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Issues:
Deduction of initial contribution for gratuity under the gratuity fund scheme for the assessment year 1964-65. Analysis: For the assessment year 1964-65, the assessee claimed a deduction of Rs. 2,07,071 for the initial contribution made towards gratuity under the approved scheme. The Income Tax Officer (ITO) estimated a lower amount payable towards gratuity and disallowed the balance. On appeal, the Appellate Assistant Commissioner (AAC) allowed a partial deduction of Rs. 85,323. The matter was taken to the Tribunal by both the assessee and the department. The Tribunal interpreted that the Income Tax Rules and the Income Tax Act do not specify the exact amount allowable for gratuity. It emphasized that the relevant factor is the salary paid to the employee in the year the provision was made. The Tribunal also noted that any excess contribution made by the assessee is allowable under the Act since the payments were made for business purposes and in the capacity of a trader. Additionally, it was highlighted that the absence of records prior to 1960 should not lead to adverse inferences against the assessee. The Tribunal referred a question of law to the High Court regarding the deductibility of the full amount claimed by the assessee under the relevant rules and sections. The High Court analyzed Rule 104, which limits the initial contribution to not exceed 8 1/3% of the employee's salary for each year of past service. It concluded that the rule does not specify the exact amount but sets a maximum limit. The Court agreed with the Tribunal's interpretation that the assessee's contribution did not exceed the prescribed limit. The High Court further upheld the Tribunal's decision that any excess contribution made by the assessee would still be allowable under the Income Tax Act as it was made for business purposes. Therefore, the High Court ruled in favor of the assessee, allowing the entire amount claimed and awarded costs to the assessee.
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