Winding up of gratuity fund. - Income Tax - 1685/CBDT

INSTRUCTION NO. 1685/CBDT Dated: February 5, 1986 A case has come to the notice of the Board where the Commissioner of Income-tax permitted the winding up of an irrevocable gratuity trust fund on the basis of the unanimous resolution of the trustees and consequential transfer of trust fund to the employer company while the business of the company was continuing. 2. The matter was examined in the light of the provisions of Rule 3(a) and Rule 7 of part C of Fourth Schedule to the Income-tax Act and Rule 106,107 and 108 of the Income-tax Rules, particularly with a view to finding out whether there was any inconsistency in these provisions. On the one hand, Rule 3(a) of part C of Fourth Schedule and Rule 106 of Income-tax Rules contained a prohibition for such windingup. 3. The matter was considered in consultation with the Ministry of Law in file No. 217/6/83-ITA.II. The Board are advised that there is no conflict between these provisions. Whereas Rule 106 provides that as long as the amount remains as gratuity fund, the employer cannot have any interest in the same. Once it is repaid to the employer, it is deemed to be the income of the employer under Rule 7 of Part C of Fourth Schedule. But the circumstances under which it is repaid to the employer are not provided either in the Income-tax Act or in the Income-tax Rules. However, Section 4(6) of the payment of Gratuity Act of 1972 lays down the circumstances under which the gratuity due to an employee can be forfeited. It provides that the gratuity payable to an employee whose service has been terminated for any wilful omission or negligence causing any damage or loss or destruction of property belonging to the employer shall be forfeited to the extent of the damage or loss so caused. It further provides that the gratuity payable to an employee whose services have been terminated for riotous or disorderly conduct or any other act of violence on his part or for an offence involving moral turpitude conducted in the course of employment shall be wholly forfeited. Thus the contributions made by the employer can be repaid to him only when the gratuity payable to an employer can be repaid to him only when the gratuity payable to an employee is forfeited under the circumstances mentioned in Section 4(6) of the Payment of Gratuity Act. There is, therefore, no conflict between the provision of Rule 7 of Part C of Fourth Schedule on the one hand and Rule 106 of Income-tax Rules on the other. 4. Another point that arises for consideration is whether there is any conflict in the provisions of Rule 3(a) of Part C of Fourth Schedule which provide for the establishment of gratuity fund under an irrevocable trust and Rule 108 of Income-tax Rules which envisages the winding up of a gratuity fund. The question of winding up of trust fund arises only when the company is wound up or discontinued in terms of Rule 107 of the Income-tax Rules. Rule 107 provides that where the employer's trade or undertaking is to be wound up or discontinued, the trustees shall make satisfactory arrangement for the payment of gratuity to the existing beneficiaries. Rule 108 provide for a situation where winding up or amalgamation of fund is necessitated due to the winding up or amalgamation of the company. In no other circumstances the gratuity fund can be wound up. 5. Board are, therefore, of the view that a gratuity fund approved under the Income-tax Act cannot be wound up unless it is necessitated due to the winding up or discontinuance of the employer's trade or undertaking. Revocation of gratuity fund cannot be permitted on the basis of the resolution of the trustees and/or beneficiaries. The Board desire that this legal position must be kept in view while dealing with the applications seeking permission for winding up of the gratuity funds. 6. These instructions may please be brought to the notice of all the officers working in your charge.