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TMI Blog2024 (8) TMI 622X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Rural Bank engaged in the business of banking filed its Return of Income for A.Y. 2015-16 on 30.09.2015 by declaring the total Income at Rs. 31,52,72,750/-. It has adjusted its books during the year as per AS-15, wherein it had reconciled the fund value as per its books and books of fund houses (SBI and LIC). On such reconciliation it was found that, the fund houses showed excess payment by the assessee, over a period of various years, the assessee had made excess payments towards gratuity and had debited its books from time to time. Now in order to adjust such excess payment, it had credited its books to that extent. However, in the computation of income, it again reduced its taxable profit on the ground that, this is neither its income nor its expenditure and, hence, there is no taxability involved. On the examination of the issue of deduction of Rs. 7,09,71,733/- claimed by the assessee, the AO not accepted the explanation of the assessee and made an Addition of Rs. 7,09,71,733/, 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. Income assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration. That the assessee challenged the validity of order dated 22.12.2017 by moving an appeal before Ld.CIT(A). The Ld.CIT(A), had disposed of the appeal on 26.05.2023 with the following findings: 5.3 Having considered the factual matrix of the case, I find that the AO is correct in saying that the amounts deducted do not pertain to the year under consideration as the same pertains to earlier years. Therefore, they can not be deducted in the year under consideration, as each assessment year is separate. Under the circumstances. I do not see any reason to interfere with the well reasoned order of the AO. 3.3. That the assessee is in appeal before us, appeal is related with addition of Rs. 7,09,71,733/- by making allegation on the assessee that assessee has made wrong claim of group gratuity of Rs. 4,47,37,085/- and leave encashment of Rs. 2,62,34,648/- in its return of Income. The Ld. CIT(A) has not appreciated the fact that assessee has made only accounting entries in its books of accounts for matching the fund balance appearing in its books of accounts with the balance as per certificate of Life insurance Corporation of India and SBI Life insurance Companies as per Account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Excess Balance in books: (A) 29,58,18,292 (B) 23,96,34,244 = 5,61,84,048/- Difference of Rs. 1,47,87,684/- in provision for leave encashment As on 31-03-2015 Balances are as under in books: (A) LIC 14,58,93,287/- (Paper book at page 16) SBI 3,08,12,965/- (Paper book at page 17) Total 17,67,06,252/- (B) As per Accrual valuation 16,19,18,568/- (paper book at page no. 21-22) Excess Balance in books Difference: (A)17,67,06,252 (B)16,19,18,568 = 1,47,87,684/- Net Excess: 5,61,84,048 + 1,47,87,684 = 7,09,71,732/- 4.1. The ld.AR for the assessee submitted that gross effect is decrease in expenses (Rs. 1,47,87,684.40 + Rs. 5,61,84,048.80 Rs. 7,09,71,733.16) in the books i.e. increase in profit in the books. This increase is not taxable the same is adjustment entries only for matching funds balance. Therefore, the same is reduced in computation of Income and thus, there is not any tax effect of these entries. 4.2. The AR also stated that Assessee has claimed deduction for the payment made to LIC and SBI Life, as per Section 36(1)(v) of the Act in various years, since inception of the scheme. In A.Y.2014-15, assessee has not claimed Rs. 7,09,71,733/- and, hence, it is not taxable. 4.3. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d upon the provisions of section 36(va) of the Act. The Ld. CIT-D.R. relied upon that according to order, all expenses of income must be routed that the profit loss account. That, in this case, nothing has been routed from the P L account. Hence, Ld.CIT-DR strongly relied on the CIT(A) s order. 5. We have heard both the parties and perused the material available on record. In this case, the addition of Rs. 7,09,71,733/- was made and duly upheld by Ld. CIT(A) being the difference in valuation of group gratuity fund and leave encashment fund. As per books of accounts and actuarial valuation of the fund made by LIC and SBI Life Insurance Companies without appreciating the fact that difference of Rs. 7,09,71,733/-. We note that assessee bank is making provision for gratuity and leave encashment as per the guidance available in Accounting Standard-15 (AS-15) issued by the Institute of Chartered Accountants of India (ICAI). The assessee also, get done actuarial valuation, from the certified actuary and then excess provisions are being reversed every year. The assessee bank makes provision every year and these provisions never shown as real expenses for income tax purposes. 5.1. Now, we d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yee s benefit (employees expenses), which is schedule 16 before us. In the above schedule 16, the real expenses incurred by the assessee bank as well as provision on account of gratuity payment and provision on account of leave encashment etc. are debited. However, at the end of year, the bank claims only actual payment made to the employee on account of gratuity and leave encashment. Therefore, in the above referred schedule 16 which is part of the balance sheet for the assessment year 2015-16 contains the actual expenses incurred by the assessee company on account of gratuity and other employees benefit including the provision for gratuity and the leave encashment. However, the provisions at the end of the year are being deducted by the bank from the total payment done in schedule 16 under the head payment and provision for employees and the provisions, for that the assessee bank does not incur any expenses, these are provisions for that the bank is again reducing the amount from schedule 16, which is evident from the above schedule 16 reproduced wherein, the assessee bank is reducing gratuity provision to the extent of Rs. 5,61,84,048.80/- and provision for leave encashment to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 5.5 Now coming to the provisions for gratuity and leave encashment, 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. 5.6 Hence, considering these facts and circumstanc ..... 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