Approved gratuity fund deduction upheld where common fund remained exclusively for gratuity benefits and approval was not withdrawn.

Section 36(1)(v) permits deduction for contribution to an approved gratuity fund created under an irrevocable trust for the exclusive purpose of providing gratuity benefits. The Fourth Schedule, Part C, Rules 2 and 3, were read as governing the fund's purpose, not limiting contributions to one employer's staff, so a common fund for employees of several companies was not inconsistent with the statute. As the fund's approval remained in force and had not been withdrawn under Rule 2, the Commissioner could not revise the assessment under section 263 on the footing that the allowed deduction was erroneous. The deduction was therefore upheld as allowable.

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Issues: Whether the Commissioner was justified in revising the assessment under section 263 of the Income-tax Act, 1961 and withdrawing the deduction for contribution to an approved gratuity fund maintained as a common fund for employees of several companies.

Analysis: Section 36(1)(v) allows deduction of contribution to an approved gratuity fund created for the exclusive benefit of employees under an irrevocable trust. The Fourth Schedule, Part C, Rules 2 and 3, form part of the Act and explain that the fund must have the sole purpose of providing gratuity benefits, be established under an irrevocable trust, and may have an employer as a contributor. On that scheme, the expression "for the exclusive benefit of the employees" qualifies the purpose of the fund, not the identity of the contributors or beneficiaries confined only to one employer's staff. A common fund for the employees of several assessees is therefore not inconsistent with the statutory conditions so long as the fund is solely for gratuity benefits. The original approval of the fund remained in force and had not been withdrawn under Rule 2. In those circumstances, the Commissioner could not, in revision, treat the deduction already allowed on the basis of that approval as erroneous.

Conclusion: The revision under section 263 was not justified and the deduction for contribution to the approved gratuity fund was held allowable in favour of the assessee.

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