1982 (1) TMI 113 - AT - Income Tax

Summary

Issues:
Interpretation of section 36(1)(v) of the Income-tax Act, 1961 regarding deduction for contribution to an approved gratuity fund. Jurisdiction of the Commissioner under section 263 to withdraw deductions previously allowed. Compliance with the rules in the Fourth Schedule for approval of gratuity funds.

Analysis:
The appeal challenged the Commissioner's order under section 263 of the Income-tax Act, 1961, disallowing the deduction for contribution to an approved gratuity fund for the assessment year 1976-77. The assessee, a wholly-owned subsidiary of a UK company, had set up a common fund for gratuity for non-executive employees. The Commissioner contended that the fund was not exclusively for the benefit of the assessee's employees, leading to the withdrawal of deductions. The assessee argued that the fund's approval by the Commissioner and compliance with section 36(1)(v) precluded the Commissioner's interference. The revenue asserted that the fund should exclusively benefit the assessee's employees to qualify for deduction.

Upon review, the Tribunal found in favor of the assessee on multiple grounds. Firstly, 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. The Fourth Schedule outlines rules for fund approval, emphasizing the fund's purpose solely for gratuity provision to employees. The Tribunal determined that the term "exclusive benefit of the employees" referred to the fund's sole purpose being gratuity provision, not restricting beneficiaries to the assessee's employees only. The Tribunal disagreed with the Commissioner's restrictive interpretation and cited the Kerala High Court decision to support its view.

Secondly, the Tribunal highlighted that the approval and deductions were based on compliance with section 36(1)(v) and the Fourth Schedule rules. As long as the fund's circumstances warranted approval, the Commissioner lacked grounds to withdraw approval based on a change in opinion regarding the fund's exclusivity. Citing judicial discipline and uniformity in tax administration, the Tribunal emphasized that once approval was granted, taxing authorities should not reassess unless conditions change. Therefore, the Tribunal set aside the Commissioner's order and reinstated the deductions allowed in the original assessment.

In conclusion, the Tribunal ruled in favor of the assessee, emphasizing compliance with section 36(1)(v) and the Fourth Schedule rules for gratuity fund approval. The Tribunal rejected the Commissioner's interference under section 263 and reinstated the deductions, maintaining consistency in tax assessments.