# U.P. State Industrial Development Corporation Ltd v. Commissioner of Income Tax, Kanpur

- **Citation:** (2016) 7 ILRA 273
- **Court:** High Court of Judicature at Allahabad
- **Decided:** 2016-07-11
- **Bench:** Sudhir Agarwal, Kaushal Jayendra Thaker
- **Source:** https://unisonlegal.in/judgment/allahabad-high-court/u-p-state-industrial-development-corporation-ltd-v-commissioner-of-income-tax-44037
- **Pages:** 8

## Text

7 All. U.P. State Industrial Development Corporation Ltd Vs Commissioner Of Income
 Tax, Kanpur

273

23. Appeal is allowed. Impugned order dated 24.7.2014 passed by Tribunal as also
assessment order in respect to Assessment Year 2003-2004 are hereby quashed.

23. This judgment shall not preclude Assessing Authority from proceeding further in
accordance with law with regard to assesssment of Assessee under section 143(3)/148 for
Assessment Year 2003-2004, after giving notice under section 143(2) of Act, 1961.
---------
APPELLATE JURISDICTION
CIVIL SIDE
DATED: ALLAHABAD 11.07.2016

BEFORE

THE HON'BLE SUDHIR AGARWAL, J.
THE HON'BLE KAUSHAL JAYENDRA THAKER, J.

Income Tax Appeal No.- 12 Of 2015
&
Income Tax Appeal No.- 13 Of 2015

U.P. State Industrial Development Corporation Ltd ...Appellant
Versus
Commissioner of Income Tax, Kanpur ...Respondent

Counsel for Appellant:
Sri S.K. Garg, Sri Ashish Bansal

Counsel for Respondent:
C.S.C. It

Income Tax -- Section 36(1)(v) and Section 37 of Income Tax Act, 1961 -- Group Gratuity
Insurance Scheme -- Payment to LIC -- Deduction -- Approved Gratuity Fund -- Section 12AA(2)
-- Deemed Approval by Efflux of Time -- Assessment Years 2005-06 and 2006-07 -- Assessee
(UPSIDC) paid premiums to Life Insurance Corporation of India under a Group Gratuity Insurance Scheme for
the benefit of its employees -- Assessing Officer disallowed deduction of Rs. 39,57,629/- (A.Y. 2005-06) and
Rs. 46,16,743/- (A.Y. 2006-07) on the ground that the Group Gratuity Scheme was not approved by the
Commissioner of Income Tax -- CIT (Appeals) upheld the disallowance and also enhanced the assessed
income -- Income Tax Appellate Tribunal, Lucknow Bench partly allowed Assessee's appeal for A.Y. 2005-06
but dismissed for A.Y. 2006-07 -- on appeal under Section 260-A, substantial questions of law include:
whether ITAT was justified in disallowing deduction of actual payment made to LIC on the ground that the
scheme was not specifically approved by CIT though carried under general approval of the Central
Government; and whether the payment was liable to be treated as payment made to an approved fund by
reason of efflux of time -- Held: the Tribunal and authorities below committed manifest error in treating the
fund as non-approved -- Assessee submitted an application for registration on 16.6.2011 -- no order was
passed by the Commissioner within six months from the end of the month of receipt of the said application --
Section 12AA(2) of the Act automatically comes into operation and by operation of legal fiction, approval is
deemed to have been granted -- the Assessee was entitled to claim deduction under Section 36(1)(v) on the
274 INDIAN LAW REPORTS ALLAHABAD SERIES

basis of deemed approval -- the subsequent order of rejection dated 25.6.2012 passed after more than one
year from the date of application is of no legal consequence in view of deemed approval. (Paras 5-11)

Income Tax -- Section 37 of Income Tax Act, 1961 -- Actual Payment to LIC -- Section 40A(7) --
Gratuity -- Payment Not in Nature of Provision -- Deductibility of Actual Business Expenditure --
Held: it is admitted by the Revenue that the amount claimed to be paid by the Assessee under the Group
Gratuity Insurance Scheme is the actual payment made to LIC and not a provision made by the Assessee for
payment of gratuity -- Section 40A(7) which bars deduction of 'provision' for gratuity is not applicable to
actual payments -- once the amount towards gratuity payable to employees has gone out of the hands of the
Assessee having been deposited with LIC, it is a case where expenses have actually been incurred by the
Assessee for the benefit of its employees which is connected with the purposes of business or profession -- if
for any technical reason the deposit did not qualify for deduction under Section 36(1)(v), the actual
expenditure incurred by the Assessee not in the nature of capital expenditure or personal expenses should
have been allowed as business expenditure under Section 37 of the Act. (Paras 6-9)

Income Tax -- Section 80-IA of Income Tax Act, 1961 -- 5% Premium Collected on Industrial
Sites -- Forfeiture of Earnest Money -- Deduction Under Section 80-IA -- Taxability of Premium --
Held: the addition of 5% of premium received on allotment of industrial sites to entrepreneurs is without basis
-- the premium received is nothing but charges for allotment of developed industrial land and has no concept
of profit or loss in terms of the nature of development activity undertaken by UPSIDC -- the assumption of 5%
income on such premium is without any rationale -- there is no justification for presuming income of 5% on
the total premium received -- since the nature of functioning of the Assessee as a public body for
development of industries in the State has not been examined, such addition is not justified in law. (Paras 1214)

Income Tax -- Section 80-IA -- Interest on Delayed Installments of Premium -- Eligible Business
Income -- Nexus With Eligible Business Activity -- Held: the Tribunal completely erred in law with
regard to interest received by the Assessee on delayed payment of installments of premium/lease rent --
CIT(Appeals) had recorded a finding of fact in para 10.3.5 that the interest earned by the Assessee on
installments granted in respect of premium payable and other receipts may have some link with the business
of the Assessee -- despite recording this finding the Tribunal without reversing it dismissed the Assessee's
appeal -- such interest income is eligible for deduction under Section 80-IA as it has a direct nexus with the
eligible business activity of the Assessee -- to hold that deduction under Section 80-IA is not admissible
without reversing the CIT(Appeals) finding is per se contradictory and not in accordance with law. (Paras 1315)

Both Income Tax Appeals Partly Allowed -- Matter Remanded to ITAT -- Impugned judgment and
order dated 24.7.2014 passed by the Income Tax Appellate Tribunal, Lucknow Bench 'A' Lucknow in ITA
No.384/LKW/2011 and ITA No. 540/LKW/2011 set aside -- Income Tax Appeal Nos. 12 and 13 of 2015 partly
allowed -- matter remanded back to the Tribunal with directions to pass a fresh order on the aforesaid aspects
in the light of the law discussed -- on the question of deduction under Section 36(1)(v), 5% premium addition
and Section 80-IA deduction on interest income. (Para 16)

Case Law Discussed:
1. Society for the Promotion of Education Adventure Sport & Conservation of Environment v. Commissioner of
Income Tax & others, (2008) 216 CTR (Alld.) 167

(Delivered by Hon'ble Sudhir Agarwal, J.
&
7 All. U.P. State Industrial Development Corporation Ltd Vs Commissioner Of Income
 Tax, Kanpur

275
Hon'ble Kaushal Jayendra Thaker, J.)

1. These two appeals have been filed under Section 260A of Income Tax Act, 1961 (
hereinafter referred to as 'Act, 1961)' arising from judgment and order dated 24.7.2014 passed by
Income Tax Appellate Tribunal, Lucknow Bench 'A' Lucknow (hereinafter referred to as the
"Tribunal") in Income Tax Appeal No.384/LKW/2011 and Income Tax Appeal No.
540/LKW/2011 with respect of Assessment Year 2006-07 and Assessment Year 2005-06
respectively.

2. Substantial questions of law arising in both the appeals in our view are as under :-

"(i) Whether the Tribunal is justified in disallowing deduction of actual payment
made to Life Insurance Corporation of India under Group Gratuity Insurance Scheme, on the
ground that such scheme was not specifically approved by concerned Commissioner of Income Tax
though carried under general approval of Central Government.

(ii) Whether the payment made to LIC by way of premium on Insurance Policy
under Group Gratuity Insurance Scheme was liable to be treated as payment made to a fund
which is deemed to have been approved by the CIT by the reason of efflux of time.

(iii) Whether at an any rate actual payment made to the retiring employees, through
the mechanism of Insurance Policy issued under Group Gratuity Insurance Scheme launched by
Life Insurance Corporation of India should have been considered and allowed as deduction under
Section 37 read with Section 43B of the Act ?"

(iv) Whether addition of amount being 5% of premium collected by Assessee and
forfeiture of earnest money/ premium is vitiated due to non-consideration of principle governing
accrual of income and other material / information placed on record.

(v) Whether the Tribunal was legally justified in upholding taxbility of 5% premium
collected by Assessee in its hand without considering obligation / liabilities of overriding nature,
attached to the receipts in question.

(vi) Whether the Tribunal was justified after holding premium as taxable and then
not directing Assessing Officer to allow deduction under Section 80IA of Act, 1961 being the same
as part of eligible profits.

(vii) Whether ITAT was legally correct in holding that interest on premium payable
by the allottees of industrial sites as financed by the appellant as an accredited financial
corporation did not form part of the income qualifying for exemption under Section 80IA of the
Act?
276 INDIAN LAW REPORTS ALLAHABAD SERIES

3. Assessing Officer made addition / disallowance in respect of Assessment Years 2005-06
and 2006-07 as under:-

Assessment Year 2005-06 :-

Sl No.
Particulars

Amount (Rs.)

Reasons, in brief, for
disallowance / additions

(A)

Payment made to
LIC on a policy
taken for the Group
Gratuity Scheme

39,57,629/-

On the ground that the Group
Gratuity
Scheme
was
not
approved by the Commissioner
of Income Tax.

(B)

5%
of
Premium
received during the
year in relation to
industrial
sites
allotted
to
entrepreneurs

5,16,27,653/-

The sum in question was
represented
income
from
purchase and sale of land and
the Revenue's stand in this
respect stood upheld both at the
level of CIT (A) and ITAT
(C)

Short dis-allowance
of deduction under
Section 80 IA

1,54,09,286/-

On the ground that the profit
declared
by
the
appellant
included receipts aggregating
Rs.1,54,09,286/- which did not
have direct nexus with the
running and management of
technical parks.

Assessment Year -2006-07 :-

Sl No.
Particulars

Amount (Rs.)

Reasons, in brief, for disallowance /
additions

(A)

Payment
made
to
LIC on a policy
taken for the Group
Gratuity Scheme

46,16,743/-

On the ground that the Group Gratuity
Scheme was not approved by the
Commissioner of Income Tax.

(B)

5%
of
Premium
received during the
year in relation to
5,12,92,142/-

The sum in question was represented
income from purchase and sale of land
and the Revenue's stand in this respect
7 All. U.P. State Industrial Development Corporation Ltd Vs Commissioner Of Income
 Tax, Kanpur

277
industrial
sites
allotted
to
entrepreneurs

stood upheld both at the level of CIT
(A) and ITAT
(C)

Short dis-allowance
of deduction under
Section 80 IA

4,04,63,639/-

On the ground that the profit declared
by the appellant included receipts
aggregating Rs. 4,04,63,639/- which
did not have direct nexus with the
running and management of technical
parks.

4. Assessee preferred an appeal where Commissioner of Income Tax (Appeals) (hereinafter
referred to as ''CIT (Appeals)') not only upheld dis-allowance but enhanced assessed income by
taking a view that eligible profit for the purposes of computation of relief under Section 80IA
deserved to be reduced by the amount of interest received on unpaid installments of premium from
income disclosed by the Tronica City Industrial Model Town Loni, Ghaziabad and Greater Noida
Export Promotion Industrial Park etc. with regard to Assessment Year 2006-07. Assessee and
Revenue both filed appeals i.e. I.T.A. No. 384 of 2011 by Assessee and I.T.A. No. 398 of 2011 by
Revenue. Similarly for Assessment Year 2005-06, Revenue filed I.T.A. No.560 of 2011 and
Assessee filed I.T.A. No. 540 of 2011. Revenue's appeals for Assessment Years 2005-06 and 200607 have been dismissed while Assessee's appeals for Assessment Year 2005-06 is partly allowed
but that of Assessment Year 2006-07 is dismissed.

5. With regard to dis-allowance of payment of Life Insurance Corporation of India (
hereinafter referred to as 'LIC') under Group Gratuity Insurance Scheme the only reason followed
by authorities below is that scheme was not approved by Commissioner of Income Tax (
hereinafter refereed to as ''CIT') and since it was covered by Section 36(1)(v), hence Section 37(1)
cannot be applied. It has also been held that amount was paid directly to LIC and not to approved
fund, therefore, deduction was not allowable.

6. It is argued that premium claimed as deduction was an actual payment and not
provisional, therefore, Section 40A(7) was not applicable. Section 40A talks of expenses of
payment not deductible and sub-section (1) declares that provisions of Section 40A shall have
effect notwithstanding anything contrary contained in any other provision of Act, 1961 relating to
computation of income under the head "profits and gains of business or profession". Sub-section
(7) as available during the course of concerned relevant years reads as under : -

"(7) (a) Subject to the provisions of clause (b), no deduction shall be allowed in
respect of any provision (whether called as such or by any other name) made by the assessee for
the payment of gratuity to his employees on their retirement or on termination of their employment
for any reason.
278 INDIAN LAW REPORTS ALLAHABAD SERIES

(b) Nothing in clause (a) shall apply in relation to any provision made by the
assessee for the purpose of payment of a sum by way of any contribution towards an approved
gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the
previous year.

Explanation.-For the removal of doubts, it is hereby declared that where any
provision made by the assessee for the payment of gratuity to his employees on their retirement or
termination of their employment for any reason has been allowed as a deduction in computing the
income of the assessee for any assessment year, any sum paid out of such provision by way of
contribution towards an approved gratuity fund or by way of gratuity to any employee shall not be
allowed as a deduction in computing the income of the assessee of the previous year in which the
sum is so paid."

7. It is admitted by learned counsel appearing for Revenue that the amount claimed to be
paid by Assessee under Group Gratuity Insurance Scheme is the actual payment made to LIC and
not something which can be said to be a provision made by Assessee for payment of gratuity.
Deduction towards gratuity fund is permitted under Section 36(1)(v) which reads as under : -

"any sum paid by the assessee as an employer by way of contribution towards an
approved gratuity fund created by him for the exclusive benefit of his employees under an
irrevocable trust; "

8. The term "approved gratuity" fund is defined in Section 2(v) as under :

"approved gratuity fund" means a gratuity fund which has been and continues to be
approved by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner
or Commissioner in accordance with the rules contained in Part C of the Fourth Schedule;"

9. It is not in dispute that no gratuity fund constituted by Assessee has not been approved
by Commissioner or Principal Commissioner till date but it is also proved that amount towards
gratuity payable to employee has gone out of hands of Assessee having been deposited with LIC
and, therefore, it is a case where expenses have actually been incurred by Assessee for benefit of its
employees which is connected with the purposes of business or profession being carried by
Assessee. If the terminology by itself is not relevant and if Revenue thinks that deposit made with
LIC, on account of lack of approval by CIT, did not qualify for deduction under Section 36(v),
even then expenditure incurred by Assessee, not in the nature of capital expenditure or personal
expenses should have been allowed under Section 37. Moreover, review application with regard to
the matter of approval was admittedly pending with Commissioner and if that be so Tribunal ought
to have asked Commissioner to decide the same and thereafter this issue should have been decided,
for the reason that in case review is allowed, approval shall relates back, in that event, technical
reason for not attracting Section 36(v) would disappear.
7 All. U.P. State Industrial Development Corporation Ltd Vs Commissioner Of Income
 Tax, Kanpur

279
10. However, from record we also find that Tribunal and other authorities have committed
manifest error in treating the fund as non approved on the basis of order dated 25.6.2012 passed by
Commissioner and disregarding specific requirement of law under Section 12AA(2) of Act, 1961.
A perusal of order dated 25.6.2012 shows that application was submitted by Assessee for
registration on 16.6.2011. No order was passed by Commissioner during six months from the end
of month of receipt of said application. Section 12AA thus automatically comes into operation and
therefore by operation of legal fiction, approval is deemed to have been granted. The view we have
taken is fortified by judgment in Society For the Promotion of Education Adventure Sport &
Conservation of Environment Vs. Commissioner of Income Tax & others, (2008) 216
CTR(Alld) 167. Therein also an application was submitted by Assessee on 24.6.2003 but no order
was passed before expiry of six months from the end of month, in which, application was received.
In the present case order has been passed after more than one year from the date, application was
received. This Court held that non-consideration of registration application within time fixed by
Section 12AA would result in deemed registration. In paras 17 and 18 the courts said as under :-

"17. Considering the pros and cons of the two view, we are of the opinion that by far
the better interpretation would be to hold that the effect of non consideration of the application for
registration within the time fixed by section 12AA(2) would be a deemed grant of registration. We
do not find any good reason to make the assessee suffer merely because the IT Department is not
able to keep it officers under check and control, so as to take timely decisions in such simple
matters such as consideration of applications for registration even within the large six month
period provided by s. 12AA(2) of the Act.

18. We accordingly direct the respondents, subject to any order which may be
passed under s. 12AA(3), to treat the petitioner society as an institution duly approved and
registered under s. 12AA and to recomputed its income by applying the provision of s. 11 of the
Act. Accordingly, a formal certificate of approval will be issued forthwith to the petitioner by the
respondent Nos. 2.

The writ petition is allowed to the above extent"

11. In this view of the matter, gratuity fund of Assessee stood deemed to have been
registered and that being so subsequent order passed by CIT(Appeals) had no consequence or
illegal effect. Hence, Assessee was entitled to claim deduction under Section 36(v). The view taken
otherwise in impugned orders, therefore, is illegal, and contrary to law and observing to be set
aside.

12. Coming to the question of 5% income in term of premium received during concerned
assessment years and deduction under Section 80IA and applicability of provision. It is said that
there is no justification for presuming income of 5% as total premium received by Assessee, for the
reason that premium received is nothing but allotment of land to entrepreneur and facility of
returning expenses incurred by Assessee for development of such industrial land and there is no
280 INDIAN LAW REPORTS ALLAHABAD SERIES

concept of profit or loss in such determination. Amount paid by allottees represents lease rent etc.
and hence assumption of 5% income on such premium is without any basis.

13. Similarly for interest received by Assessee on delayed payment of installment of
premium or lease rent etc, Tribunal has held that it is not income of eligible business for the
purpose of computation of deduction under Section 80IA. We find that Tribunal has completely
erred in law inasmuch as a finding of fact was recorded by CIT in para 10.3.5 that interest earned
by Assessee on installments granted in respect of premium payable, and other income etc. receipts
may have some link with the business of appellant and having said so, still it has reversed order of
Assessing Authority to the extent, it has allowed deduction under Section 80IA on such 'interest'
and Tribunal has erred in law in failing to appreciate this finding of Commissioner of Income Tax (
Appeals) and without reversing the same, has dismissed Assessee's appeal.

14. In view thereof the questions formulated above are answered by observing that
Assessee was entitled for deduction towards payment of group gratuity insurance paid to LIC by
treating fund as any approved fund. 5% of premium collected by Assessee and forfeiture of earnest
money/premium has been added illegally based on conjuncture and surmises. Since the nature of
functioning of Assessee has not been examined looking to the public nature of its functioning for
development of industries in the State, such addition, therefore, is not justified in law.

15. With regard to applicability of Section 80IA, without reversing findings of
CIT(Appeals), that such interest received may have some link with the business of appellant and
once that is so, to hold that deduction under Section 80IA is not admissible is per se contradictory
and hence is not correct and in accordance with Law.

16. On the aforesaid aspects, impugned judgment of Tribunal dated 24.7.2014 is hereby set
aside and the matter is remanded back. Appeal is partly allowed. Tribunal shall pass a fresh order
on the aforesaid aspects in the light of law, discussed above.
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REVISIONAL JURISDICTION
CIVIL SIDE
DATED: ALLAHABAD 11.07.2016

BEFORE

THE HON'BLE MANOJ MISRA, J.

Civil Revision No.- 14 Of 2015

Sam Higginbottom Institute of Agriculture Technology & Sciences ...Revisionist
Versus
M/S Acurite Contractors & Engineers ...Opposite Parties

Counsel for Revisionist:
Sri Amit Negi, Sri Ravi Kant (Sr. Counsel), Sri J. Nagar (Sr. Counsel), Sri Tarun Agrawal