Case Law Details

Case Name : DCIT Vs M/s. Reliance Jute Mills International Ltd (ITAT Kolkata)
Appeal Number : ITA No. 897/Kol/2014
Date of Judgement/Order : 17/03/2017
Related Assessment Year : 2008-09
Courts : All ITAT (4457) ITAT Kolkata (289)

 Provisions for gratuity actually accrued during the year is allowable

Section 40A(7)(a) speaks that any of provisions made for the payment of the gratuity to the employees on the retirement shall not be liable which means that the provision made for preretirement of the employees in future shall not be liable and the same also therefore do not debar the allowability of accrued liability for the employees who actually retired during the year. In fact such liability accrued during the year is taken care of in section 40A(7)(b) and the operation of section 40A (7) (a) is subject to section 40A(7)(b) which is as under:-

(b) Nothing in clause (a) shall apply in relation to any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year.

It is clear from the above provisions contained in section 40A(7)(b) that provision made by the assessee for the purpose of payment of any gratuity, that has become payable during the year is allowable which means that the liability which has actually accrued during the year is allowable. In fact the CBDT has also clarified the introduction of section 40A(7) that the provision made for payment of gratuity that has become payable during previous year is allowable. Therefore the liability accrued on account of the gratuity which became payable during the year on account of the employees who retired during the year itself is allowable.

Payments towards Employees’ contribution to PF are Deductible If the Payments are made after the due date but within grace period

with respect to the Employees’ Contribution to Provident Fund, in view of the decisions in the case of CIT –vs- Vijayshree Ltd of the Calcutta High Court in ITA No. 245 of 2011 dated 6-9-2011, the payment towards Employees’ Contribution to Provident Fund is allowable even if the same has been deposited after the due date but before the date of filing of return.

Extract of the ITAT Order is as follows :-

This appeal by the revenue is against the order dt: 30-01- 2014 passed by the Commissioner of Income Tax (Appeals),I Kolkata for the assessment year 2008-09.

2. In this appeal, the appellant revenue has raised the following effective grounds of appeal:-

1. That, on the facts and circumstances of the case, the ld. CIT(A) is not justified in deleting the disallowance of gratuity liability of Rs.2,54,03,464/- without considering the fact that the assessee was following mercantile system of accounting and that there was no accrual of such liability during the year under consideration.

2. That, on the facts and circumstances of the case, the ld. CIT(A) is not justified in deleting the disallowance of Employees’ contribution to the “Labour Welfare Board” and PF of Rs.15,951/- and 32,62,654/- respectively, without considering the fact that provisions of Section 43B of the I.T Act, 1961 is not related to the Employees’ contribution to PF. The Hon’ble ITAT ‘A ‘Bench, Mumbai has decided this issue in favour of the department in the case of M/s. LKP Securities Ltd.”

3. Ground no.1 is relating to deletion of addition/disallowance of Rs.2,54,03,464/- towards gratuity liability.

4. Brief facts of the issue are that during the assessment proceedings the AO on perusal of the computation sheet filed before him found that the assessee claimed deduction of gratuity liability of Rs.2,54,03,464/- in respect of retired employees not debited to the profit & loss account. In explanation, the assessee submitted that by following the order dated 21-09-2007 in ITA No. 1832/Kol/2007 for the A.Y 2004-05 [ assessee’s own case], the assessee made provision in that respect. However, the AO disallowed the said amount of Rs.2,54,03,464/- as per provisions of section 36(1)(iv), 43B & 40A(7) of the Act and added the same to the total income of assessee.

5. The CIT-A by following the earlier order dated 21-09-2007 of the Tribunal supra, wherein it has been held by the ITAT that this accrued gratuity liability was not disallowable u/s. 36(1)(v), 43B and 40A(7)(a) or Rule 103 and 104 of the IT Rules and as such the addition made by the AO was deleted by the CIT-A.

6. The Ld. AR submits that the issue is covered by the order of Co-ordinate Bench of Kolkata in assessee’s own case and referred to para-8 and placed reliance on the same. The ld.DR has relied on the order of the AO.

7. Heard rival submissions and perused the material on record. We find that the issue is covered by order of this Tribunal in assessee’s own case for A.Y 2004-05 and relevant portion is reproduced herein below:-

8. This leaves us to decide on the reasons enumerated by the ld. CIT(A) confirming the addition on the basis of reliance on section 36(i)(v), 40A (7) (a), 43B(b) of the I.T Act 1961 and rule 103 and 104 of the I.T Rules. The Ld. CIT(A) has not accepted the contention of the assessee and has distinguished the judgement of the Hon’ble Supreme Court in the case of Kedarnath Jute on the ground that after introduction of section 43B the judgement in Kedarnath’s was not relevant. But it appears to us that the Ld. CIT(A) has erred in relying on 36(1)(v), section 40A(7) and section 43B(b) or rule 103 and 104 of the Income tax Act 1961. For convenience section 36(1)(v), section 40A (7) (a), section 43B(b) and Rule 103 and 104 are reproduced hereunder here under:-

36(i)(v) – any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust. 40A(7) (a) – Subject to the provisions of clause (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other-name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason.

43B(b) -any sum payable by the assessee as an employer by way of ‘contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees,

Rule 103 – Ordinary annual contribution: The ordinary annual contribution by the employer to a fund shall be made on a reasonable basis …. that such contribution shall not exceed

Rule 104 – Initial Contribution: The amount to be allowed as a deduction as initial contribution service with the employer.

On reading of 36(1)(v) it is clear that the said section deals with the payment by way of contribution towards on approved gratuity fund only. The section nowhere speaks of the actual liability incurred during the year on account of retirement of the employees during the year itself.

Section 40A(7)(a) speaks that any of provisions made for the payment of the gratuity to the employees on the retirement shall not be liable which means that the provision made for preretirement of the employees in future shall not be liable and the same also therefore do not debar the allowability of accrued liability for the employees who actually retired during the year. In fact such liability accrued during the year is taken care of in section 40A(7)(b) and the operation of section 40A (7) (a) is subject to section 40A(7)(b) which is as under:-

(b) Nothing in clause (a) shall apply in relation to any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year.

9.1 It is clear from the above provisions contained in section 40A(7)(b) that provision made by the assessee for the purpose of payment of any gratuity, that has become payable during the year is allowable which means that the liability which has actually accrued during the year is allowable. In fact the CBDT has also clarified the introduction of section 40A(7) that the provision made for payment of gratuity that has become payable during previous year is allowable. Therefore the liability accrued on account of the gratuity which became payable during the year on account of the employees who retired during the year itself is allowable.

9.2 Similarly section 43B also speaks of the contribution of any gratuity or other fund and not to the liability accrued as above.

9.3 Similarly rule 103 and 104 also speaks of the contribution or initial contribution to any gratuity fund and not for the actual liability accrued during the year.

9.4 In view of the above discussions it is clear that on the facts of this case the principles laid down in Kedarnath and other judgements mentioned above are fully applicable and the assessee is entitled to the deduction of the accrued liability as claimed by it in the computation of the income.

In view of above, we uphold the order of the CIT-A on this issue. Hence, this ground of revenue’s appeal is dismissed.

8. Ground no. 2 is relating to deletion of disallowance towards Employees’ contribution to the Labour Welfare Board and PF of Rs.15,951/- and Rs.32,62,654/- respectively.

9. On perusal the tax audit report u/s. 44AB of the Act as filed by the assessee before the AO, during the assessment proceedings he found that the assessee has not deposited the Employees Contribution towards Labour Welfare Board of Rs.15,951/- and Provident Fund of Rs.32,62,654/- as per P.F Act within due date. Thus, the AO disallowed the amount of Rs.15,951/- and Rs.32,62,654/- as per provisions of section 36(1)(va) r.w.s 2(24)(x) of the Act and added the same to the total income of assessee.

10. The CIT-A deleted the impugned addition by relying on the decision of the Hon’ble Calcutta High Court in the case of CIT Vs. Vijayshree Ltd reported in . Relevant portion of the CIT-A order is reproduced herein below :-

6.1 In Appeal it has been submitted that with respect to the disallowance of Employees’ Contribution towards Labour Welfare Board a sum of Rs.15,894/- was paid on 24-1 -2008 which was well before the due date. Further that the payment for Employees’ Contribution to Provident Fund and there had only be a delay of 2 days for payment of Rs.81,691/- and 1 day for payment of Rs.3l,80,963/-. It was further submitted that –

“a) Disallowance of Employees Contribution to Labour Welfare Board. Out of this amount of Rs.15951/- (57/- + 15894/-), a sum of Rs.15894/- was made by the Company by cheque No. 732238 dated 16.01.2008 duly acknowledged by Labour Welfare Board on 24.01.08 which is in time as due date of such is one month from the date of deduction.

b) Disallowance of Rs.3264654/- (Rs.81691/- + Rs.3180963/-) on account of Employees contribution to Provident Fund.

Both the payments of Rs.81691/- & Rs.3180963/- has been deposited by the assessee vide cheque No. 472994 & 472967 on 13.10.2007 & 15.10.2007 which were deposited in their Bank Account Punjab National Bank on 17.10.2007 & 16.10.2007 respectively i.e. there has been a delay of 2 days for Rs.81691/- & 1 day for Rs.3180963/-.

Your kind attention is drawn to Madras High Court’s decision of Shri Ganapathy Mills case in 247 ITR 879 & another decision of the same Court in the case CIT -Vs- Solem Co-op. Spinning Mills Ltd. 258 ITR 360 where it has been held deduction in the year of payment cannot be denied as long as the same is made within the grace period allowed under the respective statute. Section 38 of EPF Scheme 1952 requires the payment to be made within 15 days of the month & various Circular issued by CPFC & in particulars dated 04.03.1964 & 24.10.1973 provide for grace period which is 5 days.

Moreover, after deletion of words during the previous year on or before the due date by Finance Act, 2003, all payments made during the year should be allowed as deduction.”

It has therefore been claimed that these expenses were allowable and the A.O as not justified in disallowing the same.

6.2 The submissions of the Appellant and the evidences submitted in support of the same have been considered. In view of the same, it is seen that the payment to the Labour Welfare Board had been made in time of the due date of payment. Further with respect to the Employees’ Contribution to Provident Fund, in view of the decisions in the case of CIT –vs- Vijayshree Ltd of the Calcutta High Court in ITA No. 245 of 2011 dated 6-9-2011, the payment towards Employees’ Contribution to Provident Fund is allowable even if the same has been deposited after the due date but before the date of filing of return. Therefore, the claim of the Appellant is allowable and the disallowance made by the AO is deleted.

11. AR submits that though payments were not made in due date, but paid within grace period and placed reliance on decision of Hon’ble High Court of Madras.

12. Heard rival submissions and perused the material available on record. We find support from the decision of Hon’ble High Court of Madras in the case of Ganapathy Mills reported in 247 ITR 879, wherein it held that the deduction can be allowed if the payments are made within the grace period. Thus the facts of the issue on hand are clearly applicable to the ratio laid down by the Hon’ble High Court of Madras supra. Thus, we find no infirmity in the order of CIT-A and accordingly it is justified. Hence, this ground of revenue is dismissed.

13. In the result, the appeal of the revenue is dismissed. ORDER PRONOUNCED IN OPEN COURT ON 17/03/2017

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Tags : ITAT Judgments (4637) section 43B (77)

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