Whether the amount paid to LIC towards Gratuity of Employee is eligible for Deduction?
Normally, Gratuity is not eligible for deduction as per Section 40A(7) of the Income Tax Act, 1961. Section 40A(7) reads as under:
(a) Subject to the provisions of clause (b), no deduction shall be allowed in respect of any provision (whether called as such or by any other name) made by the assessee for the payment of gratuity to his employees on their retirement or on termination of their employment for any reason:
(b) Nothing in clause (a) shall apply in relation to any provision made by the assessee for the purpose of payment of a sum by way of any contribution towards an approved gratuity fund, or for the purpose of payment of any gratuity, that has become payable during the previous year.
Explanation: For the removal of doubts, it is hereby declared that where any provision made by the assessee for the payment of gratuity to his employees on their retirement or termination of their employment for any reason has been allowed as a deduction in computing the income of the assessee for any assessment year, any sum paid out of such provision by way of contribution towards an approved gratuity fund or by way of gratuity to any employee shall not be allowed as a deduction in computing the income of the assessee of the previous year in which the sum is so paid.
However, it may be noted that Section 40A(7) of the Income Tax Act, 1961 allows deduction only of the amount contributed to approved gratuity fund. Now the question arises, whether the amount paid to LIC towards Gratuity of Employee is eligible for deduction?
Here is an interesting judgment that allowed the payment made by the assessee-company directly to LIC towards Group Gratuity Fund as deduction under section 36(1)(v) of the Income Tax Act, 1961. The case law has been reproduced for reference.
COMMISSIONER OF INCOME TAX vs. TEXTOOL CO. LTD.
HIGH COURT OF MADRAS
Order
The question referred to us is as follows :
“Whether, on the facts and in the circumstances of the case, the Tribunal is right in allowing the deduction of Rs. 55,84,754 being the payment made by the assessee-company directly to LIC towards Group Gratuity Fund under s. 36(1)(v) of the IT Act, 1962 ?”
- It seems that the assessee-company had made this payment to the Life Insurance Corporation of India (in short ‘LIC’) as the said sum was insured by the LIC. There is no denial that the Textool Company Employees Group Gratuity Fund is a duly approved gratuity fund created for the exclusive benefit of the employees of the said company and that it is also an irrevocable trust. It also could not be denied that the payments were made by the assessee-company directly to the LIC instead of a contribution towards the approved gratuity fund. However, the LIC had accepted the payment as on behalf of the Group Gratuity Life Assurance Scheme which was meant to the exclusive benefit of the employees under the policy issued by the LIC. Even the original master policy was produced before the authority and after going through the said policy, the authority had recorded its suggestion that the initial contribution of Rs. 50 lakhs as also the premium of Rs. 5,57,943 was paid on behalf of the assessee and was credited to the Group Gratuity Life Assurance Scheme on behalf of the assessee-company’s Group Gratuity Fund only.
- This is what the CIT(A) has recorded in his order.
“In other words, the insurance policy had been taken in the name of the approved Gratuity Fund only and this fund is also shown as the payee in the policy. It is also confirmed by the appellant-company in its letter dt. 20th Nov., 1985, addressed to the IAC that in the subsequent assessment years, the company had contributed funds to the Employees Group Gratuity Fund and the trustees in turn had made payment to the LIC in respect of the Textool Co. Ltd. Employees Group Gratuity Assurance Scheme under the Master Policy No. GGI 42365. Only the initial payment and first annual premium had been made directly by the appellant company to the LIC towards the said policy.”
From this, the CIT(A) came to the conclusion that this payment was well covered within the language of s. 36(1)(v) and to hold that merely because the payment was made directly to the LIC, the section was violated would be making violence to the language of the section and in the process losing the real intent on the part of the legislature. Ultimately, the CIT(A) has specifically recorded as follows :
“Even the AO does not appear to deny that the contribution in the instant case amounting to Rs. 55,84,754 is positively towards the approved Gratuity Fund. On facts the contribution cannot be linked to any other fund or scheme. Even the LIC has received the payment by way of premium for the policy issued under its Group Life Assurance Scheme for the benefit of the employees of the Textool Company Limited.”
On these findings, ultimately the CIT(A), relying on the Supreme Court judgment CIT vs. J.H. Gotla (1985) 48 CTR (SC) 363 : (1985) 156 ITR 323 (SC) : TC 45R.115 came to the conclusion that the credit had to be given to the assessee for the aforementioned amount. The Tribunal also went on to endorse this view.
- In our opinion, the CIT(A) as well as the Tribunal have correctly held that merely because the payments were made directly to the LIC, the company could not be denied the benefit under s. 36(1)(v) and the amount had to be credited in favour of the assessee. Both the CIT(A) as well as the Tribunal have correctly read the law and have correctly relied upon the aforementioned Supreme Court judgment. In our opinion, since the finding of fact is that all the payments made were only towards the Group Gratuity Fund, there would be no question of finding otherwise. Therefore, it will have to be answered that the Tribunal was right in allowing the deduction of Rs. 55,84,754 being the payment made by the assessee-company directly to the LIC towards the Group Gratuity Fund under s. 36(1)(v) of the IT Act. The reference is answered accordingly in favour of the assessee.
