approved gratuity fund but only paid the premium to LIC of India. The AO cited Section 40A(7) of the Income Tax Act and the lack of approval from the appropriate authority for the gratuity fund. The Commissioner of Income Tax (Appeals) upheld the disallowance, stating that the appellant had control over the funds received back from LIC of India, thus not meeting the requirements of Section 36(1)(v) of the Act. The appellant's argument that the payment was allowable under Section 43B of the Act was dismissed, as the deduction itself was not allowable under Section 36(1)(v). The CIT(A) concluded that the appellant did not comply with the Act's requirements, hence disallowing the deduction.

Issue 2: Whether the premium paid to LIC of India is an allowable expense:

The appellant argued that the payment made to LIC of India was eligible for deduction under Section 37 of the Act, as it was based on actual payments made and the policy taken. The appellant relied on decisions from the Kerala High Court and the Chennai Tribunal to support their claim. The Senior Departmental Representative contended that the provision for gratuity claimed by the appellant was not incurred during the year and therefore not an allowable expenditure. The ITAT noted that the appellant paid ?1 lakh to LIC as premium to cover gratuity obligations, with a balance of ?16,585 as a provision. The ITAT agreed with the appellant's submission that the disallowance should be restricted to the provision amount, as evidenced by previous decisions of the CIT(A) and coordinate benches of the Tribunal.

Issue 3: Interpretation of Section 36(1)(v) and Section 40A(7) of the Income Tax Act:

The ITAT analyzed the provisions of Section 36(1)(v) and Section 40A(7) of the Income Tax Act in light of the appellant's case. It considered the control over funds, the actual payments made to LIC, and previous decisions on similar matters. The ITAT concluded that the appellant's payment of ?1 lakh to LIC was an allowable expenditure, granting relief to the extent of the actual payment made to LIC. The ITAT partially allowed the appellant's appeal based on the interpretation of the relevant sections and previous decisions.

In conclusion, the ITAT partially allowed the appeal filed by the appellant concerning the disallowance of the premium amount paid to LIC of India for gratuity liability, based on a detailed analysis of the provisions of the Income Tax Act and relevant case law.