2002 (7) TMI 66 - HC - Income Tax

Gratuity Fund Contributions as Business Expenditure: Court Rules in Favor of Assessee

The High Court held that the contribution to the approved gratuity fund constituted business expenditure, allowable under section 36(1)(v) or section 37 ... '1. Whether having regard to provisions of rule 103 of the Income-tax Rules, 1962, the Appellate Tribunal was right in law in holding that the assessee-company is eligible for deduction of gratuity of Rs. 3,41,202 as admissible under section 36(1)(v) of the Income-tax Act, 1961? - 2. Whether, having regard to provisions of rule 103 of the Income-tax Rules, 1962, the Appellate Tribunal's interpretation that the last drawn salary could also be construed to be salary during the year is sustainable in law?' - The short point that arises for consideration is whether the assessee is entitled to the deduction of gratuity amount of Rs. 3,41,203 paid to an approved gratuity fund as a contribution made to the fund. - we hold that the actual payment made to the gratuity fund is allowable as business expenditure and the Tribunal was right in holding that it should be allowed as a business expenditure. Though the question referred to us raises the question regarding allowability under section 36(1)(v) of the Act, we hold that the entire amount would be allowable either under section 36(l)(v) or under section 37 of the Act. Accordingly, the first question referred to us is answered in favour of the assessee and against the Revenue. In view of the answer to the first question, it is unnecessary to answer the second question Issues:1. Eligibility for deduction of gratuity under section 36(1)(v) of the Income-tax Act, 1961.2. Interpretation of the last drawn salary for the purpose of allowability of expenditure under rule 103 of the Income-tax Rules, 1962.Eligibility for Deduction of Gratuity:The case revolved around the deduction of a gratuity amount paid to an approved fund by the assessee. Initially, the Income-tax Officer allowed a deduction of a specific sum based on rule 103 of the Income-tax Rules, 1962, and disallowed the remaining amount. However, the Commissioner of Income-tax (Appeals) allowed the entire deduction. The Tribunal upheld the decision that the gratuity contributed to the fund should be considered as expenditure, and the payment based on the last drawn salary would not exceed the ceiling limit prescribed under rule 103. The Tribunal dismissed the Revenue's appeal, leading to the reference to the High Court.Interpretation of Last Drawn Salary:The Revenue contended that the salary drawn by an employee throughout the year should determine the ceiling limit under rule 103, not just the salary paid at the end of the year. Additionally, the Revenue argued that section 40A(7) of the Act should apply, requiring a remittance to the Tribunal for further consideration. On the contrary, the assessee argued that the amount should be allowable under section 36(1)(v) along with rule 103, or under section 37 if there was an excess amount. The High Court, after considering the submissions, held that the contribution to the approved gratuity fund constituted business expenditure, thus allowable under section 36(1)(v) or section 37 of the Income-tax Act, 1961. Referring to previous court decisions, the High Court established that the actual payment to the fund should be considered a business expenditure, and section 40A(7) did not apply in such cases. Consequently, the High Court answered the first question in favor of the assessee and did not address the second question, disposing of the tax case accordingly.This detailed analysis of the judgment highlights the key legal issues, arguments presented by both parties, and the High Court's decision based on relevant provisions and precedents.