1989 (3) TMI 106 - HC - Income Tax

Summary

Issues Involved:
1. Deductibility of contributions to the approved gratuity fund.
2. Validity and applicability of Rule 103 of the Income-tax Rules.
3. Harmonious interpretation of the Income-tax Act and the Payment of Gratuity Act.
4. Allowability of excess contributions under section 37 of the Income-tax Act.

Summary:

1. Deductibility of Contributions to the Approved Gratuity Fund:
The petitioner constituted a gratuity fund under an irrevocable deed of trust dated June 25, 1967, and obtained approval from the Commissioner of Income-tax with retrospective effect. The petitioner claimed deductions for contributions of Rs. 24,460 and Rs. 14,933 for the assessment years 1975-76 and 1976-77, respectively. However, the Income-tax Officer allowed only Rs. 4,161 and Rs. 4,390, disallowing the balance under Rule 103 of the Income-tax Rules, which limits contributions to 8 1/3% of the employee's salary.

2. Validity and Applicability of Rule 103 of the Income-tax Rules:
The petitioner contended that section 36(1)(v) of the Income-tax Act, 1961, does not restrict the amount of contribution and that Rules 103 and 104, which seek to impose such restrictions, are ultra vires. The Commissioner of Income-tax rejected this contention, stating that as a creature of the statute, he could not question the validity of the rules, which have the same statutory force as the sections in the Income-tax Act.

3. Harmonious Interpretation of the Income-tax Act and the Payment of Gratuity Act:
The petitioner argued that the Payment of Gratuity Act, 1972, cast a statutory obligation on the employer to make payments based on the last drawn salary of employees, necessitating annual re-computation of gratuity amounts. The petitioner claimed that the provisions of the Income-tax Act and the Payment of Gratuity Act should be construed harmoniously. However, the respondents maintained that the provisions of the Income-tax Act, 1961, are self-contained and cannot be overridden by the Payment of Gratuity Act.

4. Allowability of Excess Contributions under Section 37 of the Income-tax Act:
The petitioner argued that any excess contributions, beyond the limits of Rule 103, should be allowed as business expenditure u/s 37. The respondents countered that section 37 specifically excludes expenditures covered by sections 30 to 36, including section 36(1)(v). The court referred to various judicial pronouncements and concluded that contributions made on a scientific and actuarial basis for future gratuity payments are allowable under general principles and section 28 itself.

Judgment:
The court quashed the order of the Commissioner of Income-tax and directed the respondents to allow the additional sums of Rs. 20,299 for the assessment year 1975-76 and Rs. 10,543 for the assessment year 1976-77 as claimed by the petitioner. The writ petitions were allowed with costs, and the court emphasized that the provisions of the Payment of Gratuity Act override the provisions of the Income-tax Act, 1961, and that contributions made on a scientific basis are allowable deductions.