2018 (9) TMI 113 - HC - Income Tax

Allowable deduction u/s. 36(1) (v) r. w. Rules 104 or u/s. 37 - initial contribution to approved gratuity fund in respect of employees taken over; for the period they were employed with the previous employer, on the basis of contract of employment entered into at the time of take over - Held that - Rule 104 comes in Part XIV of the Income Tax Rules, 1962 under the head Approved Gratuity Funds permitting any initial contribution made by an employer to a fund constituted even in respect of past services of an employee admitted to the benefits of a fund, to the extent of 81/3 % of the employee s salary for each year of his past service with the employer. The Assessing Officer and the appellate authorities seem to have laboured under the misapprehension that the words employed with the employer would take in only the benefits accrued under a particular employer. The entire contributions paid by the appellant/assessee to the LIC as premium for the policy obtained for indemnification of the gratuity liability towards the employees even for the prior years, when the employees were in the employment of the Company taken over would be eligible for deduction under Section 36(1)(v). We answer the question of law in favour of the assessee and against the Revenue.

Summary

Issues:
- Allowability of initial contribution to approved gratuity fund in respect of employees taken over for the period they were employed with the previous employer under Section 36(1)(v) r.w. Rules 104 or Section 37 of the Income Tax Act.

Analysis:
1. Facts and Background: The appellant company took over another business and its employees under a specific agreement ensuring continuation of service and statutory benefits, including gratuity. The appellant formed a group gratuity scheme and obtained approval from the Commissioner of Income Tax. The Assessing Officer disallowed a portion of the claimed deduction under Section 36(1)(v) based on Rule 104 of the Income Tax Rules.

2. Rule 104 Interpretation: The appellant argued that Rule 104 should not restrict the deduction to only benefits accrued under a particular employer, as the rule aims to limit the deduction to a percentage of the employee's salary for each year of past service with the employer. The court noted that the rule does not specify that the benefits should be limited to the current employer only.

3. Precedents Considered: The court referred to previous judgments, including Textool Company Ltd. and Pratap Cashew Pvt. Ltd., to analyze similar situations where liabilities for past services were contested. In Textool Company Ltd., the Supreme Court emphasized that the employer should not control the funds of the trust exclusively for employees' benefit, which was satisfied in the present case.

4. Deduction Eligibility: The court concluded that the entire contributions paid by the appellant to the Life Insurance Corporation of India for indemnification of gratuity liability, even for prior years when employees were under the previous employer, are eligible for deduction under Section 36(1)(v). The claim under Section 37 was not necessary due to the favorable decision under Section 36(1)(v).

5. Judgment: The court ruled in favor of the appellant, allowing the appeal and answering the question of law in favor of the assessee against the Revenue. Each party was left to bear their respective costs, concluding the matter in favor of the appellant based on the interpretation of relevant rules and precedents cited during the proceedings.