ITAT Ruling: Substance Over Form in Gratuity Deductions
In a significant relief to employers, the Income Tax Appellate Tribunal (ITAT), Ahmedabad Bench, has ruled in favour of the assessee in the case of True Sparrow Systems Pvt. Ltd Vs DCIT. The Tribunal held that a deduction for gratuity actually paid cannot be denied under Section 43B of the Income Tax Act, 1961, merely because the accounting entries were routed through the salary payable ledger.
The ruling clarifies that as long as there is documentary evidence establishing the nature of the payment as gratuity, the specific method of book entry does not alter the tax deductibility of the expenditure.
Background of the Case
The dispute arose during the assessment proceedings for the Assessment Year (AY) 2021-22. The assessee, a private limited company, had claimed a deduction of ₹11,84,163 representing gratuity payments made to two employees upon the discontinuation of their services.
However, the Assessing Officer (AO) disallowed this claim. The Revenue's stance was based on the observation that the assessee had not furnished sufficient evidence to prove the payments were indeed for gratuity. Furthermore, the authorities noted that the settlement entries were passed through the "Salary Payable" account. Consequently, the AO treated the amount as non-compliant with the provisions of Section 43B and added it back to the assessee's income.
The decision was subsequently upheld by the Commissioner of Income Tax (Appeals) [CIT(A)], prompting the assessee to move the Tribunal.