Gratuity fund withdrawals do not become income on repayment or adjustment; deduction was allowed on that legal basis.

Rule 106 of the Income-tax Rules, 1962, read with rule 7 of Part C of the Fourth Schedule to the Income-tax Act, 1961, treats money drawn from a gratuity fund as not becoming the employer's income merely because it is drawn, adjusted, or repaid. Only contributions repaid to the employer in the circumstances contemplated by the rule can take the character of income in the relevant previous year. An amount initially obtained as a loan does not become income simply on repayment or adjustment against gratuity liability. On that basis, the assessee was entitled to the deduction, and the issue was decided against the Revenue.

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Issues: Whether the assessee was entitled to deduction in respect of interest payment made on the amount drawn from the gratuity fund, and whether the amount drawn or repaid was to be treated as income or as a loan transaction.

Analysis: The matter was governed by rule 106 of the Income-tax Rules, 1962, and rule 7 of Part C of the Fourth Schedule to the Income-tax Act, 1961. Those provisions indicate that money of the gratuity fund does not become receivable by the employer as income merely because it is drawn or adjusted, and that only contributions repaid to the employer in the circumstances contemplated by the rule can assume the character of income of the employer in the relevant previous year. On that legal framework, an amount initially obtained as a loan does not change its character into income merely because of repayment or adjustment against gratuity liability.

Conclusion: The question was answered in the affirmative, holding that the assessee was entitled to the deduction. The answer was against the Revenue and in favour of the assessee.

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