Actuarially backed superannuation contributions to remedy severe fund deficits are fully deductible without Rule 87 ceiling limits.

ORDER

Rajarshi Bharadwaj, J. – The appellant has filed this appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), challenging the order dated November 18, 2024 passed by the Learned Income Tax Appellate Tribunal (ITAT), Kolkata Bench “B”, for the assessment year AY 2020-21, on the substantial questions of law formulated at the time of admission.

2. The facts in a nutshell are that the assessee-respondent, formerly known as the Kolkata Port Trust (KoPT), is an Artificial Juridical Person with a history of providing essential port services for nearly 150 years since its establishment in the year 1870. For the Assessment Year (AY) 2020-21, the assessee filed its Return of Income on March 11, 2022, declaring a total income of Rs.227,13,00,220/-. This return was initially processed under the provisions of Section 143(1) of the Act. Subsequently, the case was selected for scrutiny under the Computer Assisted Scrutiny Selection (CASS) system, and a notice under Section 143(2) of the Act was issued to the assessee on June 29, 2021. The assessment was completed by the Assessing Officer (AO) under Section 143(3) read with Section 144B of the Act through an assessment order dated September 28, 2022. In the said assessment order, the AO determined the total assessed income of the assessee to be Rs.780,81,75,188/- after incorporating the following substantial additions and disallowances that includes, disallowance of contribution to Superannuation Fund (under Section 37 read with Section 43B): Rs.564,49,19,729/-, disallowance of contribution to Calcutta Port Officers’ Club (under Section 37): Rs.1,31,23,083/-, disallowance under Section 14A(2) read with Rule 8D of the Income-tax Rules, 1962 of Rs.21,13,100/- and addition of deemed profit under Section 41 of Rs.5,35,626/-.

3. Aggrieved by these additions and disallowances, the assessee preferred an appeal before the Learned Commissioner of Income Tax (Appeals) [CIT(A)], National Faceless Appeal Centre (NFAC). The Ld. CIT(A), NFAC allowed the assessee’s appeal in part. By placing reliance on various case laws, the Ld. CIT(A) deleted the additions and disallowances made by the AO on the issues of the contribution to the Superannuation Fund of Rs.564,49,19,729/- and the contribution to the Calcutta Port Officers’ Club of Rs.1,31,23,083/-. However, the Ld. CIT(A), NFAC dismissed the assessee’s appeal and confirmed the additions made on account of the Section 14A(2) disallowance of Rs. 21,13,100/- and the Section 41 deemed profit of Rs.5,35,626/-. Dissatisfied with the deletion of the substantial additions, the revenue preferred a second appeal before the Learned Income Tax Appellate Tribunal (ITAT), Kolkata, solely on the issue of the contribution to the Superannuation Fund of Rs.564,49,19,729/-. The revenue accepted the Ld. CIT(A)’s deletion regarding the Calcutta Port Officers’ Club contribution and no further appeal was preferred on that ground. The assessee-respondent also filed cross-objections before the ITAT.

4. The ITAT, following the legal principles established by the Hon’ble Calcutta High Court in the cases of Pr. CIT v. Exide Industries Ltd.  (Calcutta) and CIT v. Eastern Equipment & Sales Ltd. [1993] 201 ITR 858  (Calcutta), confirmed the decision of the Ld. CIT(A) and deleted the additions. Regarding the superannuation and gratuity funds, the ITAT observed that the remitted amounts were intended to bridge the gap between actual contributions and actuarial valuations. The Tribunal held that such payments were neither initial contributions nor ordinary annual contributions, meaning the ceilings fixed under the respective rules did not apply. The revenue, thereafter, approached this Court under Section 260A of the Act, asserting that the ITAT was not justified in deleting the aforementioned disallowances of Rs. 564,49,19,729.

5. Learned counsel appearing for the appellant raises the issue on the following substantial questions of law that have been admitted:

6. We have heard the appellant-revenue and Learned Senior Counsel for the respondent-assessee at length. Since the issues involved are pure questions of law, this Court proceed to decide the appeal on merits.

7. The Assessing Officer (AO) disallowed Rs.564,49,19,729/- on account of contributions made to the Superannuation Fund in excess of the 27% ceiling fixed under Rule 87 of the Income-tax Rules, 1962. The assessee submitted that the contribution was necessitated to meet a severe deficit revealed by an actuarial valuation of the Superannuation Fund. For several preceding years, the assessee could not fully fund the required contribution due to a persistent procedural fund crunch. Consequently, the contribution in the financial year 2020-21 was an extraordinary ad hoc interim payment meant to cover both current and past year deficiencies, aligning the fund’s assets with its real actuarial liabilities. The CIT(Appeals) and the ITAT correctly held that since these payments were ad hoc interim contributions made specifically to bridge the gap in actuarial valuation, they were neither ordinary annual contributions under Rule 87 nor initial contributions under Rule 88. The ITAT relied on the High Court decision in Exide Industries Ltd. (supra), which established that the statutory ceiling of Rule 87 does not apply to extraordinary contributions made to address actuarial deficits.

8. The revenue argued before this Court that the case of Exide Industries Ltd. (supra) is distinguishable because the assessee’s practice of funding shortfalls was a regular, recurring method of operation over past years, rather than an exceptional one-time payment. This Court is unable to accept the revenue’s contention. The legal nature of a contribution is defined by its purpose i.e., remedying an actuarial deficit and not by how many years the deficit takes to be fully addressed. A persistent deficit caused by past funding constraints cannot convert ad hoc gap-filling payments into ordinary annual contributions. To superimpose the Rule 87 ceiling on necessary, actuarially-backed funding of an approved fund would compromise the solvency of the fund and is contrary to the scheme of Section 36(1)(iv) of the Act. The ITAT committed no error in upholding the deletion of the disallowance. We answer substantial questions of law (1) and (2) in negative, i.e., against the appellant revenue and in favour of the respondent assessee. The deletion of the disallowance of Rs.564,49,19,729/-is hereby upheld.

9. Regarding the overall validity of the ITAT order, herein being question no.3, while the revenue disputes the findings on superannuation and gratuity, the order itself is not perverse or arbitrary in a legal sense. The ITAT reached its conclusions by placing reliance on jurisdictional high court precedents, such as Exide Industries (supra) and Eastern Equipment & Sales Ltd (supra).While the application of those precedents to the specific facts of the superannuation and gratuity issues may be contested, the ITAT’s reliance on existing judicial interpretations ensures the order remains a reasoned legal document rather than an arbitrary one. We answer substantial question (3) in the negative, i.e., against the revenue and in favour of the assessee.

10. The findings of the Tribunal concerning the superannuation fund contributions and the overall non-perversity of the order are upheld. Therefore, the appeal filed by the revenue against the impugned order dated November 18, 2024, passed by the Income Tax Appellate Tribunal relating to the Assessment Year 2020-2021 is devoid of any merit. Accordingly, we answer substantial questions (1), (2) and (3) in the negative, i.e., against the revenue and in favour of the assessee.

11. There shall be no order as to costs.

12. Urgent certified copy, if applied for, be supplied upon compliance with requisite formalities.