Approved gratuity fund contributions paid in respect of employees taken over eligible for deduction u/s 36(1)(v)

Approved gratuity fund contributions paid in respect of employees taken over by the company eligible for deduction under Section 36(1)(v) – High Court

ABCAUS Case Law Citation:
ABCAUS 2520 (2018) 09 HC

Important Case Laws Cited/relied upon by the parties:
Commissioner of Income Tax v. Textool Co.Ltd. [(2013) 263 CTR 257(SC)]
Commissioner of Income Tax v. Pratap Cashew Co.(P) Ltd. [(1979) 116 ITR 733]
CIT v. Saravana Spinning Mills Pvt.Ltd. [(293) ITR 201]

The appellant company took over the business of another company. When the business was taken over, the employees of the earlier company was also taken over on specific agreement as to continuation of service without any break, as also statutory benefits including gratuity.

The appellant company on take over, framed a group gratuity scheme and formed a trust, for which approval was obtained from the Commissioner of Income Tax. The assessee company took out a policy from the Life Insurance Corporation of India to indemnify the gratuity payments of the retiring employees and made payment accordingly.

The appellant company claimed deduction under Section 36(1)(v) of the Income Tax Act. The Assessing Officer applied Rule 104 of the Income Tax Rules and computed the initial contribution and disallowed the excess claim. This dis-allowance was made since the disallowed amounts were contributed for the prior years, when the employees were not employed under the present appellant/assessee.

The First Appellate Authority and the Tribunal concurred with the Assessing Officer, against which the instant appeal was filed by the assessee company.

The Department argued that Rule 104 creates an impediment in accounting the past service with another employer. The rule only enables the contribution made by an employer to its employees and there cannot be an inclusion of the contribution made for the previous years, since the employees in those previous years were under another employer. It was specifically argued that Rule 104 was not noticed by the earlier Division Bench.

The Hon’ble High Court opined that True, Section 104 was not noticed by the Division Bench, but even if it was noticed there would not have been any change in the dictum laid down.

The Hon’ble High Court observed that Rule 104 comes in Part XIV of the Income Tax Rules, 1962 under the head “Approved Gratuity Funds” permitting any initial contribution made by an employer to a fund constituted even in respect of past services of an employee admitted to the benefits of a fund, to the extent of 8 1/3 % of the employee’s salary for each year of his past service with the employer. The Assessing Officer and the appellate authorities seem to have laboured under the misapprehension that the words ’employed with the employer’ would take in only the benefits accrued under a particular employer. That would be creating unnecessary impediment especially looking at the intention of the provision under Section 36(1)(v), as has been found by the Honourable Supreme Court.

It has also to observed that the rule is intended at restricting the deduction to 8 1/3rd % of the employees salary for each year of his past service with the employer. The take over and the specific term fastening the liability to gratuity for even the past service, on the assessee, makes the assessee the employer for the past period, at least with respect to the liability for payment of gratuity.

It was observed that in another case also the issue was with respect to the initial contributions paid directly to the Life Insurance Corporation of India for the purpose of indemnification of the liability to gratuity, payable to the retiring employees, from a trust created for the purpose approved by the Commissioner. Therein, the Hon’ble Supreme Court noticed the fact that only the initial payment was made by the employer directly to the LIC and the trust was formed later as also the approval obtained from the Commissioner subsequently. The later contributions were made directly by the trust to the LIC. It was held that the claim made under Section 36 (1)(v) of the Income Tax Act was perfectly in order. The mere fact that payments were made directly by the employer to the LIC was held to be not a sufficient reason to deny benefit under Section 36 (1) (v).

It was noticed that the Tribunal has also relied on the judgment to deny the claim raised under Section 37 of the Income Tax Act. The assessee submitted that the said decision is an authority for the proposition that if there is a claim raised under Section 31 to 36, then there cannot be an alternative plea under Section 37.

The Hon’ble High Court held that the entire contributions paid by the appellant assessee to the LIC as premium for the policy obtained for indemnification of the gratuity liability towards the employees even for the prior years, when the employees were in the employment of the Company taken over would be eligible for deduction under Section 36(1)(v).

Accordingly, the Hon’ble High Court answered the question of law in favour of the assessee and against the Revenue.

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