Case Law Details
Integrace Private Limited Vs NFAC/CIT(A) (ITAT Bangalore)
Introduction: The recent ITAT (Income Tax Appellate Tribunal) Bangalore decision in the case of Integrace Private Limited Vs NFAC/CIT(A) has reignited discussions around the provision of gratuity and tax deductions under the Income-tax Act, 1961. The tribunal’s ruling, passed on December 14, 2022, for the assessment year 2021-22, offers crucial insights into the allowable deductions under section 37 and 43B of the Act. This article aims to dissect the complexities of the case, elaborating on key elements that impact tax liabilities related to gratuity provisions.
The Background: Integrace Private Limited, the appellant, faced disallowance of gratuity amounting to Rs. 55,74,555 under section 143(1) of the Income-tax Act. Despite representing an actual payment, this disallowance ignited a chain of legal debates, eventually landing the case in front of ITAT Bangalore.
The CIT(A) Observations: CIT(A) reviewed the case, emphasizing that auditors need to verify the details of contributions to the Gratuity Fund and assess its liability under section 43B. The Tax Audit Report in Form 3CD should be filed electronically after such verification and confirmation by the assessee. However, the CIT(A) upheld the disallowance, arguing it was in line with the laws and the records provided.
The ITAT Ruling: The tribunal acknowledged a similar issue previously addressed by the Chennai Tribunal. After hearing both sides and examining the records, it concluded that if the actual payment of gratuity is debited under the provision for gratuity, there’s no reason to disallow it under section 143(1) of the Act. The tribunal remitted the issue back to the AO for fresh consideration, requiring verification of the treatment given by the assessee in their books of accounts.
Legal Precedents: The tribunal also cited the Athenahealth Technology Pvt. Ltd. case to further substantiate that disallowance under procedural provisions like s. 143(1)(a) can’t negate the rights confirmed under substantive law.
Conclusion: The ITAT Bangalore ruling in Integrace Private Limited Vs NFAC/CIT(A) offers valuable lessons for companies and tax practitioners alike. It serves as a precedent that supports the allowance of actual gratuity payments under section 37, provided that they are properly accounted for. The decision underscores the importance of meticulous accounting and tax reporting, as well as the need for an effective audit process to avoid unnecessary litigations. As the issue is sent back to the AO for fresh consideration, businesses must remain vigilant and well-prepared to substantiate their gratuity provisions and claims.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal by assessee is directed against order of NFAC passed u/s 250 of the Income-tax Act,1961 [‘the Act’ for short] dated 14.12.2022 for the assessment year 2021-22.
2. First ground for our consideration is with regard to disallowance of gratuity at Rs.55,74,555/- while processing return u/s 143(1) of the Act, though it represents the actual payment during the assessment year under consideration, which is allowable u/s 37(1) of the Act.
3. Facts of the case are that the assessee has an unproved gratuity fund. The assessee made a provision of Rs.52,49,681/- and the same was disallowed u/s 40A(7) of the Act. However, it said to be made actual payment of Rs.55,74,555/- and the same has been claimed u/s 37 of the Act while processing the return of income. This was disallowed by the ld. AO. On appeal, ld. CIT(A) observed that auditor is required to call for and verify the details of contribution to gratuity fund, etc.
3.1. The ld. CIT(A) observed that the Auditor is required to call for and verify the details of contributions to Gratuity Fund etc., along with Books of accounts and vouchers. Any such liability which is debited as per the books of accounts of the assessee, to the extent it is not allowable under section 43B alone is required to be reported in clause 26(i)B of Form 3CD. Such reporting has to be confirmed by the assessee as well. The Tax Audit Report in Form 3CD is filed electronically only after such confirmation by the assessee. In the instant case, as per assessee’s claim, the reporting in Clause 26(i)B of Form 3CD is being disputed now as incorrect. Detailed instructions are issued every year by CBDT/DGIT(Systems) as to how the various schedules and entries in different ITR are to be properly filled in and how its consistency with other reports like Form 3CD are to be ensured. If the details reported in Tax Audit Report are found to be incorrect, then the same has to be addressed in accordance with the Guidance Note on preparation of Tax Audit Report under section 44AB, issued by ICAI. It mandates that Tax Audit Report should not normally be revised except in the following circumstances and in the manner as prescribed below at para 13.11 and 13.12 of 2014 edition:
“13.11 It may be pointed out that report under section 44AB should not normally be revised. However, sometimes a member may be required to revise his tax audit report on grounds such as:
(i) revision of accounts of a company after its adoption in annual general meeting.
(ii) change of law e.g., retrospective amendment.
(iii) change in interpretation, e.g., CBDT Circular, judgements, etc.
13.12 In case where a member is called upon to report on the revised accounts, then he must mention in the revised report that the said report is a revised report and a reference should be made to the earlier report also. In the revised report, reasons for revising the report should also be mentioned.”
3.3. The ld. CIT(A) observed that as per Rule 12(2) of Income Tax Rules, 1962, as amended with effect from 01.04.2013, Tax Audit Report u/s.44AB has to be mandatorily filed electronically within the prescribed due date by the auditor and any correction thereof also ought to be carried out by filing a revised Tax Audit Report electronically. Reasons for such corrections also have to be clearly stated by the Auditors in the Revised report in accordance with the Guidance Note issued by ICAI. Further such corrections ought to be carried out before finalization of account of subsequent accounting period as well.
3.4. He further observed that Rule 6G of Income Tax Rules itself, now provides for furnishing revised Audit Report under section 44AB in certain circumstances with effect from 01.04.2021 as under:
“6G. (1) The report of audit of the accounts of a person required to be furnished under section 44AB shall,—
(a) in the case of a person who carries on business or profession and who is required by or under any other law to get his accounts audited, be in Form No. 3CA;
(b) in the case of a person who carries on business or profession, but not being a person referred to in clause (a). be in Form No. 3CB.
(2) The particulars which are required to be furnished under section 44AB shall be in Form No. 3CD.
(3) The report of audit furnished under this rule may be revised by the person by getting revised report of audit from an accountant, duly signed and verified by such accountant, and furnish it before the end of the relevant assessment year for which the report pertains, if there is payment by such person after furnishing of report under sub-rule (1) and (2) which necessitates recalculation of disallowance under section 40 or section 43B.”
In assessee’s case, no such revised Audit Report has been validly e-filed till date.
3.5. For these reasons, the ld. CIT(A) observed that the adjustment u/s.143(1)(a) of the Act made by CPC on the basis of the validly e-filed Tax Audit Report on the issue of disallowance under section 43B is found to be consistent with facts on record and in accordance with law and hence does not warrant any interference.
3.6. The ld. CIT(A) further observed that the second issue raised by the assessee is regarding carry forward loss of current year. According to the assessee, the details of unabsorbed depreciation to be carried forward to next year has not been mentioned in Schedule CFL of the intimation issued by CPC and hence, the grounds raised by the assessee on this issue fail.
3.7. He further observed that the intimation u/s.143(1) of the Act shows that as against the sum of Rs.54,43,53,518/- claimed by the assessee as Loss of Current Year to be carried forward, CPC has allowed a sum of Rs.53,87,78,963/-. The difference of Rs.55,74,555/- is due to the adjustment u/s.43B of the Act.
3.8 Thus, he observed that there is no ground for any appeal on this issue. According to ld. CIT(A), the mentioning or non-mentioning of the amount of such carry forward loss in the concerned Schedules per se is not an appealable issue, and it has no relevant to the loss allowed to be carried forward also in the instant case. Hence, the ld. CIT(A) dismissed this ground as non- maintainable. Against this assessee is in appeal before us.
4. The ld. A.R. submitted that similar issue was decided by coordinate bench of Chennai Tribunal in case of Athenahealth Technology Pvt. Ltd. in ITA No.82/Chny/2021 dated 21.9.2022, wherein held as under:
“9. After hearing both the sides and going through the facts that the assessee has made a disallowance under the provisions of s. 37 of the Act, because there is no specific clause in tax audit report to report the amount to be considered for disallowance u/s. 40(a)(ii) of the Act. We find that there is some problem in the tax audit form or in the processing of return through CPC. But, in any case from the facts it is clear that these amounts are already disallowed by the assessee and nothing more is to be disallowed, because total disallowance practically comes to Rs. 21,02,846/- and for that purpose no separate disallowance u/s. 143(1) of the Act can be made for an amount of Rs. 8,24,846/-. We direct the A.O to allow the same. This issue of assessee’s appeal is allowed.
10. The next issue in this appeal of assessee as regards to the order of CIT(A) confirming the action of the A.O in not considering the difference pertaining to payment made for gratuity to the employees which is of allowable expenditure as per Explanation 2 to s. 40A(7) of the Act.
11. We have heard the rival contentions and gone through the facts and circumstances of the case. We noted that the CPC while processing the return u/s. 143(1) of the Act made disallowance of gratuity amounting to Rs. 42,36,722/- being inconsistency in amount disallowed u/s. 43B of the Act in processing previous year, but allowable during previous year. We noted that the assessee has claimed deduction for an amount of Rs. 42,36,722/- being payment made for gratuity to the employees during the year as per s. 40A(7) r/w s. 37 of the Act and the same was disclosed at Sr. No.10B of the ITR i.e., Page No.30 of ITR u/s. 43B of the Act in the absence of specific field for disclosure in the ITR. It was claimed that the payment made for gratuity during the A.Y 2017-18 was not disclosed in the tax audit report in the clause for reporting as per s. 43B of the Act. We are of the view that this position led to inconsistency in the column as per ITR and the tax audit report that the amount disallowed u/s. 43B of the Act in any preceding previous year, but allowable during the previous year. The assessee also submitted that the additional evidence before us along with supporting documentary evidences i.e., extract from the books of accounts to further substantiate the following:
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- Entire provision made in the books towards gratuity benefits of employees is disallowed in the ITR filed by the company and:
- The Actual claims paid towards gratuity by LIC to the employees of the company is essentially claimed in the ITR as allowable deduction from total income.
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12. In view of the above, we are of the view that the deduction of gratuity is available in substantive law and it cannot be disallowed merely by the reference of inconsistent entries in explanation of s. 143(1)(a) of the Act being a procedural provisions, it shall not take away the right confirmed in s. 37 r/w s. 40A(7) and s. 36(1)(v) of the Act. We direct the A.O to delete this disallowance. This issue of assessee’s appeal is allowed.”
4.1 Thus, he submitted that this issue cannot be dealt u/s 143(1) of the Act and even on merit the issue to be decided in favour of assessee.
5. The ld. D.R. relied on the order of the lower authorities.
6. We have heard the rival submissions and perused the materials available on record. In the present case, the assessee made addition to the provision for gratuity to the profit as pr profit & loss account. Thereafter, deducted actual gratuity benefits paid during the year. In other words, assessee made addition of provision for gratuity at Rs.52,49,681/-, thereafter deducted actual gratuity benefit paid during the year at Rs.55,74,555/-. However, while processing return of income u/s 143(1) of the Act, the ld. AO made addition of the impugned amount of Rs.55,74,555/- by giving the reasons as under:-
“There is inconsistency in any amount debited to profit & loss account of the previous year but disallowable u/s 43B of the Act claimed in return and audited report.”
6.1 In our opinion, if the assessee has charged gross provision for gratuity to the profit as per profit & loss account, thereafter the assessee deducted actual gratuity payment of Rs.55,74,555/-, the assessee’s claim cannot be disallowed in principle. On the other hand, if the assessee has debited actual payment of gratuity in the account provision for gratuity, then the payment of gratuity already gets subsumed, thereafter, the assessee cannot once again claim actual payment of gratuity in the return of income as it would amount to double deduction. To verify this, we remit this issue to the file of AO to examine the provision for gratuity account along with payment of gratuity. After satisfying the treatment given by the assessee in his books of accounts, the claim of assessee to be examined. Accordingly, the issue is remitted back to the file of AO for fresh consideration.
7. Next ground in this appeal is with regard to denial of carried forward current year loss of Rs.54,43,53,518/-. The contention of the ld. AR is that though AO quantified the carried forward of current year loss at the tune of Rs.53,87,78,963/- in the end in Annexure-Schedule CFL {as computed u/s 143(1)} in column no.(xiv) – current year losses to be carried forward (xiv-xv) – mentioned as ‘0’, which is incorrect. It is to be permitted to the assessee to be carried forward to subsequent assessment year. In our opinion, the assessee claimed loss of current year to be carried forward at Rs.54,43,53,578/- after disallowance of gratuity payment of Rs.55,74,555/-. The carried forward current year loss to be Rs.53,87,78,963/-. In our opinion, the claim of assessee to carry forward current year loss to be Rs.53,87,78,963/- without prejudice to our findings in earlier ground. Accordingly, the error crept in the intimation u/s 143(1) of the Act is to be corrected as current year loss to be carried forward at Rs.53,87,78,963/- which is subject to our findings in ground no.1. Ordered accordingly.
8. In the result, appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 7th Aug, 2023
