All about Gratuity & Compliance  provisions in the Income Tax Act – 1961

Complying with the provisions of the Gratuity Act is a statutory liability under the Payment of Gratuity Act, 1972. There are various provisions in the Income Tax Act – 1961 also to ensure that the compliance is done in the right spirit in a time bound manner. Though the Payment of Gratuity Act contains provisions with regard to eligibility of “Employees” for gratuity under section 2(e), the method for computation of gratuity under section 4(2), the mode and time of payment of gratuity under section 4(1) along with the maximum amount which can be paid under section 4(3), it’s the Income Tax Act – 1961 which provides rule for its deductions, the provisions related to registration of the gratuity trust and the mode in which the gratuity trust can invest/claim its income as exempt. In short, Gratuity Act compliance and Income Tax Act compliance need to be aligned for its optimum benefit.

It may be noted that the Gratuity Act provides for the manner in which an organization can meet its gratuity liability. It is provided in section 4A of the Gratuity Act. To ensure the payment, an organization can either Obtain a Gratuity Insurance from Life Insurance Corporation of India or other approved insurer as provided in section 4A(1) or can establish an Approved Gratuity Fund and contribute periodically as provided in section 4A(2) of the payment of Gratuity Act. However, section 4A has been notified only in few states and not notified for entire country.

Even if it is not notified, it will not at all affect the employer’s liability to pay Gratuity when it becomes payable and so the organization need to plan for it well in advance. The liability of gratuity can be met by an organization by three different routes.

First Route:

Gratuity liability could be met by purchasing the Gratuity Insurance from LIC or other approved insurer. In this scheme, simply the organization has to make contribution to the Insurer  It may be noted that if an assessee company has made payment directly to Life Insurance Corporation of Indian towards premium for Group Gratuity Scheme held in the name of Approved Gratuity Fund instead of first contributing to Approved Gratuity Fund and Approved Gratuity Fund making the payment of premium, deduction u/s 36(1)(v) will be allowable. This has been decided by Apex Court in the case of CIT vs. Textool Co. Ltd. [2013] 35 taxmann.com 639. Also the Payment on a date after the creation of Trust but prior to date of approval of Gratuity Fund will be allowed as deduction u/s 36(1)(v). An approval for a fund which is already set up is in the nature of post facto approval and it relates back to the date on which it is set up in accordance with the scheme of the law as held in the case of Prakash Software Solution (P.) Ltd. v. Income-tax Officer [2018] 89 taxmann.com 130 (Ahmedabad – Trib.)

Second Route:

Alternatively, organization can set up its independent gratuity fund, get it approved under provisions of Income Tax Act wherein it can make a regular and periodic contribution to meet the liability of employee at the time of retirements. In such case, the trust can note the provisions in the Income Tax Act – 1961 also which need to be complied with.

Setting up Employee Trust by an Organization:

The best approach normally is by setting up a separate gratuity trust of employee of an organization. Section 2(5) of the Income Tax Act, 1961 defines an approved gratuity fund as a gratuity fund which has been and continues to be approved by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner in accordance with the rules contained in Part C of the Fourth Schedule. By forming a trust, an organization can appoint at least 2 trustees for its administration. For trust approval, minimum of 90% of the employees should be employed in India. Even a director can be a member/beneficiary of the Trust if such person is a Whole Time Director or Managing Director and does not hold shares in the Company carrying more than 5% of the total voting power.

One must note that such trust has to apply to the Commissioner of Income Tax (CIT) or other Authority appointed for granting approval under the Income Tax Act- 1961.

The Income Tax Act – 1961 has a Schedule – IV wherein Part –C is specifically dedicated to Gratuity Fund Rules & Regulations. It provides for approval as well as withdrawals of approvals, conditions and applications for approvals along with other related provisions. Once an approval is granted, an organization can start making contribution. However, if the approval is refused then an organization can prefer an appeal with CBDT in Form No. 44.

An approved gratuity fund has been accorded a separate legal entity under the Income Tax Act. The trust must have its own separate PAN & bank account. It is assessable as an AOP for Income Tax purpose. Under Rule 101 of Income Tax Rules, 1962, the trust has to keep the contribution received by it in a bank account opened with Scheduled Bank. Amount can be invested by the trust in the LIC Group Gratuity Scheme or such scheme by other insurer. It has to invest the contribution in manner specified under Rule 67(2) of Income Tax Rules.

It may be noted that the contribution by an employer to an Approved Gratuity Fund for exclusive benefit of its employees and is an allowable deduction u/s 36(1)(v) of Income Tax Act, 1961. The amount received by the trust has to be deposited in their separate bank account. Since, this is a capital receipt in the hands of the Trust, it will not be liable for any income tax. Additionally, even section 10(25)(iv) provides for full exemption. Even income by way of dividend, interest, value appreciation on the investment by Trust will be exempt u/s 10(25)(iv).

It may be noted that the income of the trust is exempt from tax and it may be not be required to file the return of income as well.

Normally, application for approval should be made immediately on creation of the trust. Where an assessee had filed application to competent authority for approval of a Gratuity Scheme and had duly complied with conditions laid down for approval, Assessing Officer cannot disallow assessee’s claim for deduction under section 36(1)(v) merely because the application for approval was pending before the Commissioner. The Commissioner should have either rejected or approved the Gratuity Scheme – CIT vs Jaipur Thar Gramin Bank [2017] 81 taxmann.com 126 (Rajasthan). Further, the Commissioner has the bestowed with the power to grant the approval to trust with retrospective effect from the date of creation if it satisfies other conditions as provided in Rule 3 of Part C of the Fourth Schedule. There is a Clarification 3 in Circular No. 14 [F.  No. 19/4/69-IT(A-II)], dated 23-4-1969 on this.

Third Route:

There is one more choice which is neither making payment to insurance companies nor creating the gratuity trust but simply providing for it in its books of accounts by estimation basis or by obtaining actuarial valuation certificate. With this, the organization can keep the fund in the organization itself. However, this option is not beneficial under the Income Tax Act – 1961 which is discussed hereunder.

There are other provisions in the Income Tax Act – 1961 which are related to Gratuity. The same are compiled herewith for ease reference of all.

Section 40A(7) provides that an assessee will not get deduction for provision made for gratuity unless & until it is for contribution to Approved Gratuity Fund or unless the Provision is for Gratuity that has become payable to employees during the year. In short, deduction simply on the basis of provisions is not permissible. Deduction may not be admissible even if it is on the basis of Actuarial Valuation Report [Circular No. 169, dated 23-6-1975]

Section 40A(7) reads as under:

Section 40A(7)

(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.

Section 40(a)(iv)

No deduction towards contribution to Approved Gratuity Fund shall be allowable u/s 36(1)(v) if the Employer has not made necessary arrangements for deduction of TDS from the Gratuity payable from the Approved Gratuity Fund.

Section 40A(9)

No deduction towards expenditure incurred for setting up of a fund or trust shall be allowable as deduction unless it is for an approved gratuity fund, approved provident fund or approved superannuation fund. It means that if the trust is not registered, expenditure incurred for its creation would not be eligible for deduction.

Section 40A(9) reads as under:

Section 40A(9)

No deduction shall be allowed in respect of any sum paid by the assessee as an employer towards the setting up or formation of, or as contribution to, any fund, trust, company, association of persons, body of individuals, society registered under the Societies Registration Act, 1860 (21 of 1860), or other institution for any purpose, except where such sum is so paid, for the purposes and to the extent provided by or under clause (iv) or clause (iva) or clause (v) of sub-section (1) of section 36, or as required by or under any other law for the time being in force.

Section 43B(b)

Section 43B provides that deduction towards contribution to Approved Gratuity Fund is available only if the amount is paid on of before the due date of furnishing the return in order to claim deduction u/s 36(1)(v).

The relevant part of the Act & Rules is also produced hereunder:

HE FOURTH SCHEDULE

PART A

RECOGNISED PROVIDENT FUNDS

[See sections 2(38), 10(12), 10(25), 36(1)(iv), 87(1)(d), 111, 192(4)]

Application of Part.

1. This Part shall not apply to any provident fund to which the Provident Funds Act, 1925 (19 of 1925), applies.

Definitions.

2. In this Part, unless the context otherwise requires,—

(a)  “employer” means any person who maintains a provident fund for the benefit of his or its employees, being—

(i)  a Hindu undivided family, company, firm or other association of persons, or

(ii)  an individual engaged in a business or profession the profits and gains whereof are assessable to income-tax under the head “Profits and gains of business or profession”;

(b)  “employee” means an employee participating in a provident fund, but does not include a personal or domestic servant;

(c)  “contribution” means any sum credited by or on behalf of any employee out of his salary, or by an employer out of his own moneys, to the individual account of an employee, but does not include any sum credited as interest;

(d)  “balance to the credit of an employee” means the total amount to the credit of his individual account in a provident fund at any time;

(e)  “annual accretion”, in relation to the balance to the credit of an employee, means the increase to such balance in any year, arising from contributions and interest;

(f)  “accumulated balance due to an employee” means the balance to his credit, or such portion thereof as may be claimable by him under the regulations of the fund, on the day he ceases to be an employee of the employer maintaining the fund;

(g)  “regulations of a fund” means the special body of regulations governing the constitution and administration of a particular provident fund; and

(h)  “salary” includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.

According and withdrawal of recognition.

3. (1) The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may accord recognition to any provident fund which, in his opinion, satisfies the conditions prescribed in rule 4 and the rules made by the Board in this behalf, and may, at any time, withdraw such recognition if, in his opinion, the provident fund contravenes any of those conditions :

Provided that in a case where recognition has been accorded to any provident fund on or before the 31st day of March, 2006 and such provident fund does not satisfy the conditions set out in clause (ea) of rule 4, the recognition to such fund shall be withdrawn, if such fund does not satisfy, on or before the 31st day of March, 2014, the conditions set out in the said clause and any other condition which the Board may, by rules specify, in this behalf :

Provided further that nothing contained in the first proviso shall apply to the provident fund of an establishment in respect of which a notification has been issued by the Central Government under sub-section (2) of section 16 of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952).

(2) An order according recognition shall take effect on such date as the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may fix in accordance with any rules the Board may make in this behalf, such date not being later than the last day of the financial year in which the order is made.

(3) An order withdrawing recognition shall take effect from the date on which it is made.

(4) An order according recognition to a provident fund shall not, unless the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner otherwise directs, be affected by the fact that the fund is subsequently amalgamated with another provident fund on the occurrence of an amalgamation of the undertakings in connection with which the two funds are maintained, or that it subsequently absorbs the whole or a part of another provident fund belonging to an undertaking which is wholly or in part transferred to or merged in the undertaking of the employer maintaining the first-mentioned fund.

Conditions to be satisfied by recognised provident funds.

4. In order that a provident fund may receive and retain recognition, it shall, subject to the provisions of rule 5, satisfy the conditions set out below and any other conditions which the Board may, by rules, specify—

(a)  all employees shall be employed in India, or shall be employed by an employer whose principal place of business is in India;

(b)  the contributions of an employee in any year shall be a definite proportion of his salary for that year, and shall be deducted by the employer from the employee’s salary in that proportion, at each periodical payment of such salary in that year, and credited to the employee’s individual account in the fund;

(c)  the contributions of an employer to the individual account of an employee in any year shall not exceed the amount of the contributions of the employee in that year, and shall be credited to the employee’s individual account at intervals not exceeding one year;

(d)  the fund shall be vested in two or more trustees or in the Official Trustee under a trust which shall not be revocable, save with the consent of all the beneficiaries;

(e)  the fund shall consist of contributions as above specified, received by the trustees, of accumulations thereof, and of interest credited in respect of such contributions and accumulations, and of securities purchased therewith and of any capital gains arising from the transfer of capital assets of the fund, and of no other sums;

(ea) the fund shall be a fund of an establishment to which the provisions of sub-section (3) of section 1 of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (19 of 1952) apply or of an establishment which has been notified by the Central Provident Fund Commissioner under sub-section (4) of section 1 of the said Act, and such establishment shall obtain exemption under section 17 of the said Act from the operation of all or any of the provisions of any scheme referred to in that section;

(f)  the employer shall not be entitled to recover any sum whatsoever from the fund, save in cases where the employee is dismissed for misconduct or voluntarily leaves his employment otherwise than on account of ill-health or other unavoidable cause before the expiration of the term of service specified in this behalf in the regulations of the fund :

Provided that in such cases the recoveries made by the employer shall be limited to the contributions made by him to the individual account of the employee, and to interest credited in respect of such contributions in accordance with the regulations of the fund and the accumulations thereof;

(g)  the accumulated balance due to an employee shall be payable on the day he ceases to be an employee of the employer maintaining the fund;

(h)  save as provided in clause (g) or in accordance with such conditions and restrictions as the Board may, by rules, specify, no portion of the balance to the credit of an employee shall be payable to him.

Relaxation of conditions.

5. (1) Notwithstanding anything contained in clause (a) of rule 4, the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may, if he thinks fit and subject to such conditions, if any, as he thinks proper to attach to the recognition, accord recognition to a fund maintained by an employer whose principal place of business is not in India, provided the proportion of employees employed outside India does not exceed ten per cent.

(2) Notwithstanding anything contained in clause (b) of rule 4, an employee who retains his employment while serving in the armed forces of the Union or when taken into or employed in the national service under any law for the time being in force, may, whether he receives from the employer any salary or not, contribute to the fund during his service in the armed forces of the Union or while so taken into or employed in the national service a sum not exceeding the amount he would have contributed had he continued to serve the employer.

(3) Notwithstanding anything contained in clause (e) or clause (g) of rule 4,—

(a)  at the request made in writing by the employee who ceases to be an employee of the employer maintaining the fund, the trustees of the fund may consent to retain the whole or any part of the accumulated balance due to the employee to be drawn by him at any time on demand;

(b)  where the accumulated balance due to an employee who has ceased to be an employee is retained in the fund in accordance with the preceding clause, the fund may consist also of interest in respect of such accumulated balance;

(c)  the fund may also consist of any amount transferred from the individual account of an employee in any recognised provident fund maintained by his former employer and the interest in respect thereof.

(4) Subject to any rules which the Board may make in this behalf, the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may, in respect of any particular fund, relax the provisions of clause (c) of rule 4,—

(a) so as to permit the payment of larger contributions by an employer to the individual accounts of employees whose salaries do not in each case exceed five hundred rupees per mensem; and

(b) so as to permit the crediting by employers to the individual accounts of employees of periodical bonuses or other contributions of a contingent nature, where the calculation and payment of such bonuses or other contributions is provided for on definite principles by the regulations of the fund.

(5) Notwithstanding anything contained in clause (h) of rule 4, in order to enable an employee to pay the amount of tax assessed on his total income as determined under sub-rule (4) of rule 11, he shall be entitled to withdraw from the balance to his credit in the recognised provident fund a sum not exceeding the difference between such amount and the amount to which he would have been assessed if the transferred balance referred to in sub-rule (2) of rule 11 had not been included in his total income.

Employer’s annual contributions, when deemed to be income received by employee.

6. That portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognised provident fund as consists of—

(a)  contributions made by the employer in excess of twelve per cent of the salary of the employee, and

(b)  interest credited on the balance to the credit of the employee in so far as it is allowed at a rate exceeding such rate as may be fixed by the Central Government in this behalf by notification in the Official Gazette,

shall be deemed to have been received by the employee in that previous year and shall be included in his total income for that previous year, and shall be liable to income-tax.

Exemption for employee’s contributions.

7. An employee participating in a recognised provident fund shall, in respect of his own contributions to his individual account in the fund in the previous year, be entitled to a deduction in the computation of his total income of an amount determined in accordance with section 80C.

Exclusion from total income of accumulated balance.

8. The accumulated balance due and becoming payable to an employee participating in a recognised provident fund shall be excluded from the computation of his total income—

 (i)  if he has rendered continuous service with his employer for a period of five years or more, or

(ii)  if, though he has not rendered such continuous service, the service has been terminated by reason of the employee’s ill-health, or by the contraction or discontinuance of the employer’s business or other cause beyond the control of the employee, or

(iii) if, on the cessation of his employment, the employee obtains employment with any other employer, to the extent the accumulated balance due and becoming payable to him is transferred to his individual account in any recognised provident fund maintained by such other employer; or

(iv) if the entire balance standing to the credit of the employee is transferred to his account under a pension scheme referred to in section 80CCD and notified by the Central Government.

Explanation.—Where the accumulated balance due and becoming payable to an employee participating in a recognised provident fund maintained by his employer includes any amount transferred from his individual account in any other recognised provident fund or funds maintained by his former employer or employers, then, in computing the period of continuous service for the purposes of clause (i) or clause (ii) the period or periods for which such employee rendered continuous service under his former employer or employers aforesaid shall be included.

Tax on accumulated balance.

9. (1) Where the accumulated balance due to an employee participating in a recognized provident fund is included in his total income owing to the provisions of rule 8 not being applicable, the Assessing Officer shall calculate the total of the various sums of tax which would have been payable by the employee in respect of his total income for each of the years concerned if the fund had not been a recognized provident fund, and the amount by which such total exceeds the total of all sums paid by or on behalf of such employee by way of tax for such years shall be payable by the employee in addition to any other tax for which he may be liable for the previous year in which the accumulated balance due to him becomes payable.

(2) Where the accumulated balance due to an employee participating in a recognised provident fund which is not included in his total income under the provisions of rule 8 becomes payable, an amount equal to the aggregate of the amounts of super-tax on annual accretions that would have been payable under section 58E of the Indian Income-tax Act, 1922 (11 of 1922), for any assessment year up to and including the assessment year 1932-33, if the Indian Income-tax (Second Amendment) Act, 1933 (18 of 1933), had come into force on the 15th day of March, 1930, shall be payable by the employee in addition to any other tax payable by him for the previous year in which such balance becomes payable.

Deduction at source of tax payable on accumulated balance.

10. The trustees of a recognized provident fund, or any person authorized by the regulations of the fund to make payment of accumulated balances due to employees, shall, in cases where sub-rule (1) of rule 9 applies, at the time an accumulated balance due to an employee is paid, deduct therefrom the amount payable under that rule and all the provisions of Chapter XVII-B shall apply as if the accumulated balance were income chargeable under the head “Salaries”.

Treatment of balance in newly recognised provident fund.

11. (1) Where recognition is accorded to a provident fund with existing balances, an account shall be made of the fund up to the day immediately preceding the day on which the recognition takes effect, showing the balance to the credit of each employee on such day, and containing such further particulars as the Board may prescribe.

(2) The account shall also show in respect of the balance to the credit of each employee the amount thereof which is to be transferred to that employee’s account in the recognised provident fund, and such amount (hereinafter called his transferred balance) shall be shown as the balance to his credit in the recognised provident fund on the date on which the recognition of the fund takes effect, and sub-rule (4) of this rule and sub-rule (5) of rule 5 shall apply thereto.

(3) Any portion of the balance to the credit of an employee in the existing fund which is not transferred to the recognized fund shall be excluded from the accounts of the recognized fund and shall be liable to income-tax in accordance with the provisions of this Act, other than this Part.

(4) Subject to such rules as the Board may make in this behalf, the Assessing Officer shall make a calculation of the aggregate of all sums comprised in a transferred balance which would have been liable to income-tax if this Part had been in force from the date of the institution of the fund, without regard to any tax which may have been paid on any sum, and such aggregate (if any) shall be deemed to be income received by the employee in the previous year in which the recognition of the fund takes effect and shall be included in the employee’s total income for that previous year, and, for the purposes of assessment, the remainder of the transferred balance shall be disregarded, but no other exemption or relief, by way of refund or otherwise, shall be granted in respect of any sum comprised in such transferred balance :

Provided that, in cases of serious accounting difficulty, the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may, subject to the said rules, make a summary calculation of such aggregate.

(5) Nothing in this rule shall affect the rights of the persons administering an unrecognized provident fund or dealing with it, or with the balance to the credit of any individual employee before recognition is accorded, in any manner which may be lawful.

Accounts of recognised provident funds.

12. (1) The accounts of a recognised provident fund shall be maintained by the trustees of the fund and shall be in such form and for such periods, and shall contain such particulars, as the Board may prescribe.

(2) The accounts shall be open to inspection at all reasonable times by income-tax authorities, and the trustees shall furnish to the Assessing Officer such abstracts thereof as the Board may prescribe.

Appeals.

13. (1) An employer objecting to an order of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner refusing to recognise or an order withdrawing recognition from a provident fund may appeal, within sixty days of such order, to the Board.

(2) The appeal shall be in such form and shall be verified in such manner and shall be subject to the payment of such fee as the Board may prescribe.

Treatment of fund transferred by employer to trustee.

14. (1) Where an employer, who maintains a provident fund (whether recognised or not) for the benefit of his employees and has not transferred the fund or any portion of it, transfers such fund or portion to trustees in trust for the employees participating in the fund, the amount so transferred shall be deemed to be of the nature of capital expenditure.

(2) When an employee participating in such fund is paid the accumulated balance due to him therefrom, any portion of such balance as represents his share in the amount so transferred to the trustees (without addition of interest, and exclusive of the employee’s contributions and interest thereon) shall, if the employer has made effective arrangements to secure that tax shall be deducted at source from the amount of such share when paid to the employee, be deemed to be an expenditure by the employer within the meaning of section 37, incurred in the previous year in which the accumulated balance due to the employee is paid.

Provisions relating to rules.

15. (1) In addition to any power conferred by this Part, the Board may make rules—

(a)  prescribing the statements and other information to be submitted along with an application for recognition;

(b)  limiting the contributions to a recognised provident fund by employees of a company who are shareholders in the company;

(bb) regulating the investment or deposit of the moneys of a recognised provident fund :

Provided that no rule made under this clause shall require the investment of more than fifty per cent of the moneys of such fund in Government securities as defined in section 2 of the Public Debt Act, 1944 (18 of 1944);

(c)  providing for the assessment by way of penalty of any consideration received by an employee for an assignment of, or creation of a charge upon, his beneficial interest in a recognised provident fund;

(d)  determining the extent to and the manner in which exemption from payment of tax may be granted in respect of contributions and interest credited to the individual accounts of employees in a provident fund from which recognition has been withdrawn; and

(e)  generally, to carry out the purposes of this Part and to secure such further control over the recognition of provident funds and the administration of recognised provident funds as it may deem requisite.

(2) All rules made under this Part shall be subject to the provisions of section 296.

PART B

APPROVED SUPERANNUATION FUNDS

[See sections 2(6), 10(13), 10(25)(iii), 36(1)(iv), 87(1)(e), 192(5), 206]

Definitions.

1. In this Part, unless the context otherwise requires, “employer”, “employee”, “contribution” and “salary” have, in relation to superannuation funds, the meanings assigned to those expressions in rule 2 of Part A in relation to provident funds.

Approval and withdrawal of approval.

2. (1) The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may accord approval to any superannuation fund or any part of a superannuation fund which, in his opinion, complies with the requirements of rule 3, and may at any time withdraw such approval, if, in his opinion, the circumstances of the fund or part cease to warrant the continuance of the approval.

(2) The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner shall communicate in writing to the trustees of the fund the grant of approval with the date on which the approval is to take effect, and, where the approval is granted subject to conditions, those conditions.

(3) The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner shall communicate in writing to the trustees of the fund any withdrawal of approval with the reasons for such withdrawal and the date on which the withdrawal is to take effect.

(4) The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner shall neither refuse nor withdraw approval to any superannuation fund or any part of a superannuation fund unless he has given the trustees of that fund a reasonable opportunity of being heard in the matter.

Conditions for approval.

3. In order that a superannuation fund may receive and retain approval, it shall satisfy the conditions set out below and any other conditions which the Board may, by rules, prescribe—

(a)  the fund shall be a fund established under an irrevocable trust in connection with a trade or undertaking carried on in India, and not less than ninety per cent of the employees shall be employed in India;

(b)  the fund shall have for its sole purpose the provision of annuities for employees in the trade or undertaking on their retirement at or after a specified age or on their becoming incapacitated prior to such retirement, or for the widows, children or dependants of persons who are or have been such employees on the death of those persons ;

(c)  the employer in the trade or undertaking shall be a contributor to the fund ; and

(d)  all annuities, pensions and other benefits granted from the fund shall be payable only in India.

Application for approval.

4. (1) An application for approval of a superannuation fund or part of a superannuation fund shall be made in writing by the trustees of the fund to the Assessing Officer by whom the employer is assessable, and shall be accompanied by a copy of the instrument under which the fund is established and by two copies of the rules and, where the fund has been in existence during any year or years prior to the financial year in which the application for approval is made, also two copies of the accounts of the fund relating to such prior year or years (not being more than three years immediately preceding the year in which the said application is made) for which such accounts have been made up, but the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may require such further information to be supplied as he thinks proper.

(2) If any alteration in the rules, constitution, objects or conditions of the fund is made at any time after the date of the application for approval, the trustees of the fund shall forthwith communicate such alteration to the Assessing Officer mentioned in sub-rule (1), and in default of such communication any approval given shall, unless the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner otherwise orders, be deemed to have been withdrawn from the date on which the alteration took effect.

Contributions by employer when deemed to be income of employer.

5. Where any contributions by an employer (including the interest thereon, if any) are repaid to the employer, the amount so repaid shall be deemed for the purpose of income-tax to be the income of the employer of the previous year in which it is so repaid.

Deduction of tax on contributions paid to an employee.

6. Where any contributions made by an employer, including interest on contributions, if any, are paid to an employee during his lifetime in circumstances other than those referred to in clause (13) of section 10, tax on the amounts so paid shall be deducted at the average rate of tax at which the employee was liable to tax during the preceding three years or during the period, if less than three years, when he was a member of the fund, and shall be paid by the trustees to the credit of the Central Government within the prescribed time and in such manner as the Board may direct.

Deduction from pay of and contributions on behalf of employee to be included in return.

7. Where an employer deducts from the emoluments paid to an employee or pays on his behalf any contributions of that employee to an approved superannuation fund, he shall include all such deductions or payments in the return which he is required to furnish under section 206.

Appeals.

8. (1) An employer objecting to an order of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner refusing to accord approval to a superannuation fund or an order withdrawing such approval may appeal, within sixty days of such order, to the Board.

(2) The appeal shall be in such form and shall be verified in such manner and shall be subject to the payment of such fee as may be prescribed.

Liability of trustees on cessation of approval.

9. If a fund or a part of a fund for any reason ceases to be an approved superannuation fund, the trustees of the fund shall nevertheless remain liable to tax on any sum paid on account of returned contributions (including interest on contributions, if any), in so far as the sum so paid is in respect of contributions made before the fund or part of the fund ceased to be an approved superannuation fund under the provisions of this Part.

Particulars to be furnished in respect of superannuation funds.

10. The trustees of an approved superannuation fund and any employer who contributes to an approved superannuation fund shall, when required by notice from the Assessing Officer, within such period, not being less than twenty-one days from the date of the notice, as may be specified in the notice, furnish such return, statement, particulars or information, as the Assessing Officer may require.

Provisions relating to rules.

11. (1) In addition to any power conferred by this Part, the Board may make rules—

(a)  prescribing the statements and other information to be submitted along with an application for approval ;

(b)  prescribing the returns, statements, particulars, or information which the Assessing Officer may require from the trustees of an approved superannuation fund or from the employer ;

(c)  limiting the ordinary annual contribution and any other contributions to an approved superannuation fund by an employer ;

(cc) regulating the investment or deposit of the moneys of an approved superannuation fund :

Provided that no rule made under this clause shall require the investment of more than fifty per cent of the moneys of such fund in Government securities as defined in section 2 of the Public Debt Act, 1944 (18 of 1944) ;

(d)  providing for the assessment by way of penalty of any consideration received by an employee for an assignment of, or creation of a charge upon, his beneficial interest in an approved superannuation fund ;

(e)  determining the extent to, and the manner in, which exemption from payment of tax may be granted in respect of any payment made from a superannuation fund from which approval has been withdrawn ;

(f)  providing for the withdrawal of approval in the case of a fund which ceases to satisfy the requirements of this Part or of the rules made thereunder ; and

(g)  generally, to carry out the purposes of this Part and to secure such further control over the approval of the superannuation funds and the administration of approved superannuation funds as it may deem requisite.

(2) All rules made under this Part shall be subject to the provisions of section 296.

PART C

APPROVED GRATUITY FUND

[See sections 2(5), 10(25)(iv), 17(1)(iii), 36(1)(v)]

Definitions.

1. In this Part, unless the context otherwise requires “employer”, “employee”, “contribution” and “salary” have, in relation to gratuity funds, the meanings assigned to those expressions in rule 2 of Part A in relation to provident funds.

Approval and withdrawal of approval.

2. (1) The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may accord approval to any gratuity fund which, in his opinion, complies with the requirements of rule 3 and may at any time withdraw such approval if, in his opinion, the circumstances of the fund cease to warrant the continuance of the approval.

(2) The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner shall communicate in writing to the trustees of the fund the grant of approval with the date on which the approval is to take effect and where the approval is granted subject to conditions, those conditions.

(3) The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner shall communicate in writing to the trustees of the fund any withdrawal of approval with the reasons for such withdrawal and the date on which the withdrawal is to take effect.

(4) The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner shall neither refuse nor withdraw approval to any gratuity fund unless he has given the trustees of that fund a reasonable opportunity of being heard in the matter.

Conditions for approval.

3. In order that a gratuity fund may receive and retain approval, it shall satisfy the conditions set out below and any other conditions which the Board may, by rules, prescribe—

(a)  the fund shall be a fund established under an irrevocable trust in connection with a trade or undertaking carried on in India, and not less than ninety per cent of the employees shall be employed in India ;

(b)  the fund shall have for its sole purpose the provision of a gratuity to employees in the trade or undertaking on their retirement at or after a specified age or on their becoming incapacitated prior to such retirement or on termination of their employment after a minimum period of service specified in the rules of the fund or to the widows, children or dependants of such employees on their death ;

(c)  the employer in the trade or undertaking shall be a contributor to the fund ; and

(d)  all benefits granted by the fund shall be payable only in India.

Application for approval.

4. (1) An application for approval of a gratuity fund shall be made in writing by the trustees of the fund to the Assessing Officer by whom the employer is assessable and shall be accompanied by a copy of the instrument under which the fund is established and by two copies of the rules and, where the fund has been in existence during any year or years prior to the financial year in which the application for approval is made, also two copies of the accounts of the fund relating to such prior year or years (not being more than three years immediately preceding the year in which the said application is made) for which such accounts have been made up, but the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may require such further information to be supplied as he thinks proper.

(2) If any alteration in the rules, constitution, objects or conditions of the fund is made at any time after the date of the application for approval, the trustees of the fund shall forthwith communicate such alterations to the Assessing Officer mentioned in sub-rule (1), and in default of such communication, any approval given shall, unless the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner otherwise orders, be deemed to have been withdrawn from the date on which the alteration took effect.

Gratuity deemed to be salary.

5. Where any gratuity is paid to an employee during his lifetime, the gratuity shall be treated as salary paid to the employee for the purposes of this Act.

Liability of trustees on cessation of approval.

6. If a gratuity fund for any reason ceases to be an approved gratuity fund, the trustees of the fund shall nevertheless remain liable to tax on any gratuity paid to any employee.

Contributions by employer, when deemed to be income of employer.

7. Where any contributions by an employer (including the interest thereon, if any) are repaid to the employer, the amount so repaid shall be deemed for the purposes of income-tax to be the income of the employer of the previous year in which they are so repaid.

Appeals.

8. (1) An employer objecting to an order of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner refusing to accord approval to a gratuity fund or an order withdrawing such approval may appeal, within sixty days of such order, to the Board.

(2) The appeal shall be in such form and shall be verified in such manner and shall be subject to the payment of such fee as may be prescribed.

Particulars to be furnished in respect of gratuity funds.

8A. The trustees of an approved gratuity fund and any employer who contributes to an approved gratuity fund shall, when required by notice from the Assessing Officer, furnish within such period, not being less than twenty-one days from the date of the notice, as may be specified in the notice, such return, statement, particulars or information, as the Assessing Officer may require.

Provisions relating to rules.

9. (1) In addition to any power conferred in this Part, the Board may make rules—

(a)  prescribing the statements and other information to be submitted along with an application for approval ;

(b)  limiting the ordinary annual and other contributions of an employer to the fund ;

(bb) regulating the investment or deposit of the moneys of an approved gratuity fund :

Provided that no rule made under this clause shall require the investment of more than fifty per cent of the moneys of such fund in Government securities as defined in section 2 of the Public Debt Act, 1944 (18 of 1944) ;

(c)  providing for the assessment by way of penalty of any consideration received by an employee for an assignment of, or the creation of a charge upon, his beneficial interest in an approved gratuity fund ;

(d)  providing for the withdrawal of the approval in the case of a fund which ceases to satisfy the requirements of this Part or the rules made thereunder ; and

(e)  generally, to carry out the purposes of this Part and to secure such further control over the approval of gratuity funds and the administration of gratuity funds as it may deem requisite.

(2) All rules made under this Part shall be subject to the provisions of section 296.

Rule 101 of Income Tax Rules, 1962 provides that the trust has to keep the contribution received by it in a bank account opened with Scheduled Bank. Amount can be invested by the trust in the LIC Group Gratuity Scheme or such scheme by other insurer. It has to invest the contribution in manner specified under Rule 67(2) of Income Tax Rules. 

The Rule is reproduced hereunder:

Investment of fund moneys.

101. All moneys contributed to the fund after the [31st day of October, 1974] or received or accruing after that date by way of interest or otherwise to the fund may be deposited in a Post Office Savings Bank Account in India or in a current account [or in a savings account] with any scheduled bank or utilised for the purpose of making contributions under Group Gratuity Scheme entered into with the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956) [or any other insurer as defined in clause (28BB) of section 2 of the Income-tax Act, 1961] [; and to the extent such moneys as are not so deposited or utilised shall be invested in the manner specified in sub-rule (2) of rule 67, and for this purpose, the expression “investible moneys” in that sub-rule shall mean the moneys of the fund as are not deposited or utilised as aforesaid].]

Rules 109 of the Inocme tax rules which provides for application for approval of gratuity trust. It provides that such trust has to maintain its separate books of accounts.

 

The Rule is reproduced hereunder:

Application for approval.

109. (1) The application for approval of a gratuity fund under sub-rule (1) of rule 4 of Part C of the Fourth Schedule shall contain the following information :—

(a)		Name of employer and address, his business, profession, etc., also his principal place of business.
(b)		Classes and number of employees entitled to admission to the fund—

(i)		in India ;
(ii)		outside India.

(c)		Place where the accounts of the fund are or will be maintained.
(d)		If the fund is already in existence, the details of investment of the fund.

(2) A verification in the following form shall be annexed to the application :—

FORM OF VERIFICATION

We/I, the trustee(s) of the above named fund, do declare that what is stated in the above application is true to the best of our/my information and belief, and that the documents sent herewith are the originals or true copies thereof.