Employee gratuity fund deduction allowed where the trust was irrevocable and employer control was absent, despite later approval effective date.

Deduction for contribution to an employee gratuity fund was allowed under section 36(1)(v) because the fund was structured as an irrevocable trust for the exclusive benefit of employees, with no employer control over the corpus. The assessee had created the trust, secured LIC coverage, and applied for approval long before the relevant year; approval was later granted only from a subsequent date. Applying the statutory scheme and the underlying principle that approved employee benefit funds must be beyond employer dominion, the later effective date of formal approval did not justify disallowance where the approval process had already been initiated and the purpose of the provision was otherwise satisfied.

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Issues: Whether the assessee was entitled to deduction for contribution made to the gratuity fund under section 36(1)(v) of the Income-tax Act, 1961, even though the formal approval of the fund became effective from a later date.

Analysis: The assessee had created an employee gratuity trust, obtained LIC master policy coverage, and had applied for approval of the gratuity fund long before the relevant assessment year. The record showed that the original application was made in 1985 and was not shown to have been rejected. Approval was ultimately granted with effect from 1 April 2012, but the essential factual feature was that the assessee had no control over the fund and the contributions were managed for the exclusive benefit of employees through LIC. The statutory scheme of section 36(1)(v), read with section 2(5) of the Income-tax Act, 1961 and the principle underlying section 4A of the Payment of Gratuity Act, 1972, is directed to approved, irrevocable employee benefit funds in which the employer does not retain control. Applying the principle of reasonable construction and the settled law on gratuity fund deductions, the later effective date of approval did not justify denial of deduction where the fund structure and application were already in place and the employer had no dominion over the corpus.

Conclusion: The deduction was allowable and the disallowance was rightly deleted. The issue was decided in favour of the assessee.

Ratio Decidendi: Where an employee gratuity fund is created as an irrevocable trust for the exclusive benefit of employees and the employer retains no control over the fund, deduction under section 36(1)(v) cannot be denied merely because formal approval is granted with effect from a later date, if the approval process had already been initiated and the statutory purpose is otherwise satisfied.

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