Gratuity provision allowed even though fund was approved by Commissioner in next year

Gratuity provision allowed even though fund was approved by Commissioner in next year.  Assessee cannot be denied benefit merely for delay at the hands of CIT – High Court

Prelude:
Gratuity is an allowable deduction under the Income Tax Act, 1961 (the Act) and provision for the same is also allowed as a deduction subject to the condition that it should be an approved gratuity fund as provided under Section 40A(7) read with Part-C of Schedule-IV of the Act.

Section 2(5) of the Act defines the “approved gratuity fund” as a gratuity fund which has been and continues to be approved by the Commissioner of Income Tax in accordance with the rules contained in Part-C of the Fourth (IV) Schedule of the Act.

A controversy arose with respect to the question whether deduction can be allowed for the provision made for contribution for gratuity fund before it was duly approved by the CIT.

Gratuity provision allowed even though fund was approved next year

ABCAUS Case Law Citation:
ABCAUS 2152 (2017) (12) HC

The Challenge/Grievance:
This income Tax appeal was filed under Section 260-A of the Income Tax Act, 1961 (the Act) by the Income Tax Department (ITD/Revenue) against the order passed by the Income Tax Appellate Tribunal (Tribunal/ITAT) allowing the deduction towards provision made for the payment of gratuity even before it was duly approved by the Commissioner of Income Tax (CIT).

Important Case Laws Cited/relied upon by the parties:
Commissioner of Income-Tax vs. Shalimar Wire And Industries Ltd. [1991 188 ITR 814 Cal]
Commissioner of Income-Tax vs. Continental Commercial Co. Ltd., [1991 192 ITR 66 Cal.]
Shree Sajjan Mills Ltd. vs. Commissioner of Income Tax [1985 (156) ITR 585 (SC)]

Brief Facts of the Case:
The respondent assessee was a company which had created a fund for providing gratuity to its employees. The assessee had made an application under Part-C of Schedule-IV of the Act in the last month of the relevant previous year. The application was considered and allowed but on a date which fell after the closure of the said previous year.

Thus the issue arose as to whether prior to the gratuity fund being approved, the assessee could make a provision and claim deduction on the basis of provision made towards gratuity.

The Substantial Questions of Law framed/pressed for determination:
The question was whether the ITAT was correct in holding that the contribution to gratuity fund before it was duly approved by the CIT could be construed as due compliance with the provisions of section 40A(7) of the Act so as to allow the same as deduction u/s 37(1) in view of the judgment of the Hon’ble Supreme Court?”

Contention made on behalf of the Petitioner Revenue:
The Revenue relying on the decision of the Hon’ble Supreme Court contended that the taxing statutes have to be construed strictly and there could not be a reasonable measure employed to relax the rigour of the provision.

It was to emphasised that section 40A(7)(a) specifically provides that no deduction shall be allowed in respect of any provision made by the assessee unless the condition under sub-Clause (b) of sub-Section (7) is satisfied. Sub-clause (b) specifically speaks about the rigour of sub-Clause (a) not being applicable insofar as the provision having been made towards an approved gratuity fund.

It was argued that the assessee could have applied sufficiently early and then there could have been provision made in the previous year of the assessment year itself.

Observations made by the High Court:
The Hon’ble High Court noted that sub-Clause (2) of Clause 2 of Part-C specifically empowers the Commissioner, who considers the approval of the gratuity fund to grant the approval and specify the date on which it takes effect.

It was observed that in the instant case, there was no such date specified and in such the Hon’ble High Court opined that it should relate from the date of application itself, which is before the close of the relevant previous year.

The Hon’ble High Court observed that fact that the application both was filed and put up to the Commissioner before the closure of the relevant previous year and the provision for gratuity was made at the closure of the previous year.

The Hon’ble High Court opined that the Commissioner, considering his workload, though justified in the delay occassioned, the assessee cannot be denied the benefit merely for reason of the delay at the hands of the Commissioner. The Hon’ble High Court also noted that the conditions of approval as seen from Clause 3 of Part-C of Schedule IV had been satisfied by the fund as constituted by the assessee; found by the Commissioner himself.

Decision/ Conclusion/Held:
Respectfully following the decisions of the Calcutta High Court the appeal of the Revenue was rejected by answering the question in favour of the assessee and against the Revenue.