2024 (8) TMI 622 - AT - Income Tax

Excess payments towards gratuity as per fund houses - wrong claim of group gratuity and leave encashment in its return of Income - Addition being the difference in valuation of group gratuity and leave encashment funds as per books of accounts and actuarial valuation of the fund made by LIC and SBI Life Insurance Companies - assessee bank makes provision every year and these provisions never shown as real expenses for income tax purposes - HELD THAT - The expenses debited and shown in schedule 16 are provisions and real expenses for the year under consideration. The provisions are being reduced by the assessee bank and net expenses are being shown by the assessee in its profit and loss account. Therefore, the real expenses pertain to the assessment year under consideration are taken into account only. Therefore, the findings of the A.O. that the same amount does not pertain to the year under consideration does not match with accounting treatment made by the assessee bank, which we have explained with factual data mentioned above. AO also noted that the assessee cannot reduce the said amount from the profit and loss account as it does not pertain to the assessment year under consideration, but this findings of the A.O. is perverse in nature and does not have any connection with the issue under consideration. As we have explained that the real expenses and provisions mentioned in schedule 16 pertains to the assessment year under consideration i.e. assessment year 2015-16 and do not pertain to earlier year. Hence, there is no question arises to reduce the earlier year provisions from the current profit and loss account. Therefore, the findings given by the A.O. are not acceptable in the light of the facts narrated above. Taxability of real income - Allowability of provisions for gratuity and leave encashment - As we find that these are two provisions made by the assessee bank and assessee bank has to make provision every year because the assessee bank would have an obligation to pay the gratuity to employees at the time of retirement. Had the bank does not make provision for gratuity and leave encashment, as per accrual system of accounting, then in that situation immediate financial burden may come on the assessee bank and in order to avoid this situation, the bank, by following accrual basis of accounting recorded the expenses based on the accrual system of accounting and makes the provision based on the accrual system of accounting. However, the provisions are never treated as expenses by the assessee bank, on actual payment assessee bank treats expense. Hence, we find that Hon ble Supreme Court in the case of Shoorji Vallabhdas and Co. 1962 (3) TMI 6 - SUPREME COURT wherein it was held that real income earned by the assessee is taxable and provisions are not included in the real income of the assessee unless there is a specific provision provided under the Act to the contrary. Therefore, we note that assessee is not taking into consideration the hypothetical expenditure to reduce its income, we have gone through the schedule 16 is reproduced above and noted that no notional expenses are being debited by the assessee in order to reduce its profit. Addition made by the assessing officer needs to be deleted. Decided in favour of assessee.

Issues Involved:
1. Addition of Rs. 7,09,71,733/- due to the difference in valuation of group gratuity fund and leave encashment fund.
2. Applicability of Accounting Standard 15 (AS-15) for the valuation of employee benefits.
3. Taxability of accounting adjustments and provisions.

Issue-wise Detailed Analysis:

1. Addition of Rs. 7,09,71,733/- due to the difference in valuation of group gratuity fund and leave encashment fund:
The primary issue revolves around the addition of Rs. 7,09,71,733/- made by the Assessing Officer (AO) due to the difference in the valuation of the group gratuity fund and leave encashment fund as per the books of accounts and actuarial valuation by LIC and SBI Life Insurance Companies. The AO argued that this difference should be added back to the taxable income of the assessee, as it was claimed that these amounts do not pertain to the year under consideration but to previous years. The CIT(A) upheld this addition, stating that the amounts deducted do not pertain to the year under consideration and each assessment year is separate.

2. Applicability of Accounting Standard 15 (AS-15) for the valuation of employee benefits:
The assessee argued that it is bound to follow Accounting Standard 15 (AS-15), which prescribes the accounting and disclosure for employee benefits. According to AS-15, the enterprise must recognize either an asset or liability with respect to the accounting of employee benefits. The assessee made accounting entries to match the fund balance appearing in its books with the balance as per the certificates from LIC and SBI Life Insurance Companies. The assessee contended that these accounting adjustments are not real expenses or income but are merely for matching fund balances and obligations as per AS-15.

3. Taxability of accounting adjustments and provisions:
The assessee submitted that the adjustments made in the books are not taxable as they do not represent real income or expenses. The AR for the assessee argued that the gross effect of these adjustments is a decrease in expenses, leading to an increase in profit in the books, which is not taxable. The AR also stated that the assessee has claimed deductions for payments made to LIC and SBI Life as per Section 36(1)(v) of the Income Tax Act in various years, and hence, the amount of Rs. 7,09,71,733/- is not taxable.

Tribunal's Findings:

The Tribunal examined the facts and arguments presented by both parties. It noted that the assessee bank makes provisions for gratuity and leave encashment as per AS-15 and these provisions are reversed every year based on actuarial valuations. The Tribunal found that the real expenses incurred by the assessee bank are debited to the profit and loss account, while the provisions are deducted from the total payments in Schedule 16 under the head "payment and provision for employees." Therefore, the net amount debited to the profit and loss account is after excluding the provisions for gratuity and leave encashment.

The Tribunal concluded that the findings of the AO were perverse, as the expenses debited and shown in Schedule 16 pertain to the assessment year under consideration and not to previous years. The Tribunal also referred to the Supreme Court's ruling in the case of Shoorji Vallabhdas and Co., which held that real income earned by the assessee is taxable and provisions are not included in the real income unless specifically provided under the Act.

Based on these findings, the Tribunal held that the addition of Rs. 7,09,71,733/- made by the AO was not justified and should be deleted. The appeal of the assessee was allowed, and the addition was deleted.

Conclusion:
The Tribunal allowed the appeal of the assessee, deleting the addition of Rs. 7,09,71,733/- made by the AO. The Tribunal found that the accounting adjustments made by the assessee as per AS-15 were not taxable as they did not represent real income or expenses. The Tribunal emphasized that the real expenses incurred by the assessee were debited to the profit and loss account, and the provisions were deducted from the total payments, resulting in no tax effect from these adjustments.

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