Madras High Court
Commissioner Of Income Tax vs Sudarsan Chit (India) Ltd. on 24 December, 1997
Equivalent citations: [1999]239ITR170(MAD)
JUDGMENT N.V. Balasubramanian, J.
1. The assessee is a subsidiary of Sudarsan Trading Co. Ltd. The employees of the assessee-company were previously the employees of the holding company. The assessee-company was incorporated on 19th December, 1973.According to the assessee, there was a continuity of the service of the employees and for the purpose of calculating gratuity the services rendered by the employees of the assessee-company in the holding company should be taken into account and after taking note of the entire service rendered by the employees in both the companies, the assessee made a contribution of Rs. 3,97,628 towards the approved gratuity fund. The assessee claimed the same as deduction in the determination of the computation of the income for the asst. yr. 1977-78. The ITO rejected the claim of the assessee on the ground that the assessee-company was incorporated only on 19th February, 1973, and as such the employees who have not put in continuous service of five years with the assessee-company did not have enforceable legal right to claim gratuity and the provision debited in the P&L a/c was liable to be added back. The assessee filed an appeal against the order of assessment disallowing the assessee's claim for gratuity to the extent of Rs. 9,09,684, before the CIT(A) and the CIT(A) held that gratuity cannot be disallowed on the ground that employees concerned have not put in five years of service with the assessee-company and the contribution to an approved gratuity fund was an admissible deduction under s. 36(1)(v) of the IT Act without any further restriction being applied to it or condition being fulfilled by it. The CIT(A) further held that the assessee was entitled to the deduction of gratuity claim to the extent of Rs. 3,97,628. It seems that the assessee has furnished details of a sum of Rs. 3,97,628 to the effect that six payments were made from 1st July, 1976, to the gratuity trust and the CIT(A) directed the ITO to verify the correctness of the payments as claimed by the assessee and allowed the amount actually paid as a deduction. The Revenue preferred an appeal before the Tribunal. The Tribunal held that once the conditions prescribed under s. 36(1)(v) of the Act were complied with any sum paid by the assessee, as an employer, by way of contribution towards a gratuity fund, for the exclusive benefit of his employees, under an irrevocable trust was an admissible deduction. The Revenue challenged the order of the Tribunal and at the instance of the Revenue the following question of law has been referred for our consideration under s. 256(1) of the IT Act :
"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the sum of Rs. 3,97,628 being contribution made by the assessee to the approved gratuity fund is an admissible deduction under s. 36(1)(v) of the Act ?"
2. Mr. C. V. Rajan, learned senior standing counsel for the Revenue, submitted that the ITO disallowed the claim of the assessee on the ground that the employees have not put in five years of service and it is not permissible to take into account the services of the employees rendered in the holding company and the Tribunal was not correct in holding that once the conditions are satisfied under s. 36(1)(v) of the Act, any sum paid by the assessee as an employer by way of contribution towards a gratuity fund was not an admissible deduction. Mr. P. P. S. Janarthana Raja, learned counsel for the assessee, submitted that by virtue of the agreement entered into between the holding company as well as the assessee-company, the employees of the holding company were taken over and under the agreement, services of the employees to its predecessor have to be taken as if they rendered continuous service in the assessee-company and on the basis of the agreement the assessee was entitled to the deduction for a sum of Rs. 3,97,628 being the contribution made by the assessee-company to the approved gratuity fund.
3. We have carefully considered the rival submissions of the learned counsel for both parties and we have set out the facts earlier. There is no dispute that the assessee is a subsidiary company and the employees of the holding company were taken over. It is also not disputed that no employee was disqualified for payment of gratuity if their services to the holding company are taken into account. The CIT(A) and the Tribunal have found that the contribution to an approved gratuity fund is an admissible deduction under s. 36(1)(v) of the Act without any further restriction being applied to it or condition being fulfilled by it. Sec. 36(1)(v) of the Act which provides for deduction by way of contribution to an approved gratuity fund 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;"
The expressions "trust" and "trustee" are defined in cl. (c) of r. 98 under Part XIV under the caption "Approved Gratuity Funds" and the said expressions have been defined as follows :
"trust" means the trust under which the funds is established and "trustee" means a trustee thereof.
Rule 103 of the IT Rules reads as under :
"Rule 103. Ordinary annual contributions. - The ordinary annual contribution by the employer to a fund shall be made on a reasonable basis as may be approved by the CIT having regard to the length of services of each employee concerned so, however, that such contribution shall not exceed 8-1/3 per cent of the salary of each employee during the year."
The CIT(A) and the Tribunal found that the conditions prescribed under s. 36(1)(v) of the Act are fulfilled and there was no violation of any of the rules or there was no excess payment in contravention of the said rules. In considering the question whether the amount paid is allowable under s. 36(1)(v), one has to focus his attention only on the question whether the conditions prescribed in s. 36(1)(v) of the Act are complied with or if the conditions prescribed therein are not complied with. It is not for the Court to travel outside the Rules. The scope of inquiry under s. 36(1)(v) of the Act is limited and inquiry is limited to the question whether the employees for whose benefit funds have been transferred, have put in five years of service or more. The jurisdiction of the ITO in a matter of deduction of the contribution to the approved gratuity fund is limited to the enquiry contemplated by the section and in that context the ITO was not correct in going to the aspect of the question whether the employees have put in five years of service or more, to the assessee or not. The finding of the Tribunal is that all the conditions prescribed under s. 36(1)(v) of the Act as well as the relevant rules have been complied with. Even that apart, when the agreement of transfer is taken into account, it is clear that the employees have rendered continuous service for more than five years. On the facts of the case, we are of the opinion that the Tribunal has come to the correct conclusion in holding that the sum of Rs. 3,97,628, being contribution made by the assessee-company to the approved gratuity fund, is an admissible deduction under s. 36(1)(v) of the Act. Accordingly, we answer the question referred to us in the affirmative and against the Revenue. However, in the circumstances of the case, there will be no order as to costs.