Gratuity Payment is Allowable Expense Only if Contributions are Made Towards Approved Gratuity Fund: ITAT
The appeals filed by the assessee company, CPV Engineer Pvt. Ltd., are related to AY 2014-15 and AY 2015-16, challenging the identical issues before the Income Tax Appellate Tribunal (ITAT), Bangalore.
For the AY 2014-15, the return filed by the assessee company was selected for scrutiny, and the total income was assessed at Rs 68,02,183. During the assessment, the AO disallowed sales commissions of Rs 35,38,382, payment of gratuity of Rs 3,19,130 and interest expenditure of Rs 1,80,000.
The company had paid a commission of Rs 69,30,890 to six individuals, including the family members of the company’s directors. The assessing officer disallowed Rs 35,38,382, saying that the assessee did not furnish the required supporting details on the services rendered. The CIT(A) upheld this disallowance, saying that out of 6 individuals, 3 were women, who could not have been involved in the sales process of industrial pumps. However, the Tribunal observed the educational qualification and the fact that they have worked with the company for many years. Based on this, the Tribunal held that the disallowance was unjustified and deleted the same.
Regarding the gratuity payment disallowance, the AO had disallowed the payment of Rs 319,130, made by the company towards the gratuity. As per the AO, only contributions towards the approved gratuity fund are deductible. The CIT(A) also confirmed this disallowance. The tribunal held that the gratuity payment is allowable only if it is paid into a gratuity fund. Therefore, the Tribunal upheld the lower authorities’ decision to disallow gratuity payment.
Ground No. 4 was about the disallowance of Rs 1,80,000. The AO had made a disallowance of interest for a loan taken by one of the directors. The CIT(A) restricted the disallowance at a rate of 12% (Rs 1,80,000) on the loan taken by the directors. The Tribunal, however, ruled that since the company had more than enough interest-free funds, the amount of advance given interest-free cannot be used to make a disallowance of interest payment made by the assessee. Therefore, this allowance was deleted by the Tribunal.
Since the facts and circumstances of the case for the AY 2015-16 were similar to AY 2014-15, the Tribunal upheld the same decision for AY 2015-16. Therefore, the assessee’s appeal was partly allowed for the years 2014-15 and 2015-16.
Case Citation: CPV Engineer Pvt. Ltd Vs ITO, Hubballi (ITAT Bangalore); ITA Nos. 1486 & 1487/Bang/2024; 02/12/2025; 2014-15 and 2015-16
