2022 (3) TMI 963 - AT - Income Tax

Disallowance of gratuity paid u/s. 43B - HELD THAT - AO while processing the return filed by the assessee u/s. 143(1) has made additions towards gratuity payment on the ground that the assessee has claimed deduction towards provision for gratuity. Assessee claims that deduction towards gratuity expenses is on payment basis, for which, necessary evidence has been filed before the CIT(A). We find that the assessee has paid gratuity to employee's through cheque drawn on ICICI Bank and the same has been debited to gratuity expenses account. From the details filed by the assessee, we find that deduction claimed towards gratuity expenses is on actual payment basis, but not on provision made for gratuity expenses - AO as well as the CIT(A) were erred in disallowing gratuity expenses u/s. 43B of the Act. Hence, we direct the AO to delete the additions made towards gratuity expenses. Denial of MAT credit u/s. 115JB - AO denied the MAT credit, because of additions towards gratuity expenses and employees' contribution to PF ESI, the income declared by the assessee turned to be positive and hence, computed tax under normal provision of the Act and denied MAT credit - HELD THAT - As assessee contended that since additions made by the AO towards employees' contribution to PF ESI has been deleted by the Ld. CIT(A) and further MAT credit relates to disallowance of gratuity is consequential and hence suitable directions may be given to AO to verify and allow MAT credit in accordance with law. We find that MAT credit entitlement of the assessee is consequential and hence, we direct the AO to verify the entitlement of the assessee towards credit and allow credit, if any, after computing income as per provisions of Sec. 115JB of the Act and also under normal provisions of the Act. Disallowance of membership fee paid to club u/s. 37 - HELD THAT - There is no merit in the arguments taken by the assessee, then the adjustment made by the AO towards disallowance of subscription fee paid to club is not permissible u/s.143(1)(a)(iv) - As regards, the contention of the assessee that subscription fee paid to club is for overall development of the business and thus, it partakes nature of expenses incurred wholly and exclusively for the purpose of business, we find that unless assessee demonstrate with relevant evidences that subscription fee paid to club, is for the purpose of business of the assessee and said expenditure is aided for overall development of the assessee, it cannot be held that expenses, at personal in nature, is in the nature of business expenditure incurred wholly and exclusively for the purpose of business, since the assessee has not demonstrated with any evidences and proved that subscription fee paid to club is for the purpose of business. Therefore, we are of the considered view that there is no error in the reasons given by the AO to make disallowance towards subscription fee paid to club. We are inclined to uphold the findings of the Ld. CIT(A) and reject the ground taken by the assessee.

Summary

Issues:
1. Disallowance of gratuity paid u/s. 43B of the Act.
2. Denial of MAT credit u/s. 115JB of the Act.
3. Disallowance of membership fee paid to club u/s. 37 of the Act.

Issue 1: Disallowance of Gratuity Paid u/s. 43B of the Act:
The case involved the assessee filing its return of income for AY 2017-18 with 'NIL' total income, which was processed by the AO under section 143(1) of the Act. The AO disallowed gratuity payment claiming it was a provision. However, the assessee contended that the deduction was on an actual payment basis, supported by necessary evidence. The ITAT found that the gratuity expenses were indeed paid by the assessee and not merely a provision. Consequently, the AO and the CIT(A) were held to be erroneous in disallowing the gratuity expenses u/s. 43B of the Act. The ITAT directed the AO to delete the additions made towards gratuity expenses.

Issue 2: Denial of MAT Credit u/s. 115JB of the Act:
The second issue revolved around the denial of MAT credit for AY 2017-18 by the AO due to additions made towards gratuity expenses and employees' contributions to PF & ESI. The assessee claimed MAT credit as it paid tax u/s. 115JB of the Act, despite declaring 'NIL' total income under normal provisions. The ITAT noted that the entitlement to MAT credit was consequential, and directed the AO to verify the assessee's entitlement towards credit and allow it after computing income as per Sec. 115JB and normal provisions of the Act.

Issue 3: Disallowance of Membership Fee Paid to Club u/s. 37 of the Act:
The final issue centered on the disallowance of membership fee paid to a club under section 37 of the Act for AY 2018-19. The AO disallowed the membership fee based on the Tax Audit Report citing personal nature expenses. The assessee argued that the subscription fee was for the overall business and should be allowed as a deduction. The ITAT held that the adjustment made by the AO towards disallowance of the subscription fee was permissible under Sec. 143(1)(a)(iv) of the Act. It was noted that the subscription fee paid to the club was not proved to enhance the business of the assessee, and thus, the disallowance was upheld. Consequently, the appeal filed by the assessee was dismissed.

In conclusion, the ITAT allowed the appeal filed by the assessee for AY 2017-18 regarding gratuity expenses and directed the AO to delete the additions. However, the appeal for AY 2018-19 regarding the disallowance of membership fee paid to the club was dismissed. The judgment was pronounced on March 9, 2022, in Chennai.