2021 (8) TMI 287 - AT - Income Tax

Disallowance of provision for gratuity and leave encashment - HELD THAT - The provisions are necessary to be made for certain purposes like, provision for depreciation is to be made in respect of decrease in value of property through wear and tear, deterioration or obsolescence and allowance is made for this purpose in book-keeping, accountancy, etc. It is the provision made for the loss or expenses incurred through using the asset for earning profits, and should, therefore, be charged against those profits as they are earned. If depreciation is not provided for, the books will not contain a true record of revenue or capital. If the asset were hired instead of purchased, the hiring fee would be charged against the profits, having been purchased, the asset is, in effect, then hired by capital to revenue, and the true profit cannot be ascertained until a suitable charge for the use of the asset has been made. Likewise, the provision for gratuity and leave encashment also required to be provided as mandated by Law. Without being such provisions made, the balance sheet will not present a true and fair view of the state of affairs. In CIT v. Indian Jute Mills Association 1981 (2) TMI 34 - CALCUTTA HIGH COURT held while constructing the expression 'expenditure incurred' in section 44(A) of the Act observed depreciation claim shall include the expenditure incurred. Thus, in case of trust, the meaning applied need not be construed as spent . It includes the necessary provisions required to be made as per statutory requirement. Therefore, we direct the AO to allow the provision for gratuity and leave encashment as applied for the object of the trust. Accordingly the ground raised by the assessee is hereby allowed.

Issues Involved:

1. Disallowance of provisions for leave encashment and gratuity.
2. Non-allowance of assessed deficit to be carried forward to subsequent years.

Issue-Wise Detailed Analysis:

1. Disallowance of Provisions for Leave Encashment and Gratuity:

The assessee, a registered Charitable Organisation, challenged the disallowance of provisions for leave encashment and gratuity totaling ?78,73,310 by the Assessing Officer (AO). The AO had disallowed these provisions, arguing they were not actual expenditures but merely provisions and thus could not be considered as application of income for the trust's objectives.

The CIT(A) upheld the AO's decision, stating that for trust assessments, only real expenses (actual outflow of money) and not provisions should be considered as application of income. The CIT(A) reasoned that the provisions under sections 11-13 of the Income Tax Act emphasize the consideration of real receipts and expenses on a receipt basis.

The assessee argued that the provisions were made based on statutory requirements and employment terms, and were necessary to reflect the true financial position of the trust as per Accounting Standards 15 (AS-15) issued by ICAI. The assessee contended that these provisions were akin to depreciation, which is also a non-cash expenditure but mandated by law to present a true financial picture.

The tribunal considered the rival submissions and concluded that provisions for gratuity and leave encashment, though non-cash, are necessary for a true and fair view of the financial statements. It noted that like depreciation, these provisions are required by law and should be treated as application of income. The tribunal directed the AO to allow the provisions for gratuity and leave encashment as applied for the trust's objectives, thereby allowing the assessee's appeal on this ground.

2. Non-Allowance of Assessed Deficit to be Carried Forward:

The assessee raised an additional ground regarding the AO's failure to allow the carry forward of an assessed deficit of ?2,13,06,095 to subsequent years. The assessee argued that this issue was not raised before the CIT(A) as it was not specifically addressed by the AO in the assessment order.

The tribunal admitted this additional ground for adjudication. The assessee relied on the decision of the Hon'ble Bombay High Court in CIT vs. Institute of Banking Personnel Section, which allowed the carry forward of excess expenditure to be set off against the income of subsequent years, treating it as application of income for charitable purposes.

The tribunal found the facts of the present case identical to the cited decision and noted that the Hon'ble Supreme Court had dismissed the SLP filed by the revenue on a similar issue. Respectfully following these judicial precedents, the tribunal directed the AO to allow the carry forward of the deficit amount of ?2,91,79,405 to subsequent assessment years, thereby allowing the additional ground raised by the assessee.

Conclusion:

The assessee's appeal was allowed in full. The tribunal directed the AO to:
1. Allow the provisions for gratuity and leave encashment as application of income for the trust's objectives.
2. Allow the carry forward of the assessed deficit of ?2,91,79,405 to subsequent assessment years.

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