ITAT Mumbai Deletes Rs. 37.21 Lakh Notional Gratuity Addition, Ruling Actuarial Gratuity Gain Not Real Income
ITAT Mumbai deleted a notional gratuity gain added under Section 143(1), holding it non-taxable. It also directed recalculation of full Section 244A interest, ruling that refunds must carry interest until the actual date of payment.
The case had been filed by a company named Reliance Commercial Dealers Limited before the Income Tax Appellate Tribunal (ITAT) Mumbai, challenging an order passed by the CIT(A) on March 12, 2025. The dispute in this case is regarding an addition of Rs. 37,21,235 made during the processing of the return under Section 143(1) and a short grant of interest under Section 244A.
While filing its income tax return (ITR) for the assessment year 2021-22, the company declared its total loss of Rs. (-) 1,78,03,55,507. The tax department processed the return on September 22, 2022, under section 143(1)(a) of the Act, accepting the total income of the company as NIL.
Later, the return was deeply scrutinised, and notices under sections 143(2) and 142(1) of the Act were issued. In response to the notice, the company furnished all the relevant documents and details as requested in the notice. The tax department did not discover anything wrong with the return, hence completed the assessment under section 143(3), and the total income was kept as NIL, the same as what was earlier shown in the initial processing. However, it made an addition to the company’s income on account of a mismatch with the tax audit report amounting to Rs. 37.21 lakh.
The aggrieved company, unhappy with the action of the tax department, approached CIT(A). However, the authority confirmed the addition of Rs. 37.21 lakh made by the tax department, ruling that since earlier years had MAT adjustments, this year’s amount should be taxed. Directed the tax department only to recheck the interest calculation, but did not allow the claim to be fully.
The company thereafter filed an appeal before the ITAT Mumbai. There, the company claimed that the Rs. 37,21,235 is not real income. It is only a notional actuarial gain on gratuity valuation shown under Other Comprehensive Income (OCI), not in the profit and loss account. Such OCI items do not affect taxable income because income tax computation starts from “profit before tax.” Earlier years had similar actuarial losses, but those were never claimed as deductions. Hence, the current year’s gain also should not be taxed. The company also claimed short TDS credit and interest under Section 244A.
The tribunal analysed the arguments of both sides and ruled that actuarial gain on gratuity is not taxable; it is a notional figure. It appears under Other Comprehensive Income, not as part of real business income. Gratuity deduction is allowed only on a payment basis (Section 43B), and the company never claimed any such deduction in earlier years. Hence, it is not justified and fair to make an addition of this notional gain to the income of taxpayers. In conclusion to the aforementioned findings, the tribunal deleted the addition of Rs. 37,21,235. Interest under Section 244A must be paid till the date the refund is actually issued. ITAT directed the tax authorities to recalculate the full interest following High Court rulings.
Citation: Reliance Commercial Dealers Limited Vs DCIT Mumbai (ITAT Mumbai); I.T.A. No. 3800/Mum/2025; 20/11/2025; 2021-22
