Contribution made Towards fund is Business Expenditure, Allowable u/s 37(1) of Income Tax Act even if fund was Unapproved by Income Tax Department: ITAT Allows Gratuity Premium Towards LIC [Read Order]

The Ahmedabad Bench of Income Tax Appellate Tribunal (ITAT) has allowed the gratuity premium paid towards the Life Insurance Corporation (LIC) holding that the contribution made towards fund is business expenditure allowable under Section 37 of the Income Tax Act even if the fund was unapproved by the Income Tax Department.

The assessee, Grand Polycoats Company Pvt. Ltd was engaged in the business of manufacturing of high-performance industrial coatings and specialised paints, and the assessee was the only Indian company selected by Indian Space Research Organization (ISRO) to supply special paints to coat for space research and was awarded contract to supply special paints for “Mission Mars”.

The appeal was related to the disallowance of gratuity expenses incurred by the assessee. The disallowance was made for the reason that it was not found to have fulfilled the conditions required by Sections 40A(7) of the Income Tax Act, regarding the gratuity being paid to an approved gratuity fund. Assessee, as per the facts of the case had paid gratuity premium to LIC, but the gratuity fund itself was not found to be approved by the PCIT/CIT, the AO disallowed the entire gratuity premium paid by the assessee during the year.

The Commissioner of Income Tax Appeals (CIT(A)) allowed the assessee’s claim by following the decision of the Madras High Court in the case of CIT Vs. Tamil Nadu Maritime Board, holding that contribution made towards the fund was to be treated as business expenditure, and was allowable under Section 37(1) of the Income Tax Act, even though, said fund was unapproved

Bandish Soparkar, appearing on behalf of the revenue was unable to point out any distinguishing facts in the present case nor was he able to show any infirmity in the order of the CIT(A). Sudhendu Das, appeared on behalf of the assessee.

The two-member Bench of Annapurna Gupta, (Accountant Member) and Madhumita Roy, (Judicial Member) observed that the assessee also pointed out that none of the dealers to whom the commission was paid was a related party of the assessee as per Section 40A(2)(b) of the Income Tax Act, and that payments were made through cheque after deducting TDS.

The Bench observed that the ITAT in the immediately preceding year, A.Y 2013-14, had confirmed the order of the CIT(A) passed on identical lines holding “Gratuity amount paid towards a fund which was not approved by the Income Tax Authority. This issue has been settled by the High Court of Gujarat in the case of Valsad District Central Co Op. Bank Ltd. Vs. ACIT in favour of the assessee held as contribution made towards the fund was to be treated as business expenditure and the same was allowable under Section 37(1) of the Income Tax Act, even though the said fund was unapproved by the Income Tax Department.

In view of the same, since the issue was squarely covered in favour of the assessee by virtue of the order passed by the ITAT in the case of the assessee itself in the preceding year, the Bench upheld the order of the CIT(A) deleting the disallowance of gratuity premium.

To Read the full text of the Order CLICK HERE

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