2021 (6) TMI 252 - AT - Income Tax

Disallowance of provision to contribution to Gratuity Fund u/s.36(1)(5) - Addition u/s 36(1)(v) on account of gratuity contribution, through the gratuity fund was not approved under the Act - whether the assessee is entitled for the deduction for the contribution made to the gratuity fund which was not approved by the Commissioner of income tax under section 2(5) of the Act in the year under consideration? - HELD THAT - To our understanding, the assessee should be vigilant enough to pursue its matter before the authorities. The assessee should not fold his hands on the reasoning that its job has done upon making the requisite application before the Commissioner of income tax under section 2(5) of the Act. Undisputedly the approval was granted under section 2(5) of the Act subsequently by the Commissioner of income tax with effect from 1st April 2012 - purpose of creating the approved gratuity fund was to ensure that the amount contributed by the assessee as the employer should leave the possession from its hands. In other words, the assessee should not have any control on the fund created for the welfare of the employees. In the case on hand, there is no ambiguity that there was no control of the assessee of whatsoever on the funds created by it for the welfare of the employees as the fund was invested with the LIC of India and LIC was directly paying amount to the employee on occasion of retirement. As relying on M/S TEXTOOL CO. LTD. 2009 (9) TMI 66 - SUPREME COURT and PRAKASH SOFTWARE SOLUTION PVT LTD 2018 (1) TMI 956 - ITAT AHMEDABAD there is hardly any doubt regarding allowability of deductions for any contributions made to an approved gratuity fund established under an irrevocable trust. Further, no deduction shall be allowed to an organization of any provision for payment of gratuity. Appeal of the revenue is dismissed.

Summary

Issues Involved:
1. Deletion of additions on account of disallowance of ?1,67,90,200/- for provision to contribution to Gratuity Fund under section 36(1)(v) of the Income Tax Act.
2. Consideration of the fact that the gratuity contribution is allowable as a deduction only if the trust is registered under the Income Tax Act.
3. The effective date of registration for the gratuity fund and its relevance to the assessment year in question.

Issue-Wise Detailed Analysis:

1. Deletion of Additions on Account of Disallowance:
The primary issue raised by the Revenue was the deletion of the addition of ?1,67,90,200/- claimed as a deduction by the assessee on account of gratuity contribution. The assessee, a registered cooperative society, had created an irrevocable Gratuity Trust and had taken a master policy with LIC for its employees. Despite applying for approval of the gratuity scheme in 1985, no communication was received from the department, and the documents were misplaced. A fresh application in 2016 led to approval effective from 01-04-2012. The AO disallowed the claim because the trust was not recognized in the year under consideration. The CIT(A) allowed the appeal, noting that the application for approval was made in 1985, and no rejection was recorded, thus the deduction should not be denied merely because the approval was granted later.

2. Registration of the Gratuity Fund:
The Revenue contended that the gratuity contribution is deductible only if the trust is registered under the Income Tax Act. The CIT(A) observed that the assessee had no control over the gratuity fund managed by LIC, aligning with the intention behind section 36(1)(v) to prevent misuse of funds. The CIT(A) referenced the Hon’ble Supreme Court judgment in CIT vs. Textool Co. Ltd, which emphasized that the employer should not control the fund created for employees' benefit. The CIT(A) concluded that the assessee met all conditions under section 36(1)(v) and relevant rules, and the delay in approval should not negate the deduction.

3. Effective Date of Registration:
The Revenue argued that since the registration was effective from 01-04-2012, the deduction for the assessment year 2011-12 was not applicable. The CIT(A) and the Tribunal noted that the assessee had applied for approval in 1985, and the delay was due to the department's inaction. The Tribunal emphasized that the purpose of the approved gratuity fund was to ensure the employer had no control over the funds, which was the case here. The Tribunal cited the Hon’ble Supreme Court and ITAT judgments, stating that the date of approval should align with the fund's creation date if the terms remain unchanged. Thus, the Tribunal upheld the CIT(A)’s decision, allowing the deduction for the year under consideration.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming that the assessee was entitled to the deduction under section 36(1)(v) despite the delayed approval, as the application was made in 1985, and the fund was managed independently by LIC. The Tribunal directed the AO to delete the addition, emphasizing that the legislative intent was to ensure the employer’s lack of control over the gratuity fund, which was satisfied in this case.