Approved gratuity fund deductions depend on Commissioner approval and contractual salary structure, not actual monthly salary payments.

An approved gratuity fund remains binding on the assessing authority until the Commissioner withdraws approval, so deduction under section 36(1)(v) cannot be restricted by re-examining whether the contribution is excessive or inconsistent with the fund rules. The employer's gratuity contribution must be tested under rule 103 on the contractual salary structure and gratuity formula, not by reference to salary actually paid in a particular period. On that basis, the contribution to the approved gratuity fund was deductible and the Revenue's disallowance was unsustainable.

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Issues: (i) Whether the Income-tax Officer could go behind the Commissioner's approval of the gratuity fund and restrict deduction under section 36(1)(v) on the ground that the contribution was excessive or not in conformity with the fund rules; (ii) Whether the contribution had to be tested against rule 103 of the Income-tax Rules, 1962, with reference to salary actually paid to employees.

Issue (i): Whether the Income-tax Officer could go behind the Commissioner's approval of the gratuity fund and restrict deduction under section 36(1)(v) on the ground that the contribution was excessive or not in conformity with the fund rules.

Analysis: An approved gratuity fund under section 2(5) and section 36(1)(v) is one which continues to bear the Commissioner's approval under Part C of the Fourth Schedule. Once approval is granted to a gratuity fund constituted by an irrevocable trust, the taxing authority cannot sit in judgment over whether the fund satisfies the approval conditions or whether a contribution made under that approved arrangement is excessive. The Commissioner alone has the statutory power to withdraw approval if the fund ceases to satisfy the prescribed conditions. Until such withdrawal, the approval remains operative and binding on the assessing authority.

Conclusion: The Income-tax Officer had no jurisdiction to go behind the Commissioner's approval, and deduction could not be restricted on that basis. The issue is decided in favour of the assessee.

Issue (ii): Whether the contribution had to be tested against rule 103 of the Income-tax Rules, 1962, with reference to salary actually paid to employees.

Analysis: Rule 103 permits ordinary annual contribution on a reasonable basis approved by the Commissioner, subject to the prescribed ceiling, and salary includes dearness allowance under the Fourth Schedule. The proper basis for computing the employer's gratuity contribution is the contractual salary structure and the gratuity formula under the Payment of Gratuity Act, 1972, not the amount actually paid in a particular month. The departmental approach of limiting the contribution by reference to actual payment was therefore erroneous.

Conclusion: The contribution was not to be disallowed on the footing adopted by the Revenue, and the issue is decided in favour of the assessee.

Final Conclusion: The reference was answered against the Revenue, with the entire contribution towards the approved gratuity fund held deductible and the disallowance set aside.

Ratio Decidendi: Once the Commissioner approves a gratuity fund under the statutory scheme, the approval is binding on the assessing authority until withdrawn, and the employer's contribution must be tested on the basis of the contractual salary structure under the gratuity rules rather than on actual salary payments in a particular period.

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