2021 (8) TMI 1032 - AT - Income Tax

Disallowance u/s 40(a)(ia) - provision for payment of gratuity - only reason for disallowance of assessee s claim of deduction is due to non approval of the gratuity scheme - HELD THAT - When, it is fact on record that assessee has applied for approval of the gratuity scheme in the year 2007, non approval of the said scheme even after more than 14 years is undesirable and has resulted in undue harassment to the assessee. Due to no fault of the assessee the deduction otherwise allowable has been denied As relying on case Narasu s Spinning Mills 2015 (12) TMI 1553 - ITAT CHENNAI , M/S. VERIZON DATA SERVICES INDIA PVT. LTD 2015 (10) TMI 316 - ITAT CHENNAI , JAIPUR THAR GRAMIN BANK 2016 (11) TMI 794 - RAJASTHAN HIGH COURT and JAIPUR THAR GRAMIN BANK 2016 (11) TMI 794 - RAJASTHAN HIGH COURT No disallowance of deduction claimed towards provision made for gratuity fund can be made even during the pendency of assessee s application for approval of the gratuity scheme. In the facts of the present appeal, as earlier discussed, there has been inordinate and unacceptable delay in disposing of assessee s application seeking approval of the gratuity scheme. Pertinently, while completing the assessment for assessment years 2011-12 and 2014-15 in assessee s own case, the AO himself has allowed deduction claimed towards provision created for gratuity, though, assessee s application seeking approval of the gratuity scheme is still pending. Thus, considering the overall facts and circumstances of the case in the light of the ratio laid down in the decisions cited before us, we are of the view that the assessee is eligible to claim deduction of the contribution make towards the gratuity fund of the employees. Accordingly, we delete the impugned disallowance. Assessee Grounds are allowed.

Summary

Issues:
Disallowance under section 40(a)(ia) of the Income Tax Act, 1961 for provision of gratuity fund.

Analysis:
The appeal pertains to the disallowance of &8377; 13,14,859 under section 40(a)(ia) of the Income Tax Act, 1961 for the assessment year 2013-14. The Assessing Officer disallowed the amount as the auditor stated that the assessee made provision for gratuity, which is not allowable under the Act. The assessee, a resident company engaged in various financial services, had filed its return declaring a loss. The AO added back the disputed amount to the income. Despite the assessee's contentions and appeals, the addition was sustained. The primary issue revolved around the non-approval of the gratuity scheme and the consequent disallowance of the deduction claimed by the assessee.

The assessee contended that a gratuity fund was created for its employees under an irrevocable trust deed, in collaboration with Tata AIG Life Insurance Company Ltd. The application for approval of the scheme was filed in 2007, but no approval was received. The assessee argued that the contributions made to the fund were legitimate and should be allowed as a deduction. The Departmental Representative, however, emphasized the lack of approval for the scheme as a basis for disallowance.

The Tribunal noted that the assessee had applied for approval of the gratuity scheme in 2007, yet no decision had been made by the Competent Authority even after more than 14 years. The Tribunal observed that the assessee was regularly contributing to the fund, and there was no dispute regarding the factual position. Citing judicial precedents, including the Supreme Court decision in CIT vs. Textool Company Ltd., the Tribunal held that in the absence of control by the employer over the fund, disallowance of the deduction was unwarranted. The Tribunal emphasized that the delay in approving the scheme caused undue harassment to the assessee, leading to the rightful allowance of the deduction.

Based on the principles established in various judicial decisions and the specific circumstances of the case, the Tribunal allowed the appeal, deleting the disallowance under section 40(a)(ia) of the Income Tax Act, 1961. The Tribunal concluded that the assessee was eligible to claim the deduction for contributions made towards the gratuity fund for its employees. The judgment was pronounced on 9th July 2021 by the Appellate Tribunal ITAT Mumbai, comprising SHRI SAKTIJIT DEY, JUDICIAL MEMBER, and SHRI RAJESH KUMAR, ACCOUNTANT MEMBER.