2022 (9) TMI 304 - AT - Income Tax

Assessment of trust - Disallowance on account of provision for gratuity expenditure - ascertained liability, provided in the books of accounts by the appellant - Scope of term applied v/s spent - HELD THAT - As per provisions of section 11 (1) (a) the income derived from the property held under the trust shall not be included in total income of the previous year to the extent such income is applied for charitable purposes in India. While dealing with the issue whether provision for gratuity and leave encashment would tantamount to application of income in the case of a trust, the coordinate bench in Anandlal Ganesh Podar Society 2021 (8) TMI 287 - ITAT MUMBAI held that i n 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. In the present case, it has not been disputed that assessee has paid gratuity to its employees in the year of their retirement. It is also not in dispute that the provision for gratuity complies with required statutory provisions and accounting standards. It is also the fact that assessee has consistently prepared its accounts following mercantile system of accounting and made provision for gratuity in the similar manner, as is made in the year under consideration. We direct the AO to delete the impugned addition by allowing the provision for gratuity made by the assessee in its books of account. Accordingly, grounds raised by the assessee in the present appeal are allowed.

Summary

Issues:
Challenge to disallowance of provision for gratuity expenditure under section 250 of the Income Tax Act, 1961 for the assessment year 2014-15.

Analysis:
1. The assessee appealed against the disallowance of Rs. 8,00,019 for provision of gratuity made in the books of account. The Assessing Officer (AO) held that since it was a provision and not actual expenditure, it should be disallowed. The AO added the amount to the total income of the assessee.

2. The assessee contended that the provision was based on statutory provisions and compliance with accounting standards. The provision was for services already provided by employees, and the liability was incurred by the assessee. The assessee maintained a separate bank account for the provision, which was used to pay gratuity upon retirement. The assessee argued that for section 11 of the Act, income needed to be "applied," not "spent."

3. The Tribunal referred to a previous case where it was observed that provisions for gratuity and leave encashment, though not actual expenditure, were necessary under the law and accounting standards to reflect the true financial position. The Tribunal emphasized that "applied" did not equate to "spent," and provisions were essential for accurate accounting. The Tribunal directed the AO to allow the provision for gratuity as applied for the trust's objectives.

4. Citing a judgment by the Andhra Pradesh High Court, it was noted that "applied" should not be equated with "spent." The court emphasized that the actual payment was irrelevant in determining the application of funds. In the present case, the assessee had paid gratuity as per statutory requirements, accounting standards, and consistently followed the mercantile system of accounting. Following judicial precedents, the Tribunal directed the AO to delete the addition and allow the provision for gratuity made by the assessee.

5. Consequently, the appeal by the assessee (ITA No. 1332/Mum/2021) was allowed, while the other appeal (ITA No. 1467/Mum/2021) was dismissed as withdrawn.