2001 PLP 566 (PTD)

N.V. BALASUBRAMANIAN; J.‑‑‑The assessee is a subsidiary of Sudarsan Trading Company Limited. The employees of the assessee‑ company were previously the employees of the holding company. The assessee‑company was incorporated on December 19, 1973. According to the assessee, there was a continuity of the service of the employees and for the purpose of calculating gratuity, the services rendered by the employees of the assessee‑company in the holding company should be taken into account and after taking note of the entire service rendered by the employees in both the companies, the assessee made a contribution of Rs.3,39,628 towards the approved gratuity fund. The assessee claimed the same as deduction in the determination of the computation of the income for the assessment year 1977‑

78. The Income‑tax Officer rejected the claim of the assessee on the ground that the assessee‑company was incorporated only on December 19, 1973, and as such the employees who have not put in continuous service of five years with the assessee‑company did not have an enforceable legal right to claim gratuity and the provision debited in the profit and loss account was liable to be added back. The assessee filed an appeal against the order of assessment disallowing the assessee's claim for gratuity to the extent of Rs.9,09,684 before the Commissioner of Income‑tax (Appeals) and the Commissioner of Income‑tax (Appeals) held that gratuity cannot be disallowed on the ground that employees concerned have not put in five years of service with the assessee‑company and the contribution to an approved gratuity fund was an admissible deduction under section 36(1)(v) of the Income‑tax Act without any further restriction being applied to it or condition being fulfilled by it. The Commissioner of Income‑tax (Appeals) further held that the assessee was entitled to the deduction of gratuity claim to the extent of Rs.3,97,

628. It seems that the assessee has furnished details of a sum of Rs.3,97,628 to the effect that six payments were made from July 1, 1976, to the gratuity trust and the Commissioner of Income‑tax (Appeals) directed the Income‑tax Officer to verify the correctness of the payments as claimed by the assessee and allow the amount actually paid as a deduction. The Revenue preferred an appeal before the Income‑tax Appellate Tribunal. The Appellate Tribunal held that once the conditions prescribed, under section 36(1)(v) of the Act were complied with any sum paid by the assessee, as an employee by way of contribution towards a gratuity fund, for .the exclusive benefit of his employees, under an irrevocable trust was an admissible deduction. The Revenue challenged the order of the Appellate Tribunal and at the instance of the Revenue the following question of law has been referred for our consideration under section 256(1) of the Income‑tax Act: "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the sum of Rs.3,97,628 being contribution made by the assessee to the approved gratuity fund is an admissible deduction under section 36(1)(v) of the Act?" Mr. C.V. Rajan, learned junior standing counsel for the Revenue submitted that the Income‑tax Officer disallowed the claim of the assessee on the ground that the employees have not put in five years of service and it is not permissible to take into account the services of the employees rendered in the holding company and the Tribunal was not correct in holding that once the conditions are satisfied under section 36(1)(v) of the Act, any sum paid by the assessee as an employer by way of contribution towards a gratuity fund was an admissible deduction. Mr. P.P.S. Janarthana Raja, learned counsel for the assessee, submitted that by virtue of the agreement entered into between the holding company as well as the assessee‑company, the employees of the holding company were taken over and under the agreement, services of the employees to its predecessor have to be taken as if they rendered continuous service in the assessee‑company and on the basis of the agreement the assessee was entitled to the deduction for a sum of Rs.3,97,628 being the contribution made by the assessee‑company to the approved gratuity fund. We have carefully considered the rival submissions of learned counsel for both parties and we have set out the facts earlier. There is no dispute that the assessee is a subsidiary company and the employees of the holding company were taken over. It .is also not disputed that no employee was disqualified for payment of gratuity, if his services to the holding company are taken into account. The Commissioner of Income‑tax (Appeals) and the Appellate Tribunal have found that the contribution to an approved gratuity fund is an admissible deduction under section 36(1)(v) of the Act without any further restriction being applied to it or condition being fulfilled by it. Section 36(l)(v) of the Act which provides for deduction by way of contribution to an approved gratuity fund and the same reads as under: "any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust;" The expressions "trust" and "trustee" are defined in clause (c) of rule 98 under Part XIV under the caption "approved gratuity funds" and the said expressions have been defined as follows: "'trust' means the trust under which the fund is established and 'trustee' means a trustee thereof." Rule 103 of the Income‑tax Rules reads as under: "

103. Ordinary annual contributions. ‑‑‑The ordinary annual contribution by the employer to a fund shall be made on a reasonable basis as may be approved by the Commissioner having regard to the length of service of each employee concerned so, however, that such contribution shall not exceed 8‑1/3 percent. of the salary of each employee during each year." The Commissioner of Income‑tax (Appeals) and the Appellate Tribunal found that the conditions prescribed under section 36(1)(v) of the Act are fulfilled and there was no violation of any of the rules or there was no excess payment in contravention of the said rules. In considering the question whether the amount paid is allowable under section 36(1)(v), one has to focus his attention only on the question whether the conditions prescribed in section 36(1)(v) of the Act are complied with or if the conditions prescribed therein are not complied with. It is not for the Court to travel outside the rules. The scope of inquiry under section 36(1)(v) of the Act is limited and inquiry is limited to the question whether the employees for whose benefit funds have teen transferred, have put in five years of service or more. The jurisdiction of the Income‑tax Officer in a matter of deduction of the contribution to the approved gratuity fund is limited to the enquiry contemplated by the section and in that context the Income‑tax Officer was not correct in going to the aspect of the question whether the employees have put in five years of service or more to the assessee or not. The finding of the Tribunal is that all the conditions prescribed under section 36(1)(v) of the Act as well as the relevant rules have been complied with. Even that apart, when the agreement of transfer is taken into account, it is clear that the employees have rendered continuous service for more than five years. On the facts of the case, we are of the opinion that the Tribunal has come to the correct conclusion in holding that the sum of Rs.3,97,628 being contribution made by the assessee‑company to the approved gratuity fund is an admissible deduction under section 36(1)(v) of the Act. Accordingly, we answer the question referred to us in the affirmative and against the Revenue. However, in the circumstances of the case, there will be no order as to costs. M.B.A./208/FC Reference answered.