Calcutta High Court
Commissioner Of Income-Tax vs Eastern Equipment And Sales Ltd. on 23 November, 1990
Equivalent citations: [1993]201ITR858(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, for the assessment years 1977-78 to 1979-80, the following question of law has been referred to this court :
" Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that there was no scope for the application of Rule 103 of the Income-tax Rules, 1962, in disallowing the contribution to the gratuity fund in excess of 8 1/3 per cent. of the salary of the employees ?"
2. Shortly stated the facts are that in the assessment years 1977-78 to 1979-80, the Income-tax Officer disallowed the amounts of Rs. 10,389, Rs. 21,902 and Rs. 13,819, respectively, being contribution paid to the gratuity fund in excess of 8 1/3 per cent. of the salary of the employees. On appeal, the Appellate Assistant Commissioner was of the opinion that Rule 103 of the Income-tax Rules was not applicable and the entire amount was allowable under Section 40A(7)(b)(i) of the Act. As such, he deleted the disallowance for all the three years. On further appeal by the Department, the Tribunal held that Section P of the Act does not apply to the instant case. Regarding the application of Rule 103, the Tribunal made the following observations :
" We, however, agree with the Commissioner of Income-tax (Appeals) that there is no scope for the application of Rule 103 of the Income-tax Rules because the provisions of Section 36(1)(v) lays down the condition that the sum must be paid (a) by way of contribution, (b) towards an approved gratuity fund, (c) created by the employer, (d) for the exclusive benefit of his employees under an irrevocable trust. There was no dispute raised by the Department that these conditions were fulfilled by the assessee. The only grievance of the Income-tax Officer was that the contribution paid was in excess of 8 1/3 per cent. of the salary of the employees. But we do not find that the provision of Section 36(1)(v) lay down this extra condition that the contribution cannot exceed 8 1/3 per cent. of the salary of the employees or that it must not exceed a certain percentage of their salaries. When the provision did not envisage any such restriction, We do not think that the Income-tax Officer was entitled to impose any such restriction."
3. The Tribunal, therefore, upheld the order of the Commissioner of Income-tax (Appeals).
4. Section 36(1)(v) provides that 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 its employees under an irrevocable trust will be allowable as a deduction. The prohibition contained in Section 40A(7) will not 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. It will appear from the aforesaid provisions that deduction is allowed in respect of any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by the employer for the exclusive benefit of its employees under an irrevocable trust.
5. Under Section 2(5) of the Act, " approved gratuity fund" means a gratuity fund which has been and continues to be approved by the Commissioner in accordance with the rules contained in Part" C " of the Fourth Schedule.
6. There is no dispute in this case that the gratuity fund has been approved by the Commissioner in accordance with the rules contained in Part "C" of the Fourth Schedule. Rule 103 of the Income-tax Rules, 1962, no doubt, provides that the ordinary annual contribution by the employer to a fund shall be made on a reasonable basis as may be approved by the Commissioner having regard to the length of service of each employee concerned so, however, that such contribution shall not exceed 8 1/3 per cent. of the salary of each employee, during each year.
7. In order that a gratuity fund may receive and retain approval, it shall satisfy the following conditions and any other conditions which the Board may by rules prescribe :
(a) The fund shall be a fund established under an irrevocable trust in connection with a trade or undertaking carried on in India, and not less than ninety per cent. of the employees shall be employed in India ;
(b) the fund shall have for its sole purpose the provision of a gratuity to employees in the trade or undertaking on their retirement at or after a specified age or on their becoming incapacitated prior to such retirement or on termination of their employment after a minimum period of service specified in the rules of the fund or to the widows, children or dependants of such employees on their death ;
(c) the employer in the trade or undertaking shall be a contributor to the fund ; and
(d) all benefits granted by the fund shall be payable only in India.
8. None of the conditions so prescribed enjoins that the contribution shall not exceed 8 1/3 per cent. The Income-tax Officer in making the assessment allowing the deduction for contribution towards the approved gratuity fund is concerned with whether the conditions laid down in Section 36(1)(v) have been satisfied or not. In other words, whether the contribution is to the approved gratuity fund or not. Section 36(1)(v) does not contain any condition regarding any restriction regarding ordinary annual contribution to the gratuity fund. He cannot take into account any fact other than the fact of compliance with the conditions made in Section 36(1)(v), that is to say, that the payment has been made to the contribution towards the approved gratuity fund created for the exclusive benefit of the employees under an irrevocable trust. If for any reason the Commissioner in granting the approval allows the excess contribution to be made, that cannot make the gratuity fund as unapproved. If there be any conflict between Rule 103 and Rule 3 of Part "C" of the Fourth Schedule regarding the conditions for approval of the gratuity fund, it is for the Commissioner of Income-tax to take appropriate steps in that behalf. But it is not for the Income-tax Officer to question the validity of the gratuity fund as approved.
9. Our attention has been drawn to a decision of the Andhra Pradesh High Court in CIT v. Super Spinning Mills Ltd. . In that case also, the Income-tax Officer restricted the claim of the assessee towards contribution to the gratuity fund to 8--per cent., but the Commissioner of Income-tax (Appeals) and the Tribunal held that it was not for the Income-tax Officer to sit in judgment over the approval granted by the Commissioner. It has been held that once approval is accorded by the Commissioner, it is binding on the assessing authority or the Appellate Assistant Commissioner and the authorities administering the provisions of the Act have no power to go behind the approval granted by the Commissioner. Once the Commissioner accords approval, it is binding on the assessing authority and the assessing authority is devoid of power and jurisdiction to go behind the permission to find out whether the contribution made by the assessee is in conformity with the rules or in excess thereof. The Andhra Pradesh High Court relied on the decision of the Supreme Court in Gestetner Duplicators (P.) Ltd. v. CIT , where the Supreme Court while considering the approved provident fund held that if the provident fund contravenes any of the conditions to be satisfied for its recognition, the taxing authority may refer the question of withdrawal of recognition to the Commissioner, but until the Commissioner acting under the powers reserved to him withdraws such recognition, the taxing authority must proceed on the basis that the provident fund has satisfied all the conditions for its recognition in that year, and any other course is bound to result in chaos and uncertainty which has to be avoided.
10. For the reasons aforesaid, we answer the question in this reference in the affirmative and in favour of the assessee.
11. There will be no order as to costs.
Bhagabati Prasad Banerjee, J.
12. I agree.