M.P.Birla Institute of Fundamental Reserch. , Kolkata V. DCIT,Exemption-Cir-1(1),kol, Kolkata

ITA 478/KOL/2023

AI Insights

The case involves M.P. Birla Institute of Fundamental Research appealing against the orders of the Commissioner of Income Tax (Appeals) which upheld the Assessing Officer's decision not to treat the provision for gratuity as application of income under Section 11 of the Income Tax Act. The Tribunal examined whether the provisions made for gratuity, which were based on actuarial valuations, should be considered as application of income. The Tribunal referenced similar cases and the Supreme Court's decisions, concluding that such provisions, being based on actuarial valuations and not mere estimates, should be allowed as application of income.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 127380 (ITAT-KOLKATA)
• Duration Of Justice: 2 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-08-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 27-06-2023
• Assessment Year: 2015-2016
• Appeal Filed On: 15-05-2023
• Other Referred Cases: Sitaram Bhartia Institute of Science & Research vs. DCIT, Apeejay Education Trust vs. DCIT, Nachimuthu Industrial Association Vs. CIT, Bharat Earthmovers Vs. CIT, Metal Box Co. of India Ltd. Vs. Their Workmen, Calcutta Co. Ltd. Vs. CIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Charitable institution; Set aside
• Section: 11; 143(3); 73; 10(23C)

Judgement Text

आयकर अपील य अ धकरण, कोलकाता पीठ “बी’’, कोलकाता IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH: KOLKATA ी राजेश क ु मार, लेखा सद य एवं ी संजय शमा या यक सद य के सम [Before Shri Rajesh Kumar, Accountant Member & Shri Sonjoy Sarma, Judicial Member] I.T.A. Nos. 478 & 479/Kol/2023 Assessment Years: 2015-16 & 2018-19 M. P. Birla Institute of Fundamental Research (PAN: AAATT 3358 C) Vs. DCIT(Exemption), Circle-1(1), Kolkata Appellant / (अपीलाथ ) Respondent / ( !यथ ) Date of Hearing / स ु नवाई क$ त&थ 28.06.2023 Date of Pronouncement/ आदेश उ)घोषणा क$ त&थ 11.08.2023 For the Appellant/ नधा /रती क$ ओर से Shri Kush Kanodia, A.R For the Respondent/ राज व क$ ओर से Shri P. P. Barman, Addl. CIT Sr. D.R ORDER / आदेश Per Rajesh Kumar, AM: These are the appeals preferred by the assessee against the separate orders of the Ld. Commissioner of Income Tax (Appeals)-NFAC, Delhi (hereinafter referred to as the Ld. CIT(A)”] dated 20.03.2023 for the AY 2015-16 & 2018-19. 2. The sole issue raised in all the grounds of appeal is against the order of Ld. CIT(A) upholding the order of AO wherein the provision for Gratuity of Rs. 42,90,174/- made for employees of the assessee has not been treated as application of income during the year. 2 I.T.A. No.478 & 479/Kol/2023 Assessment Year: 2015-16 & 2018-19 M.P. Birla Institute of Fundamental Research. 3. Facts in brief are that the AO observed from Income & Expenditure A/c that assessee has claimed provisions for Gratuity amounting to Rs. 37,12,876/- and Rs. 5,77,298/- towards provisions for fundamental research wings. According to AO, provisions could not be allowed as application of income u/s 11 of the Act and only actual payments during the year can be treated as application of income and consequently the said amount was disallowed and not treated as application of income in the assessment framed u/s 143(3) of the Act vide order dated 22.11.2017. 4. In the appellate proceedings, the Ld. CIT(A) after taking into account the contentions of the assessee that the amount has been debited to income and expenditure account on the basis of actuarial valuation, dismissed the appeal by holding the assessee is a charitable institute and not a business entity and therefore the concept of allowing expenses on accrual basis cannot be allowed.. The Ld. CIT(A) observed that in case of business entities, the income is to be computed under the head income from business and profession and in case of computation of income under the same head business or profession, provision on actuarial basis and not a provision on the basis of actuarial basis where the income was computed on the basis of receipt and expenditure account. 5. After hearing the rival contentions and perusing the material on account, we observe that income in case of charitable trust is specifically dealt with under the provisions of Section 11 of the Act and there is a concept gross receipt and application of funds and whatever surplus is left is treated and dealt with in accordance with provisions of Section 11(1)(a) of the Act. In the present case, we note that the expenses charged to the income and expenditure account on the basis of actuarial valuation are not in the nature of contingent. In the present case, expenses has been charged to the income and expenditure account to be discharged in the subsequent year. We have perused the explanation inserted to Sub-section (7) to Section 11 by Finance Act, 2022 w.e.f 01.04.2023 and observe that it has been provided w.e.f AY 2023-24 that any sum payable by any trust or institution shall be considered as application of income in the previous year in which such sum is actually paid by it 3 I.T.A. No.478 & 479/Kol/2023 Assessment Year: 2015-16 & 2018-19 M.P. Birla Institute of Fundamental Research. irrespective of the previous year in which such sum is was incurred by the trust according to the method of accounting regularly employed by it and thus the expenses are not allowable during AY 2023-24 as application of income even on accrual basis. Thus the position is different in the earlier years. The case of the assessee finds support from the decision of Co-ordinate Bench of Kolkata in the case of Sitaram Bhartia Institute of Science & Research vs. DCIT in ITA No. 202/Kol/2020 for AY 2013-14 dated 4.1.2023 . The operative part is reproduced as below: 9. Facts in brief are that the AO during the assessment proceedings observed that the assessee has booked in the income and expenditure account a sum of Rs. 43,14,446/- representing the provisions created for payment of gratuity and leave encashment. According to the AO, the said provisions cannot be allowed as expense and accordingly Rs. 43,14,446/- was disallowed by the AO in the assessment framed. However the actual payment made by the assessee during the year of Rs. 5,29,401/- was treated as application of income. 10. The Ld. CIT(A) affirmed the order of AO on this issue by observing that the actual payment made by the assessee towards gratuity and leave encashment was rightly treated as application of income and dismissed the appeal of the assessee on this issue. 11. After hearing the rival submissions and perusing the material on record, we are of the view that the computation of income in case of charitable trust are specifically dealt with under the provisions of section 11 of Act. In the case of trust , the concept gross receipt and application of funds are adopted and whatever surplus is left is treated in accordance with provision of section 11(1)(a) of the Act based on the gross receipt and if still any income is left or is not applied for charity purpose for the same is accumulated to be carried forwards in the subsequent years to be applied for the said charitable purpose in accordance with the provisions of section 11(2) of the Act. In the present case, we note that the expenses charged to the income and expenditure account by the assessee trust has already crystallized and quantified but not paid and therefore we find merit in the arguments of the Ld. Counsel for the assessee that once the expenses are charged to the income expenditure after being foreseen with certainly are not in the nature of contingent but certainly to be considered as application of income to be discharged in the subsequent year. We also note that these were, in fact, paid in the subsequent years. We also look at this issue from another angle where the assessee has not charged anything to the income expenditure account and resulting into surplus going up and the assessee availing the benefit of accumulation u/s 11(2) to be carried forwards for the subsequent years. But in the present case, the facts are quite different as the assessee has calculated and charged these expenses to Income and Expenditure account. We have also examined the explanation inserted after sub-section 7 of Section 11 by the Finance Act, 2022 w.e.f 1.4.2023 which is extracted below: “Explanation- For the purpose of this section, any sum payable by any trust or institution shall be considered as application of income in the previous year in which such sum is actually paid by it (irrespective of the previous year in which the liability to pay such sum was incurred by the trust or institution according to the method of accounting regularly employed by it). 4 I.T.A. No.478 & 479/Kol/2023 Assessment Year: 2015-16 & 2018-19 M.P. Birla Institute of Fundamental Research. Provided that where during any previous year, any sum has been claimed to have been applied by the trust or institution, such sum shall not be allowed as application in any subsequent previous year.” A perusal of the above amendment by Finance Act, 2022 by inserting explanation is very clear and conspicuous that w.e.f AY 2023-24 any sum payable by any trust or institution shall be considered as application of income in the previous year in which sum is actually paid by it irrespective in which the liability to pay such sum was incurred by the trust/institution according to the method of accounting regularly employed by it. So we draw strength from the said explanation to section 11(7) that prior to AY 2023-24 the expenses were allowable to the trust as application of income even on accrual basis and thereafter specifically provided to be treated as application of income on the payment basis w.e.f. AY 2023-24. We have perused the provisions of section 11(1) of the Act which specifies only application of income and not the actual spending which has been amended to by Finance Act, 2022 w.e.f. 01.04.2023 as stated above. The case of the assessee finds support from the decision of Co- ordinate Bench of Kolkata in the case of Apeejay Education Trust vs. DCIT in [2021] 130 taxmann.com 436 (Kolkata-Trib.). The operative part is reproduced as under: “4.6. We have heard rival submissions and gone through the facts and circumstances of the case. We note that the assessee claimed an amount of Rs.33,16,214/- in its income and expenditure account as provisions for gratuity liability. According to AO, an assessee claiming expenditure u/s. 10(23C) of the Act cannot be allowed this claim since the provision booked by the assessee has not been applied by the assessee. For that he relied on the decision of Hon’ble Supreme Court in the case of Nachimuthu Industrial Association Vs. CIT 235 ITR 190. According to him, only the actual expenditure made during the year can be treated as application and, therefore, he disallowed the claim of the assessee and made addition. The Ld. CIT(A) has simply confirmed the same. We note that assessee’s case is that the provision for gratuity has been done as per the actuarial valuation and as such it is not an unascertained liability. According to the Ld. AR, the same has been determined by actuarial valuer as in the year end date. According to him, the actuarial value of gratuity liability is akin to ascertained liability. It was pointed out by the Ld. AR that the liability to pay gratuity is a statutory liability. According to him, actuarial valuation is a process thereby liability as on a certain date is crystallized and such a valuation cannot be compared for mere estimate of expenses to be incurred. According to him, the provision of such liability is mandated by the accounting standard applicable for preparation of financial statements and refer to the accounting standard 15 (revised) and he distinguished the case relied on by the AO in the case of Nachimuthu Industrial Association (supra). According to the Ld AR, in that case the assessee had only appropriated out of the profit of the year a sum of Rs. 3 lakhs and credited it to the ‘reserve for donation account’. According to the Ld. AR, the action of the assessee in that case by appropriating out of the profit of the year a sum of Rs. 3 lakh in the ‘Reserve for donation account’ does not tantamount to application of the income. Therefore, the said sum (Rs. 3 lacs) was held to be not a case of application. Therefore in the peculiar facts of the case, it was observed that ‘except for the making of entries in the assessee’s own books, which entries could have been reversed if and when the assessee chose to do, the assessee has not done in anything which can be characterize the payment as donation or application of the income of the trust for any charitable purpose’’ which was not the case of the present assessee as misinterpreted by the AO, therefore, according to the Ld. AR the case of Nachimuthu Industrial Association (supra) is distinguishable on facts. Therefore, according to the Ld. AR, the provision for gratuity is required to be made since it is a statutory obligation and, therefore, he prayed that the provision for gratuity need to be considered as application of income. We agree that the gratuity to the employees is a statutory obligation, and therefore is obliged by law to disburse the same when the employees demit office or superannuate. In this case, the assessee has booked provision for gratuity as per the actuarial valuation and the manner and determination of the same is a scientific process adopted by expert professionally trained in the valuation and as such it cannot be compared with mere estimate of expenses to be incurred in future. Therefore, relying on the ratio of the decision rendered by the Hon’ble Supreme Court in the case of Bharat Earthmovers Vs. CIT 112 taxmann 61 though it refers to 5 I.T.A. No.478 & 479/Kol/2023 Assessment Year: 2015-16 & 2018-19 M.P. Birla Institute of Fundamental Research. the case of a company in respect of deduction of provision for gratuity under the head ‘business and profession’, however, the principle can be seen extracted in that order in the case of Metal Box Co. of India Ltd. Vs. Their workmen 73 ITR 53 (SC) wherein the Hon’ble Supreme Court has held as under: “5. In Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC), the appellant company estimated its liability under two gratuity schemes framed by the company and the amount of liability was deducted from the gross receipts in the profit and loss account. The company had worked out on an actuarial valuation its estimated liability and made provision for such liability not all at once but spread over a number of years. The practice followed by the company was that every year the company worked out the additional liability incurred by it on the employees putting in every additional year of service. The gratuity was payable on the termination of an employee's service either due to retirement, death or termination of service - the exact time of occurrence of the latter two events being not determinable with exactitude before hand. A few principles were laid down by this Court, the relevant of which for our purpose are extracted and reproduced as under : (i) For an assessee maintaining his accounts on mercantile system, a liability already accrued, though to be discharged at a future date, would be a proper deduction while working out the profits and gains of his business, regard being had to the accepted principles of commercial practice and accountancy. It is not as if such deduction is permissible only in case of amounts actually expended or paid; (ii) Just as receipts, though not actual receipts but accrued due are brought in for the income-tax assessment, so also liabilities accrued due would be taken into account while working out the profits and gains of the business; (iii) A condition subsequent, the fulfillment of which may result in the reduction or even extinction of the liability, would not have the effect of converting that liability into a contingent liability; (iv) A trader computing his taxable profits for a particular year may properly deduct not only the payments actually made to his employees but also the present value of any payments in respect of their services in that year to be made in a subsequent year if it can be satisfactorily estimated. 6. So is the view taken in Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1, wherein this Court has held that the liability on the assessee having been imported, the liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be discharged at a future date. There may be some difficulty in the estimation thereof but that would not convert the accrued liability into a conditional one; it was always open to the tax authorities concerned to arrive at a proper estimate of the liability having regard to all the circumstances of the case.” 4.7. Therefore, in the light of the aforesaid discussion and the ratio of the case law supra, we are of the opinion that the assessee’s claim in respect of provision for gratuity as per the actuarial valuation should have been allowed in the facts and circumstances of the case; and, consequently, the impugned order of the Ld. CIT(A) is set aside and the AO is directed to allow the provision for gratuity as application of income. Therefore, ground no. 2 of the assessee’s appeal stands allowed.” Considering these facts and also the decision of the coordinate bench , we are not in agreement with the Ld. CIT(A) on this issue and direct the AO to consider the provisions created as application of income. The grounds raised by the assessee are allowed. 6 I.T.A. No.478 & 479/Kol/2023 Assessment Year: 2015-16 & 2018-19 M.P. Birla Institute of Fundamental Research. Since the facts are quite similar to one as decided by the coordinate bench supra, we are therefore inclined to set aside the order of Ld. CIT(A) and direct the AO to allow the provisions charged in the Income and Expenditure account as application of funds. The grounds raised by the assessee 6. Issue raised in the appeal in ITA NO. 479/Kol/2023 for AY 2018-19 is similar to one as decided by us in ITA No. 478/Kol/2023 for AY 2015-16(supra) and therefore our decision in ITA No. 478/Kol/2023 for AY 2015-16 would, mutatis mutandis, apply to the appeal as well. Consequently the appeal of the assessee is allowed. 7. In the result, both the appeals of the assessee are allowed. Order is pronounced in the open court on 11 th August, 2023 Sd/- Sd/- (Sonjoy Sarma /संजय शमा ) (Rajesh Kumar/राजेश क ु मार) Judicial Member/ या यक सद य Accountant Member/लेखा सद य Dated: 11 th August, 2023 SB, Sr. PS Copy of the order forwarded to: 1. Appellant- M.P. Birla Institute of Fundamental Research, 9/1, R. N. Mukherjee Road, Kolkata-700001. 2. Respondent – DCIT (Exemption)-Circle-1(1), Kolkata 3. Ld. CIT(A)-NFAC, Delhi 4. Ld. Pr. CIT- , Kolkata 5. DR, Kolkata Benches, Kolkata (sent through e-mail) True Copy By Order Assistant Registrar ITAT, Kolkata Benches, Kolkata