Gratuity Paid to Employee Classified as Salary, Deemed Expense allowable u/s 37(1) of Income Tax Act: ITAT [Read Order]

In a recent ruling, the Kolkata bench of the Income Tax Appellate Tribunal ( ITAT ) highlighted that the  gratuity paid to an employee is classified as salary, hence deemed an allowable expense under Section 37(1) of the Income Tax Act, 1961.

In the case at hand, the assessee was involved in the business of purchasing, blending, packing, and selling tea. It filed its income tax return on 29th November 2014, reporting a loss of Rs. 2,23,56,292/-. During the assessment, the Assessing Officer (AO) noted that the assessee had contributed Rs. 12,14,720/- to a gratuity fund held in the name of Twinning Private Ltd. group gratuity fund.

The AO observed from the tax audit report in Form 3CD at column 21(e) that the fund in question was yet to receive approval from the concerned Commissioner of Income Tax. Consequently, as the contribution was made to an unapproved gratuity fund, the AO disallowed the claim under Section 36(1)(v) of the Income Tax Act.

Mr. Siddharth Agarwal, representing the assessee, submitted that the assessee had applied to the CIT (Administration) for approval of the gratuity fund. He referred to the application submitted on 10th December 2002, which had been pending since then due to reasons beyond the assessee's control.

On the other hand, B. K. Singh, representing the respondent, contended that Section 36(1)(v) of Income Tax Act required the fund to be approved by the competent authority for claiming deduction. He further argued that the approval granted in October 2023 could not be retrospectively applied, as it only took effect from January 2023. He cited the decision of the Calcutta High Court in the case of Brooke Bond India Ltd. to support his argument.

The ITAT bench comprising Sanjay Garg (Judicial Member) and Girish Agarwal (Accountant Member), expressed bewilderment at the prolonged delay in processing the assessee's application for approval. Despite the delay, the assessee had been consistently making payments to LIC for the group gratuity scheme and claiming deductions accordingly.

Therefore, considering Rule 5 of Part C of the 4th Schedule, which treats gratuity paid to an employee during their lifetime as a deemed allowable expense under Section 37(1) of the Income Tax Act, the ITAT deemed it appropriate to allow the claim of the assessee. Consequently, the grounds taken by the assessee on this issue were upheld.

To Read the full text of the Order CLICK HERE

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