Revision Under Section 263 Quashed as Contribution to Approved Gratuity Fund Exceeding 8.33% Is Allowable

ORDER

Narendra Prasad Sinha, Accountant Member.- This appeal is filed by the assessee against the order of Principal Commissioner of Income Tax, Ahmedabad -1 [hereinafter referred to as “PCIT”] dated 09.02.2026 passed in his revisional jurisdiction u/s. 263 of the Income Tax Act [hereinafter referred as “the Act”].

2. The brief facts of the case are that the assessee had filed its return of income for A.Y. 2022-23 on 27.10.2022 declaring income of Rs. 1,77,39,340/-. The case was selected for scrutiny under CASS. The assessment was completed u/s. 143(3) of the Act on 27.03.2024 as per returned income. Subsequently, the case record was called for and examined by the Ld. PCIT. He found that the assessee had made payment of Rs. 33,53,965/- to LIC Group Gratuity Scheme as per demand request sent by the LIC. According to the Ld. PCIT, contribution towards approved gratuity found was deductible to the extent of 8.33% of employees’ salary in accordance with Rule 103 of the Income Tax Rules. He, therefore, found that the assessee had claimed excess deduction of Rs. 17,48,656/- which was not properly examined by the AO while completing the assessment. Therefore, the Ld. PCIT had held that the assessment order was erroneous and pre-judicial to the interest of revenue and accordingly he set aside the order with a direction to pass the assessment order afresh in accordance with law.

3. Aggrieved with the order of the Ld. PCIT, the assessee is in appeal before us. The following grounds have been taken in this appeal:

4. Shri Rushin Patel, the Ld. AR of the assessee submitted that the Group Gratuity Scheme of the assessee was duly approved by Commissioner of Income Tax and the assessee was eligible to claim the deduction for contribution made to the approved scheme. He further submitted that the payment was made as per the demand request raised by LIC. The assessee was, therefore, entitled to deduction u/s. 36(1)(v) of the Act in respect of payment made to LIC Group Gratuity Scheme as per their demand letter. He submitted that the provision of Rule 103 of Income Tax Rules was not applicable in respect of payment made to approved Group Gratuity Scheme. In this regard, he placed reliance on the following decisions.

5. Per Contra, Shri Kiran Unavekar, the Ld. CIT-DR submitted that as per Rule 103 of the Income Tax Rules, the assessee was entitled for deduction in respect of contribution to the extent of 8.33% of the salary of the employees. Therefore, the Ld. PCIT had rightly held that the order of the AO was erroneous and pre-judicial to the interest of revenue, as the deduction claimed by the assessee exceeded this limit.

6. We have considered the rival submissions. The moot question to be decided in the present case is whether the assessee was entitled to claim deduction in respect of contribution to approved Gratuity Fund in excess of 8.33% of the employee’s salary. In the present case, the assessee had made payment of Rs. 33,53,965/- as per demand request of LIC on the basis of actuarial valuation. The Hon’ble Supreme Court has held in the case of Textool Co. Ltd. (supra) that an assessee is entitled to deduction in respect of payment made directly to LIC towards employees Group Gratuity Fund duly approved by the Commissioner. The Hon’ble Apex Court had held that the real intention behind the provision was that the employer should not have any control over the funds of the irrevocable trust credited exclusively for the benefit of the employees. In the present case, the assessee had no control over the funds contributed to LIC Group Gratuity Scheme. Similarly, in the case of Eastern Equipment & Sales Ltd (supra), the Hon’ble Calcutta High Court had held that once the gratuity fund is approved by the Commissioner, there is no scope for application of Rule 103 of Income Tax Rules in disallowing contribution to Gratuity fund in excess of 8.33% of salary of the employees. Similarly, the Hon’ble Madras High Court has held in the case of Triplicane Permanent Fund Ltd. (supra) that excessive contribution made towards gratuity liability beyond 8.33% was allowable as deduction u/s. 37 of the Act. An identical view was taken by Hon’ble Madras High Court in the case of Premier Cotton Spg. Mills Ltd. (supra).

7. In view of the above settled laws in this issue, the assessee had rightly claimed deduction for payment to LIC Group Gratuity Scheme as per the demand request sent by LIC. The demand was raised as per the actuarial valuation and the Auditor too had not pointed out any infirmity in the claim for deduction as made by the assessee. This issue was also examined by the AO in the course of assessment proceeding and the claim of the assessee was found in order. Considering the settled laws on this issue, we do not find any mistake in the order of the AO, as the assessee had rightly claimed deduction for payment to approved Gratuity Fund and the same was allowable even if it exceeded 8.33% of the employee’s salaries. In view of these facts, finding of the Ld. PCIT that the assessment order was erroneous and pre-judicial to the interest of revenue, is not found correct. Therefore, the order passed by the Ld. PCIT u/s. 263 of the Act, is quashed.

8. In the result, the appeal of the assessee is allowed.