1987 (2) TMI 41 - HC - Income Tax

Summary

Issues involved:

1. Jurisdiction of the Income-tax Officer to go behind the approval granted by the Commissioner for the constitution of the gratuity fund.
2. Interpretation of rule 103 regarding the calculation of the gratuity fund contribution.

Issue-wise detailed analysis:

1. Jurisdiction of the Income-tax Officer to go behind the approval granted by the Commissioner for the constitution of the gratuity fund:

The primary issue is whether the Income-tax Officer (ITO) has the jurisdiction to question the approval granted by the Commissioner of Income-tax for the constitution of the gratuity fund. The assessee-company executed an irrevocable trust deed on December 16, 1972, to constitute a "gratuity fund," which was approved by the Commissioner on February 3, 1973, and corrected on June 20, 1973. The approval was granted under section 4 of the Payment of Gratuity Act, 1972, which mandates the employer to pay gratuity to employees based on the rate of wages last drawn. The ITO disallowed a portion of the contribution, arguing that it exceeded the statutory limit of 8 1/3% as per rule 103.

The court held that once the Commissioner of Income-tax grants approval to the gratuity fund, it is irrevocable unless revoked by the Commissioner. The approval is binding on the assessing authority, and they have no jurisdiction to question or go behind the approval. The court referred to the precedent set in Gestetner Duplicators (P.) Ltd. v. CIT [1979] 117 ITR 1 (SC), where it was established that the recognition granted by the Commissioner is conclusive and final, and the assessing authority must proceed on the basis that the provident fund satisfies all conditions for recognition. Therefore, the ITO must allow the entire contribution made by the assessee towards the gratuity fund.

2. Interpretation of rule 103 regarding the calculation of the gratuity fund contribution:

The second issue pertains to the interpretation of rule 103 of the Income-tax Rules, 1962, which limits the employer's contribution to the gratuity fund to 8 1/3% of the salary of each employee during each year. The ITO interpreted this as 8 1/3% of the actual salary paid to employees, whereas the assessee argued that the contribution should be based on the salary as per the contract of employment, including dearness allowance.

The court clarified that "salary" under rule 103 includes dearness allowance, and the contribution should be calculated based on the contract of employment, not the actual salary paid. The Payment of Gratuity Act prescribes the formula for calculating gratuity as 15/26 days of salary for each completed year of service. The court found that the ITO's approach of considering only the actual salary paid was incorrect. The contribution must be based on the contractual salary, including dearness allowance, and calculated using the 15/26 formula. Consequently, the disallowance of Rs. 97,551 by the ITO was deemed illegal.

Conclusion:

The court concluded that the ITO had no jurisdiction to question the approval granted by the Commissioner for the gratuity fund and that the contribution made by the assessee was in conformity with rule 103. The entire contribution towards the gratuity fund should be allowed as a deduction under section 36(1)(v) of the Income-tax Act, 1961. The questions were answered in favor of the assessee and against the Revenue, with no costs.