Treatment of provision for gratuity in tax audit (3CA and 3CD)


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Treatment of arrangement for gratuity in tax audit (3CA and 3CD). While doing tax Audit under area 44 AB of income tax act one may stumble upon the disallowances u/s 43 B. This includes payment based deductions such as “Provident fund”, leave encashment, gratuity and so on. Here I’m talking about some fundamental concerns about gratuity and its treatment in different cases.

It’s understood to all that Gratuity is a retirement benefit. It is normally payable at the time of cessation of work and on the basis of period of service.

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Typically the majority of business companies utilized to develop some arrangement for satisfying the coming future needs of paying the gratuity for the service rendered by the employees.

There are even more different methods in managing the gratuity funds. U moneyed gratuity is simply contrary to financed i.e no amount is invested in any funds.

There are further 2 types of gratuity funds.First one is acknowledged gratuity and another is unacknowledged gratuity. If a gratuity fund is acknowledged by commissioner of income tax then it is called as acknowledged gratuity. Normally moneyed, acknowledged gratuity is allowed as reduction to the level the quantity is paid out of the pocket of the company.

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There’s a case law where the business contributes specific amount as gratuity by paying a group insurance coverage premium for its employees. Initially it was prohibited by the department stating that it is not deposited/paid into the fund. But the decision of court where the assessee opted for further petition enabled it as deduction. Court justified that the quantity is paid to the insurance provider by the company on behalf of the workers. Thus the intention behind the provision has actually not been breached. So the deduction is permitted.

Usually during the times of filing type 3CA, 3CD gratuity paid of pocket of the business only will be allowed as deduction.

Initially we will prohibit the arrangement at first later the amount of gratuity paid towards gratuity fund will be permitted as reduction.

The case law here I referred is M/s Textool Ltd and CIT Coimbatore.

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