Deduction for staff ex-gratia & benefit cannot be denied merely for showing under appropriation of fund

Himatnagar Nagrik Sahakari Bank Ltd. Vs ACIT (ITAT Ahmedabad)

Introduction: The recent case of Himatnagar Nagrik Sahakari Bank Ltd. vs. ACIT, decided by the ITAT Ahmedabad, revolves around the denial of deduction for staff ex-gratia and benefits under section 43B of the Income Tax Act. The Assessee challenged the disallowance made by the Commissioner of Income Tax (Appeals), asserting that the expenses were paid during the year and should be allowed as per section 43B.

Background: The Assessee, a cooperative bank, claimed deductions for staff-related expenses without debiting the same in the profit and loss account for the relevant year. The claimed expenses included staff ex-gratia, leave encashment, staff benefit, and staff gratuity. The Assessee argued that these expenses were appropriated from the profit in earlier years but were not claimed as deductions until actual payment.

AO’s Disallowance: The Assessing Officer (AO) disallowed the deductions, emphasizing that the claimed expenses were not debited in the profit and loss account. The AO also pointed out that the Assessee had not made provisions for these expenses on the date of finalization of books of accounts. The total disallowance amounted to Rs. 1,12,87,989.

CIT(A) and NFAC Decision: The Commissioner of Income Tax (Appeals) confirmed the disallowance, stating that certain amounts were appropriations from the profit and not actual expenditures debited to the profit and loss account. The National Faceless Appeal Center (NFAC) upheld this decision, adding that for any expenditure to be allowable under section 43B, it should be in the nature of expenditure debited to the profit and loss account in the current or preceding years.

ITAT Decision: The ITAT acknowledged certain payments made by the Assessee in the current year and held that they were allowable as deductions under section 43B. The ITAT disagreed with the CIT(A)’s finding that staff ex-gratia and staff benefit were appropriations from profit and should not be allowed as deductions.

The ITAT directed the restoration of the issue to the AO for fresh adjudication, considering the documents filed by the Assessee, which were not presented before the authorities below.

Conclusion: The Himatnagar Nagrik Sahakari Bank case highlights the importance of proper documentation and adherence to tax provisions. While the Assessee succeeded in challenging the disallowance, the case underscores the need for accurate quantification and matching of entries in books of accounts to ensure fair play. The restoration of the issue to the AO for further verification emphasizes the importance of a thorough examination of facts for a just decision.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Commissioner of Income tax (Appeals), Ahmedabad, arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as “the Act”) relevant to the Assessment Year 2017-2018.

2. The assessee has raised following grounds of appeal:

1. The Hon’ble CIT(A) NFAC, Delhi has grievously erred in confirming the disallowance of the expenditure which is paid during the year following the provision of section 43B of the IT Act. The details are as under:

The Ld. CIT (A) has diverted the practice followed by the appellant since long as every co­operative bank is providing the liability on adhoc system and claimed the same in the year it has been paid. Therefore the addition should be deleted.

The appellant submits that the Hon. CIT(A) NFAC Delhi did not understand the system followed by the appellant bank and unnecessarily made a double addition of the expenditure.

It is further stated that in the year of provision the expenses are not claiming in the IT Return and therefore they should be allowed in the year in which it has been actually paid. Further the appellant strictly followed the provision of Sec. 43B of the Act.

The appellant therefore requests your goodself to kindly delete the above mentioned additions made by the Ld. A. O. looking to the merits of the case.

The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.

3. The only effective issue raised by the assessee is that the learned NFAC/CIT(A) erred in confirming the disallowance of expenses claimed on payment basis under the provisions of section 43B of the Act.

4. The facts in brief are that the assessee is a co-operative bank and engaged in the banking business. The assessee in the computation of income claimed the deduction of certain expenses without debiting the same in the profit and loss account for the year under consideration which are detailed as under:

4.1 The assessee explained that the above-mentioned expenditures were appropriated from the profit in the earlier years by debiting the profit and loss account and crediting the respective fund account. However, the same was not claimed as deduction since actual payment was not made. As such, the deduction of these expenses without actual payment is prohibited under the provisions of section 43B of the Act. However, in the year under consideration, the actual payments were made and accordingly deductions were claimed directly in the computation of income. As per the assessee, these amounts were debited to the respective fund account instead of debiting the profit loss account in the year under consideration. The assessee also submitted that the identical claim was made during the assessment year 2014-15 which was allowed by the then AO in the assessment order passed under section 143(3) of the Act.

4.2 However, the AO disagreed with the explanation of the assessee by holding that the expenditure claimed were not debited in the profit loss which is necessary. The assessee has also not made provisions in this regard on the date of finalization of books of account. The AO has also distinguished the fact of the assessment year 2014-15 by observing that in that assessment year (2014-15), the assessee has made provision regarding the expenditure claimed on the date of finalization of books. Thus, the AO disallowed the claim of the assessee for the above-mentioned expenditure aggregating to Rs. 1,12,87,989/- claimed on payment basis without debiting to profit and loss account and added to the total income of the assessee.

5. The aggrieved assessee preferred an appeal before the National Faceless Appeal Center (NFAC). The assessee during the appeal proceedings reiterated its contentions made before the AO.

6. The learned NFAC after considering the submission of the assessee confirmed the order passed by the AO by observing as under:

7.1 For any expenditure to be allowable us 4B of the Income Tax Act, it should be in the nature of expenditure and should have been debited to the P&L A/c in this year or the preceding years. Regarding deduction of staff ex-gratia of Rs.33,61,716/- and staff benefit of Rs.1,26,273/-, the appellant itself has stated that as per the bye laws of the bank, ex-gratia payable amount of Rs.33,61,716/- and staff benefit fund of Rs.1,50,000/- has been created from the P & L Appropriation account. This clearly shows that the above sums are an appropriation from the P&L A/c and not expenditure, which has been debited to the P&L A/c. Hence, deduction of staff ex-gratia amount of Rs.33,61,716/- and staff benefit of Rs.1,26,273/- cannot be allowed since it is an appropriation out of profit. The disallowance made by the AO of staff ex-gratia and staff benefit is upheld and the appeal of the

7.2 Regarding staff gratuity Rs.47,00,000/- and leave encashment of Rs.31,00,000/-; the appellant has not given extracts of the P&L A/C of the -preceding years to show that these sums have been debited as expenditure to the P&L A/c in the preceding years. Moreover, in the ledger account of staff gratuity fund, the opening balance as on 01.04.2016 is shown as only Rs.25,00,000/- (instead of Rs.47,00,000/-). Similarly, in the account of leave encashment reserve, there is a opening credit balance as on 01.04.2016 of only Rs.8,00,000/- (instead of Rs.31,00,000/-). In view of the above, I uphold the disallowance made by the AO on account of staff gratuity of Rs.47,00,000 and leave encashment of Rs.31,00,000/- as no evidence has been submitted to show that these expenses have been debited to the P&L A/c in the earlier years and reserves of equivalent amount have also not been created in these years. The appeal of the assessee on these issues is therefore, dismissed.

7. Being aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us.

8. The Ld. AR before us filed a paper book running from pages 1 to 97 and further filed the ledger accounts of all 4 funds in support of which the accounting entries were made. As per the Ld. AR these documents were not filed before the authorities below due to some unavoidable reason. However, the documents regarding the expenses are available now supported by the payment of the expenditure which are allowable as deduction by virtue of the provision of section 43B of the Act. Accordingly, the Ld. AR requested to restore the issue to the file of the AO for fresh adjudication as per the provision of law.

9. On the contrary, the Ld. DR also did not raise any objection if the appeal is transferred to the AO for fresh adjudication as per the provision of law.

10. We have heard the rival contention of both the parties and perused the materials available on record. From the preceding discussion, we note that there was certain payment made by the assessee in the year under consideration which were allowable as deduction under the provision of section 43B of the Act. As per the assessee all these expenses in respect of which the payment was made in the current year were pertaining to the earlier year.

10.1 On perusal of the order of the Ld. CIT(A), we note that the Ld. CIT(A), has confirmed the addition of the expenditure shown by the assessee representing staff ex-gratia and staff benefit of Rs. 33,61,716/- and Rs. 1,26,273/- respectively. One of the reasons for confirming the addition was that the impugned payments were representing the appropriation of the fund. As such, the impugned payments do not represent any expenditure and therefore the same cannot be allowed as deduction.

10.2 The issue before us arises whether the staff ex-gratia and staff benefit were representing appropriation of fund and therefore the same cannot be allowed as deduction. In this regard, we are of the view that the question of making any payment towards staff ex-gratia and staff benefit arises in relation to the employees/management of the assessee. These employees/management persons are paid salary, remuneration which is nowhere been disallowed by the authorities below. Based on the salary structure the amount of ex-gratia and employee staff benefit are determined. Thus, we are of the view that there is a direct connection between the impugned payment and the activities of the assessee. Therefore, we are of the view that the assessee cannot be denied the benefit of the deduction which available to it under the Act. Merely the same has been shown under appropriation of fund, the benefit available to the assessee cannot be denied. Thus, we disagree with the findings of the Ld. CIT(A).

10.3 At this juncture, it is important to note that the claim made by the assessee with respect to the payment as discussed above were not matching with the copies of the ledger filed by the assessee. As such, to our understanding, the amount of payment made by the assessee in the year under consideration under the head as discussed above must match with the books of accounts of the assessee. Though, we are conscious about the facts that entries in the books of accounts cannot be decisive factor whether deduction is to be allowed or disallowed but at the same time in the given fact it is to be seen that the assessee should not be claim double benefit while making some entries in the books of accounts on provisional as well on payment basis. As such, the assessee is not entitled to get double benefit of the same deduction. Accordingly, we are of the view that as far as quantification of amount is concern, it is necessary to work out so as to allow the deduction u/s of the correct amount under section 43B of the Act. Hence, in the interest of justice and fair play, we restore the issue to the file of the AO for necessary adjudication/verification as per the provision of law. Hence the ground of appeal of the assessee is partly allowed for the statistical purposes.

11. In the result, the appeal of the assessee is allowed for statistical purposes.

Order pronounced in the Court on 01/11/2023 at Ahmedabad.