ITAT Deletes Commission & Interest Disallowances; Upholds Gratuity Addition

CPV Engineers Pvt. Ltd., engaged in manufacturing industrial pump spares and engineering components, filed appeals for AYs 2014-15 and 2015-16, challenging disallowances sustained by NFAC on three issues; commission payments to family members of directors, gratuity provision, and notional interest on directors’ loan. The Assessing Officer had treated part of the commission (Rs.. 35.38 lakh) as unjustified, disallowed gratuity for non-compliance with Section 36(1)(v), and computed notional interest on a director’s loan.

The CIT(A) partly upheld this disallowance. Aggrieved, the company pursued relief before the ITAT.

Issue Raised: Whether the commission paid to related persons was substantiated as a business expenditure, whether the gratuity provision qualified for deduction, and whether the interest-free loan to a director warranted notional interest disallowance.

Tribunal Held: The Tribunal noted that all six recipients of the sales commission were qualified individuals, associated with the company’s operations, and had disclosed the commission income in their returns with TDS duly deducted. The ITAT observed that the authorities below focused on relationships and assumptions without addressing their qualifications, long-standing roles or the factual submissions on record. The Tribunal deleted the entire disallowance for both years. On the interest issue, the Bench accepted that the company had substantial interest-free funds exceeding the amount advanced to the director; hence, applying the settled principle that interest-free funds are presumed to be utilised first, it directed deletion of notional interest disallowances for both years.

The Tribunal upheld the disallowance on gratuity. The assessee had created a provision in its accounts, reflected under employee benefit liabilities, and such a provision was allowable only if paid to an approved gratuity fund, which the company did not maintain. The ITAT held that the claim was in the nature of a provision and not an ascertained liability actually paid, and therefore, the conditions of Section 36(1)(v) were not satisfied. Therefore, the gratuity disallowances for both years were confirmed.

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