Deductibility of LIC group gratuity contributions depends on employer control over an irrevocable employee-benefit fund.

Contribution to an LIC-administered group gratuity scheme was treated as deductible where the insurer controlled the fund and gratuity was paid directly to eligible employees or their beneficiaries. The absence of formal approval of the gratuity fund did not defeat deduction because the employer retained no control over the irrevocable fund created exclusively for employees' benefit. On that construction of section 36(1)(v) of the Income-tax Act, the payment satisfied the statutory purpose and was allowable as a business deduction.

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Issues: Whether the payment made to the LIC under the employees' group gratuity scheme was deductible, notwithstanding the absence of formal approval of the gratuity fund.

Analysis: The assessee had obtained a group gratuity insurance policy from the LIC, under which the insurer administered the fund and directly disbursed gratuity benefits to eligible employees or their beneficiaries. The assessee had no control over the fund or the disbursement of benefits. The governing principle applied was that the object of section 36(1)(v) of the Income-tax Act, 1961 is satisfied when the employer does not retain control over an irrevocable fund created exclusively for employees' benefit. On that basis, and following the settled view that a reasonable construction may be adopted to give effect to the legislative purpose, the contribution paid to the LIC was treated as an allowable deduction.

Conclusion: The payment made to the LIC towards the group gratuity scheme was deductible and the disallowance was unsustainable.

Final Conclusion: The assessee's claim for deduction of the LIC contribution towards the group gratuity scheme was accepted, and the addition disallowing the expenditure was deleted.

Ratio Decidendi: A contribution to an LIC-administered group gratuity scheme is allowable where the employer has no control over the irrevocable fund maintained exclusively for employees' benefit.

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