Though s. 36(1)(v) requires direct payment to the gratuity trust fund, payment to the LIC Group Gratuity Scheme is also allowable

CIT vs. Textool Co. Ltd (Supreme Court)

The assessee set up a gratuity fund which was duly approved by the CIT. However, instead of making payment to the fund directly, the assessee paid an amount of Rs. 50 lakhs as initial contribution and an amount of Rs. 5 lakhs as annual premium to the Life Insurance Corporation (“LIC”) pursuant to the group Life Assurance Scheme framed by the LIC for the benefit of the employees of the assessee. The AO disallowed the claim for deduction on the ground that payment towards the gratuity fund was not made to an approved gratuity fund and was not allowable u/s 36(1)(v). The CIT(A), Tribunal and High Court (257 ITR 39 (Mad)) upheld the assessee’s claim on the basis that the payment to LIC under the Group Life Assurance Scheme was for the exclusive benefit of the employees of the assessee under the policy issued by it and that the conditions stipulated in s. 36(1)(v) had not been violated. On appeal by the department to the Supreme Court, HELD dismissing the appeal:

While it is true that a fiscal statute has to be construed strictly and nothing should be added to or subtracted from it, yet a strict construction of a provision does not rule out the application of the principles of reasonable construction to give effect to the purpose and intention of any particular provision of the Act. From a bare reading of s. 36(1)(v), it is manifest that the real intention behind the provision is that the employer should not have any control over the funds of the irrevocable trust created exclusively for the benefit of the employees. On facts, it is evident that the assessee had absolutely no control over the fund created by the LIC for the benefit of the employees of the assessee and further all the contribution made by the assessee in the said fund ultimately came back to the Textool Employees Gratuity Fund, approved by the CIT. Thus, the conditions stipulated in s. 36(1)(v) were satisfied.

Note: Though the judgement is old, it is not reported yet. It has great relevance in the context of the Q whether payments to the LIC leave encashment scheme is allowable u/s 43B(f)