Gratuity Policy from LIC by a Society

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This discussion examines whether a society, maintaining accounts on an accrual basis and making gratuity provisions actuarially, can claim tax deductions. The core question is whether Sections 36 and 40A, typically applicable to 'profits and gains of business or profession', apply to societies registered under Section 12 of the IT Act, whose income is chargeable under Sections 11 and 12. The consensus leans towards these sections not directly applying, meaning gratuity provisions might be allowable expenditure under Sections 11 and 12, irrespective of whether an LIC policy is taken, though some suggest funding via LIC is necessary for deductibility.

shashi mehta

shashi mehta (Querist)
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03 March 2021 As per section 40A (7) (a) subject to the provisions of clause (b) no deduction shall be allowed in respect of any provision made by the assesse for the payment of gratuity to has employees on their retirement or on termination of their employment for any reason.
(b) nothing in clause (a)shall apply in relation to any provision made by the assesse 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.
Section 36 deals with deduction allowable in computing the income under section 28 (Profit and gains of Business or profession). Clause (1)(v) of the section say any sum paid by the assessee as an employer by way of contribution towards an approved Gratuity fund created by him for exclusive benefit of his employees under an irrevocable trust.
A Society maintain its Books of account on accrual basis and makes provision of Gratuity on actuarial basis.
My quarry is – (i) whether society can claim deduction of Gratuity provision while computing its income and its application as its income is chargeable u/s 11 and 12, while provisions of Section 36, 40A applicable for computing income under the head Profit and gains from Business or profession and not applicable to the Trust / Society.
(ii) if by any interpretation, provisions of section 40A apply to Society, whether it may take Gratuity policy from LIC directly without forming any Gratuity Trust?

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)
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03 March 2021 Yes, take Gratuity policy from LIC directly without forming any Gratuity Trust.

shashi mehta

shashi mehta (Querist)
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04 March 2021 Whether section 36 and 40A(7) applicable to Society registered u/s 12 of IT Act?

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)
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04 March 2021 40A(7) applicable...............

shashi mehta

shashi mehta (Querist)
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04 March 2021 But sir clause (1) of 40A says provisions of this section ( i.e. 40A ) shall have effect ........ computation of income under the head "profits and gains of business or profession.
and there is no income under head business or profession of the Society.

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)
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04 March 2021 In case of charitable society sections 11 and 12 applicable. Where 85% application of funds required. LIC funding of gratuity will fall under application of funds.

shashi mehta

shashi mehta (Querist)
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05 March 2021 Sir, my humble opinion is that as provisions of section 36 and 40A not applicable hence provision made by Society on the basis of acturial valuation (on accrual basis of accounting) is allowable expenditure u/s 11 and 12 and it is immaterial whether Society takes policy from LIC or not.

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)
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05 March 2021 It's not allowable expenditure under section 11 and 12 unless funded with LIC.

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