1990 (11) TMI 27 - HC - Income Tax

Summary

Issues:
Interpretation of rule 103 of the Income-tax Rules, 1962 in relation to the contribution to the gratuity fund in excess of 8% of the employees' salary for assessment years 1977-78 to 1979-80.

Analysis:
The case involved a reference under section 256(1) of the Income-tax Act, 1961, regarding the disallowance of contributions to the gratuity fund exceeding 8% of the employees' salary for the assessment years 1977-78 to 1979-80. The dispute arose when the Income-tax Officer disallowed the excess contributions, but the Appellate Assistant Commissioner allowed the entire amount under section 40A(7)(b)(i) of the Act, stating that rule 103 of the Income-tax Rules was not applicable. The Tribunal upheld the decision, emphasizing that section 36(1)(v) did not impose any restriction on the contribution percentage, leading to the conclusion that the Income-tax Officer could not impose such a restriction.

The Tribunal highlighted that section 36(1)(v) allows deductions for contributions to an approved gratuity fund created by the employer for the exclusive benefit of employees under an irrevocable trust. It was noted that the conditions laid down in the Act were met by the assessee, and the Income-tax Officer's grievance regarding the contribution percentage limit was not supported by the legislation. The Tribunal affirmed the order of the Commissioner of Income-tax (Appeals) in favor of the assessee.

Furthermore, the judgment discussed the conditions for an approved gratuity fund, emphasizing that none of the prescribed conditions limited the contribution to 8%. The Income-tax Officer's role was clarified to focus on compliance with section 36(1)(v) conditions, rather than imposing additional restrictions. The judgment referenced a decision by the Andhra Pradesh High Court, emphasizing that once approval is granted by the Commissioner, it is binding on the assessing authority, preventing them from questioning the contribution's conformity with rules post-approval.

In conclusion, the High Court answered the reference question in favor of the assessee, highlighting that the Income-tax Officer's role is limited to verifying compliance with section 36(1)(v) conditions, and once approval is granted, the assessing authority cannot challenge the contribution's conformity. The judgment emphasized the binding nature of the Commissioner's approval and the importance of adhering to the approved conditions to avoid chaos and uncertainty in tax assessments.