2025 (6) TMI 463 - AT - Income Tax

Disallowance u/s 43B and 40A - disallowance of provision for unfunded gratuity - HELD THAT - We find that the assessee has added amount disallowable u/s 40A to the net profit being the provision for unfunded gratuity. At page no. 42 of the paper-book the same has been shown at Column No. 9 of the return. The same has been disallowed at Column No. 11(h) . Hence the Assessing Officer is directed to consider the all the three documents mentioned hereinabove and see that no double disallowance is made in respect of the same amount. Appeal of the assessee is allowed for statistical purposes.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Appellate Tribunal in this appeal are:

(a) Whether the disallowance of Rs. 17,99,901/- made under Section 43B of the Income-tax Act, 1961, on account of provision for unfunded gratuity, was justified, particularly when the disallowance was made through an intimation under Section 143(1) of the Act, which ordinarily does not permit such adjustments.

(b) Whether the provision for unfunded gratuity falls within the ambit of Section 43B of the Act, and consequently, whether such provision should be disallowed in the absence of actual payment or earmarked funds.

(c) The applicability and interpretation of Section 40A(7) of the Act concerning deduction of provisions made for gratuity, especially distinguishing between funded and unfunded gratuity provisions.

(d) Whether there has been any double disallowance of the same amount under different provisions, warranting correction.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Validity of Disallowance under Section 43B via Intimation under Section 143(1)

Relevant legal framework and precedents: Section 143(1) of the Income-tax Act provides for summary assessment and intimation, allowing limited adjustments as prescribed under Section 143(1)(a). Generally, substantive additions or disallowances require assessment proceedings under Section 143(3). Section 43B mandates that certain expenses are allowable only on actual payment.

Court's interpretation and reasoning: The Tribunal noted that the Assessing Officer disallowed the provision for unfunded gratuity under Section 43B through an intimation under Section 143(1), which is typically not the prescribed mode for such adjustments. The appellant contended that this was not permissible and that the issue was debatable on facts and law.

Application of law to facts: The Tribunal observed that the disallowance was made in the intimation but also directed the Assessing Officer to ensure no double disallowance occurs, indicating recognition of procedural irregularity or overlap. However, the Tribunal did not explicitly overturn the disallowance on this ground but allowed the appeal for statistical purposes, implying procedural considerations were relevant but not determinative.

Treatment of competing arguments: The appellant argued procedural impropriety and debatable legal position; the Revenue defended the disallowance as per Section 43B. The Tribunal balanced these by allowing the appeal for statistical purposes and directing careful verification to avoid double disallowance.

Conclusion: The disallowance via intimation under Section 143(1) was procedurally questionable, but the Tribunal did not invalidate it outright, instead emphasizing correction of any double counting.

Issue (b) and (c): Applicability of Sections 40A(7) and 43B to Provision for Unfunded Gratuity

Relevant legal framework: Section 40A(7) of the Income-tax Act restricts deduction for provisions made for gratuity payments unless such provision is for payment to an approved gratuity fund or actual gratuity paid during the year. Section 43B mandates that certain expenses, including contributions to approved funds, are deductible only on actual payment.

Court's interpretation and reasoning: The CIT(A) and the Tribunal examined the distinction between funded and unfunded gratuity provisions. Section 40A(7)(a) disallows deduction for provisions made for gratuity, whereas Section 40A(7)(b) allows deduction if the provision relates to payment to an approved gratuity fund or actual gratuity paid.

The Tribunal noted that the appellant's provision was for unfunded gratuity, i.e., no separate fund was earmarked or actual payment made. Therefore, the provision did not satisfy the criteria under Section 40A(7)(b) for deduction. The Tribunal relied on the explanation in Section 40A(7) that the purpose or intention to pay gratuity through an approved fund or actual payment is essential for deduction.

Key evidence and findings: The appellant failed to demonstrate earmarking of funds or actual payment of gratuity. The provision was merely an accounting entry without corresponding cash outflow or fund allocation.

Application of law to facts: Since the provision was unfunded, it falls under the disallowance clause of Section 40A(7)(a). Further, Section 43B(b) supports disallowance of such provisions where actual payment has not been made.

Treatment of competing arguments: The appellant cited case laws supporting deduction of gratuity provisions but these were distinguished on facts as those involved funded gratuity or actual payments. The Tribunal rejected applicability of such precedents to unfunded gratuity provisions.

Conclusion: The Tribunal upheld the disallowance of the provision for unfunded gratuity under Sections 40A(7)(a) and 43B(b), affirming that only funded or actual gratuity payments qualify for deduction.

Issue (d): Potential Double Disallowance

Relevant legal framework: The principle against double taxation or double disallowance requires that the same expenditure or provision should not be disallowed multiple times under different provisions.

Court's interpretation and reasoning: The Tribunal observed that the provision for unfunded gratuity was added back to net profit and disallowed under Section 43B. It referred to the return and intimation documents showing the same amount in different columns, raising the possibility of double disallowance.

Application of law to facts: The Tribunal directed the Assessing Officer to examine all relevant documents carefully and ensure that no double disallowance is made in respect of the same amount.

Conclusion: The Tribunal mandated correction to avoid double counting, thereby safeguarding the assessee's interest against multiple disallowances of the same provision.

3. SIGNIFICANT HOLDINGS

The Tribunal made the following key determinations and legal pronouncements:

"From the above provision of Section 40A(7)(b) of the Act, it can be observed that if "purpose" of payment of gratuity is established then deduction of such provision of gratuity can be allowed. In other words, if intention of the assessee is established that it has made provision of gratuity for actually paying it to the eligible employees, then deduction of such provision of gratuity can be allowed. But, in present case, the appellant has not shown such intention or purpose. The appellant has made provision in form of unfunded Gratuity. It has created provision of gratuity without earmarking separately the funds for gratuity payment Therefore, provision in form of unfunded Gratuity does not fall under Section 40A(7) (b) of the Act Moreover, the appellant has not actually paid the amount in any gratuity fund as it was unfunded, therefore it is rightly disallowed by the AO U/s 43B(b) of the Act."

Core principles established include:

• Provision for gratuity is deductible only if it relates to funded gratuity or actual payment during the year.
• Unfunded gratuity provisions do not qualify for deduction under Section 40A(7)(b) and are liable for disallowance under Sections 40A(7)(a) and 43B(b).
• Disallowance under Section 43B must be made on actual payment basis, and mere accounting provisions without payment or earmarked funds are not allowable.
• Procedural correctness requires that disallowances under Section 43B should not be made through intimation under Section 143(1) unless prescribed, and care must be taken to avoid double disallowance.

Final determinations on each issue:

• The disallowance of Rs. 17,99,901/- under Section 43B on account of unfunded gratuity provision was upheld as legally valid.
• The provision for unfunded gratuity does not qualify for deduction under Section 40A(7)(b) as no earmarked fund or actual payment was made.
• The procedural issue regarding disallowance through intimation under Section 143(1) was noted, and the appeal was allowed