ORDER : (PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) 1. Heard learned Senior Standing Counsel Mr.Karan Sanghani for the appellant. 2. This Tax Appeal is filed under Sec.260A of the INCOME TAX ACT ,1961 (for short ’the Act’) proposing the following substantial questions of law arising out of the Judgement and Order dated 10.07.2024 passed by the Income Tax Appellate Tribunal, Rajkot (for short ‘the Tribunal’) in ITA No. 227/RJT/2023 for the Assessment Year 2015-16. “[A] Whether on facts of the case as well as in law, the Appellate Tribunal was justified in deleting the disallowance of Rs.7,09,71,733/- being the difference in valuation of group gratuity and leave encashment funds as per books of accounts and actuarial valuation of the fund made by LIC and SBI Life Insurance Companies? [B] Whether the findings of the Appellate Tribunal is perverse and contrary to the established principles of tax law, which require that only actual and not merely anticipated or notional expenses should be considered in computing the taxable income of an assessee?” 3 The brief facts giving rise to filing of this appeal are as under: 3.1 The respondent- assessee, which is a Regional Rural bank is engaged in the business of banking. The assessee filed return of income for the Assessment Year 2015-16 on 30.09.2015 by declaring the total income at Rs.31,52,72,750/- 3.2 The assessee adjusted its books of accounts during the year as per Accounting Standard (AS)-2015, wherein, it had reconciled the fund value as per its books and books of fund houses i.e. the Life Insurance Corporation of India (‘LIC’ for short) and State Bank of India (‘SBI’ for short) and on such reconciliation, it was found that the houses showed excess payment by the assessee over a period of various years as the assessee had made excess payments towards gratuity and had debited its books from time to time accordingly. The assessee, therefore, in order to adjust such excess payment had credited its books to that extent. However, in the computation of income, it reduced its taxable profit to the amount which was credited in the books of accounts on the ground that it was neither its income nor its expenditure and hence there is no taxability involved. The assessee, therefore, in order to adjust such excess payment had credited its books to that extent. However, in the computation of income, it reduced its taxable profit to the amount which was credited in the books of accounts on the ground that it was neither its income nor its expenditure and hence there is no taxability involved. 3.3 The Assessing Officer on examination of the issue of deduction of Rs.70,71,733/- claimed by the assessee, rejected such explanation of the assessee and made the addition of the said amount being the difference in valuation of group gratuity and leave encashment funds as per the books of accounts and actuarial valuation of the fund made by the LIC and the SBI Life Insurance Company. 3.4 Being aggrieved, the assessee challenged the Assessment Order before the CIT(Appeals). The CIT(Appeals) also rejected the appeal filed by the assessee. Being aggrieved, the assessee preferred an appeal before the Tribunal. The Tribunal, after considering the submissions made by the learned advocates of both sides, allowed the appeal on the ground that the amount of Rs.70,71,733/- which was disallowed by the Assessing Officer was required to be considered and not be considered as part of taxable income by observing as under: “5.2 We note that assessee under consideration maintaining gratuity fund and leaves encashment fund. On order to maintain these two funds, the assessee makes provision at the end of every year. The assessee himself is liable to make the payment of gratuity at the time of retirement of any employee. The assessee is also liable to make payment on account of leave encashment, as and when employee’s right to receive leave encashment arises. Since the gratuity payment is to be made at the time of retirement of employee and at the end of retirement entire obligation arises on the assessee bank. In order to discharge this obligation, the bank maintains the fund relating to gratuity with Life Insurance Corporation of India (LIC). The assessee bank deposits the amount in the fund maintained with Life Insurance Corporation of India (LIC) every year as per the total strength of the employees. Whenever any employee retires, the obligation for payment of gratuity is there on the employee bank, however, the funds are taken from the Life Insurance Corporation of India(LIC) gratuity fund in which the assessee bank has already contributed on behalf of various employees. Whenever any employee retires, the obligation for payment of gratuity is there on the employee bank, however, the funds are taken from the Life Insurance Corporation of India(LIC) gratuity fund in which the assessee bank has already contributed on behalf of various employees. Therefore, at the time of retirement of a particular employee, the Life Insurance Corporation of India (LIC) will pay the gratuity on behalf of the assessee bank, out of the funds maintained by the assessee bank, which was contributed by the assessee bank on year to year basis in the gratuity fund, maintained with Life Insurance Corporation of India (LIC). Therefore, of making the payment by the employee bank himself, at the time of retirement, gratuity is being paid to the employee directly from the Life Insurance Corporation of India (LIC) out of the gratuity fund maintained by the bank. Therefore, this mechanism is like as if the assessee bank is to pay gratuity out of its own fund. 5.3 As we have explained above that the assessee bank makes the provision for gratuity considering the total strength of employees every year and this provision, the bank never treats as expenses in the books of accounts. What the bank is doing is every year, the bank makes the provision for leave encashment and the provision of gratuity and debited to the employee’s benefit (employees expenses), which is schedule 16 before use. In the above schedule 16, the real expenses incurred by the assessee bank as well as provision on account of gratuity payment and provision on account of leave encashment etc. are debited. However, at the end of year, the bank claims only actual payment made to the employee on account of gratuity and leave encashment. Therefore, in the above referred schedule 16 which is part of the balance sheet for the assessment year 2015-16 contains the actual expenses incurred by the assessee company on account of gratuity and other employees benefit including the provision for gratuity and the leave encashment. Therefore, in the above referred schedule 16 which is part of the balance sheet for the assessment year 2015-16 contains the actual expenses incurred by the assessee company on account of gratuity and other employees benefit including the provision for gratuity and the leave encashment. However, the provisions at the end of the year are being deducted by the bank from the total payment done in schedule 16 under the head payment and provision for employees and the provisions, for that the assessee bank does not incur any expenses, these are provisions for that the bank is again reducing the amount from schedule 16, which is evident from the above schedule 16 reproduced wherein, the assessee bank is reducing gratuity provision to the extent of Rs.5,61,84,048.80/- and provision for leave encashment to the extent of Rs.1,47,87,684/-. Total of these two provisions comes to Rs.7,09,71,732/- Therefore, by doing this treatment, the bank is nullified, the provision taken in the main expenses schedule. Therefore, we find that in schedule 16, the net amount debited to the profit and loss account to the tune of Rs.41,94,73,451/- is net of provisions. In other words, the amount which is being debited to the assessee profit and loss account is after excluding the provisions of gratuity and leave encashment. Therefore, we find that the amount debited in the profit and loss account is purely expenditure incurred by the assessee bank and paid by the assessee bank during the financial year 2014- 15 relevant to the assessment year 2015-16. Hence, by no stretch of imagination, there is debit of provisions in the profit and loss account. 5.4 Therefore, in this scenario, we find that the findings of the assessing officer to the effect that in contributing these two funds namely; gratuity fund and leave encashment fund, the assessee bank claims the expenses which does not pertain to the year under consideration. In para 4.2, the assessing officer observed that the assessee bank debited the amount in the profit and loss account which do not pertain to the year under consideration and these amounts pertain to previous year. However, we note that the findings of the A.O. are perverse, as we have explained above that the expenses debited and shown in schedule 16 are provisions and real expenses for the year under consideration. However, we note that the findings of the A.O. are perverse, as we have explained above that the expenses debited and shown in schedule 16 are provisions and real expenses for the year under consideration. The provisions are being reduced by the assessee bank and net expenses are being shown by the assessee in its profit and loss account. Therefore, the real expenses pertain to the assessment year under consideration are taken into account only. Therefore, the findings of the Assessing Officer that the same amount does not pertain to the year under consideration does not match with accounting treatment made by the assessee bank, which we have explained with factual data mentioned above. The AO also noted that the assessee cannot reduce the said amount from the profit and loss account as it does not pertain to the assessment year under consideration. We find that this findings of the A.O is perverse in nature and does not have any connection with the issue under consideration. As we have explained that the real expenses and provisions mentioned in schedule 16 pertains to the assessment year under consideration ie assessment year 2015- 16 and do not pertain to earlier year. Hence, there is no question arises to reduce the earlier year provisions from the current profit and loss account. Therefore, the findings given by the A.O. are not acceptable in the light of the facts narrated above. 5.5 Now coming to the provisions for gratuity and leave encashment, we find that these are two provisions made by the assessee bank and assessee bank has to make provision every year because the assessee bank would have an obligation to pay the gratuity to employees at the time of retirement. Had the bank does not make provision for gratuity and leave encashment, as per accrual system of accounting, then in that situation immediate financial burden may come on the assessee bank and in order to avoid this situation, the bank, by following accrual basis of accounting recorded the expenses based on the accrual system of accounting and makes the provision based on the accrual system of accounting. However, the provisions are never treated as expenses by the assessee bank, on actual payment assessee bank treats expense.” 3.5 The Tribunal also referred to and relied upon a decision of the Hon’ble Apex Court in the case of Commissioner of Income Tax, Bombay City I, Bombay Vs. Shoorji Vallabhdas & Co. reported in [1962] 46 ITR 144 , wherein, it was held that the yearly income earned by the assessee is taxable and provisions cannot be included in the real taxable income of the assessee unless there is a specific provision provided under the Act. The Tribunal also referred to and relied upon the decision of the Hon’ble Apex Court in the case of Sutlej Cotton Mill Ltd Vs. CIT. , reported in [1979] 116 ITR 1, wherein, it is held that notional income and notional expenses cannot be allowed under the INCOME TAX ACT for calculation of tax. 4 Learned advocate Mr. Sanghani for the revenue submitted that the Assessing Officer as well as the CIT(Appeals) has rightly disallowed the amount of claim made by the petitioner pertaining to the gratuity, excess funding of the gratuity as well as the leave encashment considering the fact that the assessee had admitted that it erroneously claimed the deduction under Sec.43B and further the books of accounts have been adjusted as per AS-15, wherein, it had reconciled the fund value as per its books funds and books of fund houses i.e. the SBI and the LIC, wherein, it is showed that the excess payment was made by the assessee. 4.1 It was, therefore, submitted that the reference made by the Tribunal to Schedule 16 of the Balance-Sheet clearly shows that it includes the provision on account of the leave encashment as well as for the gratuity and it also includes the prior period expenses of gratuity and leave encashment which is rightly disallowed by the Assessing Officer and the CIT(Appeals) as the excess funding made as per AS-15 amounting to Rs.7,09,71,733/- could not have been claimed as deductions by the assessee. 5 Having heard the learned advocate for the revenue it appears that the Tribunal, after considering the facts of the case, arrived at a finding of fact to the effect that the gratuity payment as well as the leave encashment actually paid by the assessee during the year under consideration has been claimed as an expenditure. 5 Having heard the learned advocate for the revenue it appears that the Tribunal, after considering the facts of the case, arrived at a finding of fact to the effect that the gratuity payment as well as the leave encashment actually paid by the assessee during the year under consideration has been claimed as an expenditure. The Tribunal has also refereed to the Schedule 16 under the head Payment and Provision for Employees in the balance sheet to come to the conclusion that the assessee bank has claimed as per the said Schedule and the assessee bank has reduced the gratuity provision to the extent of Rs.5,61,84,048.80/- and provision for leave encashment to the extent of Rs.1,47,87,684/- total Rs.7,09,71,732/- by nullifying the provision taken in the main expense schedule. The Tribunal has therefore found that in Schedule 16, the net amount debited to the Profit & Loss Account to the tune of Rs.41,94,73,451/- is a net of provision, and therefore, the amount which is being debited by the assessee in the Profit & Loss Account is after excluding the provision of gratuity and leave encashment and therefore, the amount debited in Profit and Loss Account is purely expenditure incurred by the assessee -bank and paid by the assessee bank during the Financial Year 2014-15 relevant to the Assessment Year 2015-16. 6 We are therefore, of the opinion that the Tribunal has rightly arrived at the finding of fact which does not call for any interference and as such no question of law much less any substantial question of law arises from the impugned order of the Tribunal. 7 The appeal therefore being devoid of any merit, is accordingly dismissed.