Actuarial Deficit Contributions to Approved Funds Exceeding Statutory Ceilings Are Taxable Revenue Deductions

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 2018-19, on the substantial questions of law formulated at the time of admission.

2. The facts in a nutshell are that the assessee herein the respondent, formerly known as the Kolkata Port Trust (KoPT), is an Artificial Juridical Person with a history of providing essential port services since its establishment in the year 1870. For the assessment year 2018-19, the assessee filed its original return of income on September 27, 2018 and a revised return on March 28, 2019. This return was initially processed under the provisions of section 143(1) of the Income Tax Act, 1961. Subsequently, the case was scrutinised under the Computer Assisted Scrutiny Selection (CASS) system, leading to the issuance of a notice under section 143(2) on September 22, 2019. The assessment was eventually completed by the Assessing Officer (A.O.) under section 143(3) read with section 144B of the Act through an order dated September 24, 2021. In the said assessment order, the A.O. determined the total income to be Rs. 876,16,93,450, having incorporated substantial additions and disallowances. These included a disallowance of Rs.710,68,55,297/- regarding contributions to the Superannuation Fund under section 37 read with section 43B. A disallowance of Rs.33,11,01,366/- for contributions to the approved Gratuity Fund under section 37(1) read with Rule 87 and a disallowance of Rs.8,38,35,219/- for belated credit of employees’ contributions to PF/ESI under section 36(1)(va).

3. Aggrieved by these disallowances, the assessee respondent preferred an appeal before the Learned Commissioner of Income Tax (Appeals) [CIT(A)], National Faceless Appeal Centre. The Ld. CIT(A) allowed the assessee’s appeal and deleted all the disallowances and additions made by the A.O. by placing reliance on various case laws. Dissatisfied with the decision, the revenue herein the appellant preferred a second appeal before the Learned Income Tax Appellate Tribunal (ITAT), Kolkata. In considering the matter, the ITAT followed the legal principles established by the Hon’ble Calcutta High Court in the cases of PCIT v. Exide Industries Ltd (2023) and Eastern Equipment Sales Ltd. or CIT v. Eastern Equipment & Sales Ltd.  (Chennai – CESTAT)(Cal), confirmed the decision of the Ld. CIT(A). 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. On the issue of PF/ESI, the ITAT noted that the relevant regulations for the Kolkata Port Trust do not specify a due date for such credits and that the deposit was made within a couple of days of the artificial due date used by the e-filing software.

4. The revenue, thereafter, approached this Court under section 260A, asserting that the ITAT was not justified in deleting the aforementioned disallowances.

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. First, the Assessing Officer (AO) disallowed Rs.710,68,55,297/- 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. During the relevant year, the actual salary for the purpose of Superannuation Fund determination was Rs. 446,33,18,867 (salaries and wages of Rs.500,60,83,433/-minus overtime of Rs.54,27,64,566/-). The AO calculated that the permissible 27% contribution under Rule 87 was Rs.120,50,96,094/-, whereas the assessee debited Rs.831,20,51,391/- to the Profit & Loss account, prompting the AO to disallow the excess. 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 2017-18 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 (3) in negative, i.e., against the appellant revenue and in favour of the respondent assessee. The deletion of the disallowance of Rs.710,68,55,297/-is hereby upheld.

9. Second, the ITAT’s decision to uphold the deletion of the Rs.33,11,01,366/- disallowance related to the Gratuity Fund is legally sound and merits no interference. The primary contention of the revenue was that the contribution exceeded the 8.33% limit prescribed by Rule 103. However, a fundamental distinction must be made between ordinary annual contributions and payments made to bridge a gap in actuarial valuation. The assessee’s contribution was specifically made to address a shortfall in actuarial valuation specifically to bridge the gap between actuarial liability and actual fund availability to ensure that the approved Gratuity Fund, which is maintained with the Life Insurance Corporation of India (LIC), remained capable of discharging its lawful obligations. As such, it does not fall under the restrictive definition of an ordinary annual contribution as contemplated by Rule 103.

10. Furthermore, Section 36(1)(v) of the Income Tax Act, which governs deductions for contributions to approved gratuity funds, does not per se impose the 8.33% restriction found in the Rules. Section 36(1)(v) allows deduction of any sum paid by the employer by way of contribution towards an approved gratuity fund created for the exclusive benefit of employees under an irrevocable trust, without imposing any 8.33% ceiling. As the assessee’s Gratuity Fund remains an approved fund recognised by the Commissioner, the taxing authority must proceed on the basis that the fund satisfies all conditions for recognition unless that recognition is formally withdrawn. The ITAT correctly placed reliance on the High Court’s precedent in Eastern Equipment & Sales Ltd.(supra), which supports the view that such contributions are fully allowable. As established in Eastern Equipment & Sales Ltd. (supra), once the Commissioner accords approval, it is binding on the assessing authority and the AO is entirely devoid of power and jurisdiction to go behind the permission to find out whether the contribution is in conformity with the rules or in excess thereof. The AO simply cannot sit in judgment over the Commissioner’s approval. Consequently, the revenue’s contention that the excess was part of a regular practice does not assist its position, even assuming such a factual claim, the AO possesses no jurisdiction in assessment proceedings to disregard the approved status of the fund and to superimpose Rule 103 as a deduction-disallowance mechanism contrary to as held in Eastern Equipment & Sales Ltd. (supra). Restricting the deduction to 8.33% when the statutory provision does not envisage such a cap especially for payments intended to maintain the solvency of the fund based on actuarial requirements would be contrary to the intent of the Act. Therefore, the ITAT correctly appreciated that the ceiling fixed under the rules does not apply to this specific type of contribution. We answer substantial question (2) in the negative, i.e., against the revenue and in favour of the assessee.

11. Third, the ITAT’s decision to delete the Rs.8,38,35,219/- disallowance regarding belated employee contributions to PF and ESI is legally sound. The A.O. had initially made this addition under Section 36(1)(va), relying on the Tax Audit Report which flagged the deposits as “delayed” based on an artificial deadline being 15^th of the month. However, Section 36(1)(va), read with its Explanation, makes it clear that a disallowance can only arise where the employees’ contribution is not credited by the ‘due date’ that is defined as the date prescribed under the applicable Act, rule, order, notification, standing order, award, contract of service or otherwise. In the present case, the assessee is governed by the Kolkata Port Trust (Non-contributory Provident Fund) Regulations 1988, approved and notified under the Major Port Trusts Act, 1963. Crucially, these specific regulations do not specify a due date for depositing the employee’s share of contributions.

12. Since there is no prescribed statutory deadline in the specific regulations applicable to the assessee, the general 15^th of the month deadline found in the Employee’s Provident Fund Scheme does not apply. The artificial due date of the 15^th of the following month mentioned under Serial No. 20(b) of the Form 3CD Tax Audit Report was entered by the Tax Auditor solely due to the technical limitations of the concerned e-filing software, which compulsorily mandates entering a date in that column. Therefore, the standard due date of the 15^th of the next month as specified under Clause 38 of the Employees’ Provident Fund Scheme, framed under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, is not applicable to the respondent. In the absence of a legally prescribed due date under the applicable regulatory regime, the statutory trigger for disallowance under Section 36(1)(va) does not arise. Without a legally defined due date, there can be no delay to trigger a disallowance under Section 36(1)(va). Furthermore, the A.O. admitted that the deposits were actually made within a couple of days of the artificial software-generated deadline. Therefore, we answer substantial question (4) in the affirmative, i.e., against the revenue and in favour of the assessee.

13. Regarding the overall validity of the ITAT order, herein being question no.5, 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 Ltd. (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 (5) in the negative, i.e., against the revenue and in favour of the assessee.

14. The findings of the Tribunal concerning the Gratuity Fund, PF/ESI 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 2018-2019 is devoid of any merit. Accordingly, we answer substantial questions (1), (2), (3) and (5) in the negative and question (4) in the affirmative, i.e., against the revenue and in favour of the assessee.

15. There shall be no order as to costs.

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