IN THE  SUPREME COURT OF INDIA                  CIVIL  APPELLATE  JURISDICTION                                     CIVIL APPEAL NO. 447 OF 2003   

Commner. of Income Tax, Coimbatore ..    Appellant(s)

                    Versus

M/s Textool Co. Ltd. ..    Respondent(s)  

                                                      O R D E R

This appeal, by special leave is directed against  

the  judgment, dated  4th February, 2002,  rendered by  the  

High Court of Judicature at Madras, in Tax Case No. 267 of  

1989.   By  the  impugned  judgment,  the  High  court  has  

answered the question of law, referred to it by the Income  

Tax  Appellate  Tribunal,  Madras  Bench  (for  short,  “the  

Tribunal”)  under  Section  256(1)  of  the  Income  Tax  Act,  

1961,  (for  short,  “the  Act”)  at  the  instance  of  the  

Revenue.  The question of law, so referred, was as follows  

:   

“...Whether  on  the  facts  and  in  the  circumstances of the case, the Appellate Tribunal  is  right  in  allowing  the  deduction  of  Rs.55,84,754/-  being  the  payment  made  by  the  assessee  company  directly  to  Life  Insurance  Corporation  towards  Group  Gratuity  Fund  under  Section 36 (1)(v) of the Incocme Tax Act, 1961?”

Material  facts  relevant  for  the  purpose  of  the  

present appeal may be stated thus :

For  the  assessment  year,  1983-84,  for  which  the  

relevant previous year ended on 30th April, 1982, the

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assessee  claimed  a  deduction  of  Rs.  92,06,978/-  as  

contribution/provision towards the approved gratuity fund.  

As  per  the  breakup  of  the  said  amount,  an  amount  of  

Rs.5,84,754/-  was  paid  as  annual  premium  to  the  Life  

Insurance  Corporation(“LIC”  for  short);  a  sum  of  

Rs.  50,00,000/-  was  paid  to  the  LIC  as  initial  

contribution in the group Life Assurance Scheme framed by  

the LIC for the benefit of the employees of the assessee  

and the remaining amount of Rs. 36,22,224/- was shown as  

provision for initial contribution.  It is common ground  

that assessee company's gratuity fund, viz., the Textool  

Company Ltd. Employees Group Gratuity Fund was approved by  

the  Commissioner  of  Income  Tax,  coimbatore,  w.e.f.  25th  

February,  1983.   While  completing  assessment,  the  

Assessing Officer allowed a deduction of Rs. 36,22,224/-  

under Section 40A(7) of the Act.  However, deduction for  

the  balance  amount  was  disallowed  on  the  ground  that  

payment towards the gratuity fund was made by the assessee  

directly to the LIC and not to an approved gratuity fund  

and,  therefore,  it  was  not  allowable  under  Section  

36(1)(v) of the Act.  

Being aggrieved, the assessee preferred appeal to  

the  Commissioner  of  Income  Tax  (Appeals).   The

Commissioner  observed  that  the   initial  payment  of  

Rs.50,00,000/- and the annual premium of Rs. 5,57,943/-  

was made by the assessee directly to the LIC instead of as  

..3/-

: 3 :

a contribution towards the approved gratuity fund; the LIC  

had accepted the said payment on behalf of the Group Life  

Assurance  Scheme  for  the  exclusive  benefit  of  the  

employees of the assessee under the policy issued by it.  

Upon perusal of the original Master policy issued by the  

LIC, the Commissioner recorded his satisfaction that the  

initial contribution as well as annual premium had been  

credited by the LIC to the Group Life Assurance Scheme on  

behalf  of  the  Textool  Company  Ltd.   Employees  Group  

Gratuity  Fund  only,  meaning  thereby  that  the  insurance  

policy had been taken in the name of the approved gratuity  

fund  only;   this  fund  was  shown  as  the  payee  in  the  

policy;  vide  its  letter  dated  20th November,  1985,  

addressed to the I.A.C., the assessee had confirmed that  

in the subsequent assessment years, they 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 said policy and it was only the initial  

payment and first annual premium had been made directly

to the LIC against the said policy. The Commissioner was  

thus, convinced that by making payment of the amounts in  

question  directly  to  the  LIC,  the  assessee  had  not  

violated any of the conditions stipulated in Section 36  

(1) (v) of the Act. Accordingly, the Commissioner came to  

the conclusion that since, on the facts of the case, the  

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objective  of  the  fund  was  achieved,  a  narrow  

interpretation  of  the  provision  would  be  straining  the  

language of Section  36(1)(v) of the Act so as to deny the  

deduction  claimed  by  the  assessee.   Consequently,  the  

Commissioner allowed the said amount of Rs. 58,84,754/- as  

deduction for the relevant assessment year.

Being  dissatisfied  with  the  view  taken  by  the  

Commissioner,  the  Revenue  took  the  matter  in  further  

appeal to the Tribunal.   Relying on its earlier decision  

in  the  case  of  Janambikai  Mills  Ltd,  the   Tribunal  

dismissed the appeal.  

As stated above, by the impugned order, the afore  

extracted  question,  referred  at  the  instance  of  the  

revenue, has been answered by the High Court in favour of  

the  assessee.   While  answering  the  question,  the  High  

Court has observed as follows :

“In our opinion, the Commissioner of Income  Tax  (Appeals)  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 Section 36(1)(v)  and the amount had to be credited in favour of the  assessee.  Both the Commissioner (appeals) 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.“

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Learned counsel appearing on behalf of the Revenue  

has submitted before us that the provisions of Section  

36(1)(v) of the Act have to be  construed strictly and for  

claiming  deduction,  conditions  laid  down  in  Section  

36(1)(v) of the Act must be fulfilled.  It is urged that  

since during the relevant previous year the contribution  

by the assessee towards the gratuity fund was not in an  

approved gratuity fund the High Court was not justified in  

affirming the view taken by the Commissioner as also by  

the Tribunal while answering the reference in favour of  

the assessee.  However, on a query by us as to whether the  

contribution made by the assessee in the approved gratuity  

fund credited by the LIC for the employees of the assessee  

and ultimately the entire amount deposited with the LIC

came back to the fund created by the assessee for the  

benefit of its employees and approved by the Commissioner  

w.e.f. 25th February, 1983, or not, learned counsel is not  

in  a  position  to  make  a  categorical  statement  in  that  

behalf.

Having considered the matter in the light of the  

background facts, we are of the opinion that there is no  

merit in the appeal. True that a fiscal statute is to be  

construed  strictly  and  nothing  should  be  added  or  

subtracted to the language employed in the Section, yet a  

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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. (See : Shri Sajjan Mills  

Ltd. vs. Commissioner of Income Tax, M.P. & Anr. (1985)  

156 ITR 585).  From a bare reading of Sectin 36(1)(v) of  

the Act, 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.   In  the  

instant case, it is evident from the findings recorded by  

the Commissioner and affirmed by the Tribunal 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  

Commissioner with effect from the following previous year.  

Thus,  the conditions stipulated in Section 36(1)(v) of  

the Act were  satisfied.  Having regard to the facts found  

by the Commissioner and affirmed by the Tribunal, no fault  

can be found with the opinion expressed by the High court,  

warranting our interference.

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Resultantly, the appeal is dismissed with no order  

as to costs.

                                    ....................J.            [ D.K. JAIN ]                                 

                                          ....................J.

              [ R.M. LODHA ]  

                  NEW DELHI, SEPTEMBER 09, 2009.