Contributions to a superannuation fund, not being in the nature of initial or ordinary annual contribution is an allowable deduction
• During the assessment year 2004-05, the taxpayer claimed a deduction for payments to the superannuation scheme in excess of the prescribed limits.
• The superannuation fund of the taxpayer, duly approved was a „defined benefit scheme? and the taxpayer made ordinary annual contribution equal to 27% of salary, less the amount of its contribution to provident fund.
• As a consequence of falling interest rates, the Life Insurance Corporation of India had revised annuity rates of pension to be provided by them to the retiring members which resulted in larger payout from the fund.
• Based on the actuarial valuation report, the taxpayer had to pay the deficit amount of INR 47.61 million to the superannuation trust.
• The Assessing Officer (“AO”) disallowed the claim of the taxpayer on the grounds that the amount paid by the taxpayer was in excess of the prescribed limit i.e. 27% of salary of the employee.
Issue before the Tribunal :- Whether the amount paid by the employer to the Approved Superannuation Fund exceeding the prescribed limit is an allowable deduction?
Observations and Ruling of the Tribunal
• The Tribunal observed that a contribution to approved superannuation fund is deductible in principle as long as the quantum of the said contribution does not exceed the prescribed limits specified in Rule 87 and 88 of the Income-tax Rules. The limits prescribed aforesaid are applicable in respect of initial contribution and ordinary annual contribution to the fund.
• Payment had been necessitated due to shortfall discovered in the course of actuarial valuation of the fund and is in the nature of an exceptional payment to ensure that the superannuation fund is able to discharge its obligation.
• The amounts paid in excess of the 27% of salaries of the employees were neither towards the ordinary annual contribution nor towards the initial contribution.
• The dis allowance under section 36(1)(iv) of the Income-tax Act read with Rule 87 would not come into play in the case of a payment to make good the shortfall, on the basis of actuarial valuation, in the superannuation fund.
• The amount was deductible, in principle, under section 36(1)(iv) and the restriction on deductibility as set out in section 36(1)(iv) and Rule 87 would not be applicable and hence the excess contribution would be allowable as a deduction.
• The above ruling may provide relief to various taxpayers, which are required to contribute amounts towards superannuation fund due to deficiences.
Source: ACIT Vs. Glaxo Smithkline Pharmaceuticals (ITA No. 6444/Mum/2007) dated 28 January 2011