The Madras High Court allowed the Income Tax deduction under Section 40(A)(7)(b) of the Income Tax Act towards the approved gratuity fund with LIC of India and approved by the Commissioner of Income Tax is not an allowable deduction.
The bench of Dr.Justice Anita Sumanth and Justice G.Arul Murugan has observed that the Assessee has been granted the benefit of the claim under examination now, for the previous and subsequent years. The documentation produced now is identical to the documentation on the basis of which the claim had been accepted by the Department for the other years.
The appellant/assessee, Sanmar Speciality Chemicals is engaged in the business of manufacturing and sale of specialty Chemicals and Biotechnology products. In respect of AY 2008 – 09, returns were filed under the Income-Tax Act, 1961 and an intimation under Section 143(1) was issued. The assessment was taken up for finalization and completed.
One of the issues picked up for assessment relates to a provision made towards a gratuity fund with the Life Insurance Corporation of India (LIC). The assessing officer notes that the claim had been made as per the provisions of Section 40(A)(7)(b) of the Income Tax Act. He was however of the view that though the narration in the schedules to the balance-sheet and profit and loss account stipulated that the amount was towards gratuity, it was only a provision.
Hence, the claim was hence hit by the provisions of Section 43B of the Income Tax Act which requires certain claims to be allowed only on the basis of actual payment. The provision was thus disallowed and the amount added back to total income would override all other provisions of the Act including Section 43B, being a specific provision. The CIT(A) allowed the appeal vide order dated 29.03.2012.
In doing so, he takes note of the order of the CIT(A) in this assessee’s case for the immediately preceding assessment year, AY 2007 – 08, where too the stand of the assessee had been accepted.
The orders of the CIT (A) for the earlier year as well the subsequent two years i.e., AY 2007-08 and 2009 – 10 / 2011 – 12 allowing the Assessee’s appeal on this point, had travelled to the Tribunal at the instance of the Revenue, and by an order dated 18.12.2015, the matter had been restored to the file of the assessing officer for adjudication afresh. The assessing authority has given effect to the order of the Tribunal accepting the contentions of the assessee.
The Income-Tax Department would defend the order of the Tribunal arguing that the claim was liable to be rejected as it is the provisions of Section 43B that would prevail. There was no material on record to indicate that the assessee had effected payments to LIC either during the relevant previous year or before the due date for filing return of income.
Section 40A adumbrates those categories of expenses/payments that are not deductible under certain circumstances. Sub-section (1) to Section 40A contains a categoric, non-obstante declaration to the effect that the provisions of Section 40A shall have effect, notwithstanding anything to the contrary contained in any other provision of the Income-Tax Act, 1961 relating to the computation of income under the head ‘Profits and Gains of Business or Profession’.
Clause (a) of Section 40A(7) states that no deduction shall be allowed in respect of any provision made by the assessee for the payment of gratuity to their employees on their retirement or on termination. Clause (b) carves out an exception to the stipulation under clause (a), to the extent of a contribution made towards an approved gratuity fund or for the purpose of payment of any gratuity that has become payable during the previous year.
Section 43B too commences with a non obstante clause that ‘notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of – ’ expenditures adumbrated in clauses (a) to (h) of that Section shall be allowed only if actually paid by that assessee.
The court while allowing the appeal ruled in favour of the assessee.
Case Details
Case Title: M/s. Sanmar Speciality Chemicals Limited Versus The Assistant Commissioner of Income-Tax
Case No.: T.C.(A).No.493 of 2013
Date: 24.03.2025
Counsel For Appellant: Vijayaraghavan
Counsel For Respondent: J.Narayanaswamy
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