Facts of the Case

The assessee, True Sparrow Systems Private Limited, filed its return of income for Assessment Year 2021-22. During assessment, the Assessing Officer disallowed ₹11,84,163 claimed as deduction under Section 43B on account of gratuity allegedly paid to two employees upon their discontinuation, on the ground that the assessee failed to establish that the payments were gratuity payments. The CIT(A), NFAC upheld the disallowance holding that no evidence was produced to prove that the payments were made towards gratuity and observing that the amounts appeared to be salary related. Aggrieved, the assessee preferred an appeal before the Tribunal.

Issues Involved

Whether deduction under Section 43B was allowable in respect of gratuity actually paid to employees on discontinuation of service, whether the lower authorities erred in holding that no evidence of gratuity payment was furnished, and whether the assessee had substantiated actual payment through cogent documentary material.

Petitioner’s Arguments

The assessee submitted that it consistently followed a policy of creating provision for gratuity based on actuarial valuation, debiting such provision to the Profit and Loss account, adding back the provision in computation of income, and claiming deduction only for gratuity actually paid during the year as mandated under Section 43B. It was contended that detailed documentary evidence was furnished, including audited financial statements with notes on employee benefits, disclosures under revised AS-15, computation of income evidencing add-back of provision and claim of actual payment, ledger accounts of provision for gratuity, salary payable ledgers of the concerned employees, and salary vouchers clearly reflecting gratuity paid of ₹6,39,490 and ₹5,44,673 respectively. It was argued that the lower authorities failed to appreciate these evidences in the correct perspective.

Respondent’s Arguments

The Revenue supported the orders of the Assessing Officer and the CIT(A), contending that the payments were not established to be gratuity payments and therefore were not allowable under Section 43B.

Court Order / Findings

The ITAT Ahmedabad observed that the assessee had placed on record comprehensive documentary evidence demonstrating its accounting policy for gratuity, creation of provision based on actuarial valuation, and actual payment of gratuity during the year. The Tribunal noted that the audited balance sheet and notes to accounts disclosed the gratuity policy, the quantum of provision created, and the amount actually paid. The Tribunal further noted that the provision for gratuity account, salary payable ledgers and salary vouchers clearly evidenced payment of gratuity to the two employees during the relevant year.

The Tribunal held that the finding of the CIT(A) that no evidence was furnished was factually incorrect. Once actual payment of gratuity was demonstrated with cogent and credible evidence, the deduction was allowable under Section 43B. Accordingly, the Tribunal directed deletion of the disallowance of ₹11,84,163.

Important Clarification

The Tribunal clarified that where an assessee follows a consistent accounting policy of adding back gratuity provision and claims deduction only for gratuity actually paid, and substantiates such payment with documentary evidence, deduction under Section 43B cannot be denied merely on an erroneous appreciation of accounting entries or mischaracterisation of the payments.

Final Outcome

The appeal filed by the assessee was allowed. The disallowance of ₹11,84,163 made under Section 43B in respect of gratuity actually paid to employees was deleted in full.

 Link to download order
 https://www.mytaxexpert.co.in/uploads/1769063430_TRUESPARROWSYSTEMSPVT.LTD.VADODARAVS.THEDY.CITCIRCLE211VADODARA.pdf 

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