ITAT allowed deduction of premium paid towards employee gratuity fund if such fund was duly approved in later year

Case details: ACIT v. Gujarat State Co-op. Marketing Federation Ltd. - [2021] 129 taxmann.com 53 (Ahmedabad - Trib.)

Judiciary and Counsel Details

• • Waseem Ahmed, Accountant Member and MS. Madhumita Roy, Judicial Member.    
  • L.P. Jain, Sr. D.R. for the Appellant. 
  • Nikunj Bagadiya, A.R. for the Respondent.

Facts of the Case

Assessee, a registered cooperative society engaged in distributing agricultural inputs, outputs, oilseeds, food grains, etc., claimed deduction for the contribution made towards the employee gratuity fund. Assessee submitted that it had created an irrecoverable Gratuity Trust. Subsequently, assessee applied to the Income-tax department for approval of its gratuity scheme. But due to unforeseen reasons, no communication was received by assessee from the department. On inquiry, it was learned that the department misplaced the document. Accordingly, assessee filed a fresh application, and CIT approved the said scheme. Assessee submitted a copy of the application filed with the department and other relevant documents in support of its claim. Assessee further submitted that gratuity trust is independent of its control and its business. The trust and LIC are independently managing the fund of gratuity. As such assessee had no control or lien on such fund created for the benefit of employees. However, Assessing Officer (AO) disallowed the claim of assessee by holding that the Trust of assessee was not recognised trust under the Act.

Assessee contended that the requirement of approval of the gratuity scheme was made with the intention to prevent the misuse of the fund created for the benefit of the employee. However, in its case, the contribution was paid to LIC in the form of a premium, and in turn, the LIC is managing all the funds independently. Assessee has no control whatsoever over the fund. Hence, the situation for utilizing such funds by diverting to the assessee’s business cannot arise.

ITAT held

On appeal, Ahmedabad ITAT held that Section 36(1)(v) provides a deduction for any sum paid by contribution towards an approved gratuity fund created by the employer for the exclusive benefit of his employees under an irrevocable trust. Section 2(5) defines an approved gratuity fund as a gratuity fund that has been and continues to be approved by Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner of Income-tax in accordance with the rules contained in Part C of the Fourth Schedule. Undoubtedly, the gratuity fund created by assessee was not approved by CIT under section 2(5) for the relevant year. CIT granted the approval with effect from 01-04-2012 effective from the assessment year 2013-14. However, it is also a fact on records that assessee had made an application for the approval under section 2(5) to the CIT vide letter dated 25-11-1985. However, the fund was approved by the CIT subsequently.
Furthermore, the purpose of creating the approved gratuity fund was to ensure that the amount contributed by assessee as the employer should leave the possession from its hands. In other words, assessee should not have any control over the fund created for the welfare of the employees. In assessee’s case, there was no ambiguity that there was no control of assessee whatsoever on the funds created by it for the welfare of the employees as the fund was invested with the LIC of India, and LIC was directly paying an amount to the employee on the occasion of retirement. Accordingly, ITAT directed AO to allow a deduction to assessee under Section 36(1)(v)

Case review

• • CIT v. Textool Co. Ltd . [2013] 35 taxmann.com 639/216 Taxman 327 (SC) (para 9.6)
  • Prakash Software Solution (P.) Ltd. v. ITO [2018] 89 taxmann.com 130 (AHD) (para 9.7) followed.

List of Cases referred to 

• • CIT v. Textool Co. Ltd. [2013] 35 taxmann.com 639/216 Taxman 327 (SC) (para 4)
  • Prakash Software Solution Ltd v. ITO [2018] 89 taxmann.com 130 (AHD) (para 9.7).