2018 (1) TMI 956 - AT - Income Tax

Disallowing contribution to gratuity fund - the gratuity fund was not approved on the date of contribution - whether as the approval was in process and hence the contribution was allowable as a deduction - allowability u/s 37 or 36 - effective date - Held that - Notwithstanding the effective date of approval set out by the Commissioner in his approval order the approval granted to the employees gratuity trust must be treated as effective from 1st January 2010 and on that basis the contribution made by the assessee to the said trust must be held to be admissible as deduction under section 36(1)(v). The assessee thus succeeds in the appeal. The alternate plea of the learned counsel which was so emphatically argued before us is anyway only fit to be noted and rejected since as clearly provided by Section 37(1) itself only such expenses can be considered for deduction under section 37(1) which are not expenditure of the nature described in sections 30 to 36 . Once the provisions of contribution to gratuity fund are specifically covered by Section 36(1)(v) as is the admitted position on the facts of the case section 37(1) can obviously not have any application. - Decided in favor of assessee.

Summary

Issues Involved:
1. Disallowance of contribution to gratuity fund under Section 36(1)(v).
2. Alternative claim of deduction under Section 37 as business expenditure.

Detailed Analysis:

1. Disallowance of Contribution to Gratuity Fund:
The primary issue in this appeal is the disallowance of ?5,63,235 contributed to a gratuity fund. The assessee set up an employees’ gratuity fund effective from 1st January 2010 and made an initial payment to the Life Insurance Corporation of India. The fund applied for approval on 7th April 2010, and the Commissioner of Income Tax granted approval effective from that date. The Assessing Officer disallowed the deduction on the grounds that the contribution was made before the fund was approved, and this decision was upheld by the CIT(A).

The tribunal examined whether contributions made to a gratuity fund before its approval can be allowed as a deduction. It noted that the approval by the Commissioner, effective from the application date, was a post facto approval. The tribunal emphasized that the Commissioner’s power to set the approval date should be exercised in a manner that prevents unjustified hardship to the assessee and aligns with the scheme of the law. The tribunal concluded that the approval should be effective from the date the fund was created, i.e., 1st January 2010, and thus the contribution should be deductible under Section 36(1)(v).

2. Alternative Claim under Section 37:
The assessee alternatively claimed that if the contribution is not allowed under Section 36(1)(v), it should be allowed as a business expenditure under Section 37. The tribunal rejected this argument, stating that Section 37(1) applies only to expenses not covered under Sections 30 to 36. Since the contribution to the gratuity fund is specifically covered under Section 36(1)(v), it cannot be considered under Section 37(1).

Conclusion:
The tribunal allowed the appeal, holding that the contribution to the gratuity fund is deductible under Section 36(1)(v) from the date the fund was created. The alternative claim under Section 37 was rejected as inapplicable. The order was pronounced on 15th November 2017.