We paid our gratuity money straight to LIC while the fund's approval was still pending. Will s.36(1)(v) be denied?
No, on these facts. Section 36(1)(v) allows a contribution towards an approved gratuity fund, and the department read that as requiring payment into the fund itself. The Court held that the object of the condition is that the employer should have no control over the money, and where the assessee had no control over the fund LIC created and every rupee ultimately reached the gratuity fund the Commissioner later approved, the deduction stood.
Decided by the Supreme Court (Supreme Court of India — D.K. Jain J and R.M. Lodha J) on 2009-09-09, reported as Civil Appeal No. 447 of 2003 (SC); [2013] 35 taxmann.com 639 (SC). It bears on section 36(1)(v), section 40A(7) of the Income Tax Act 1961, in Deductions & Disallowances matters.
Group gratuity schemes are almost always run by paying the insurer directly, and the trust deed and the approval frequently lag behind the first cheque. This is the authority for reading the clause by its object rather than by its form. It is narrow, though: the assessee here did have an irrevocable trust, the money did end up in a fund that was approved, and approval was granted with effect from a date in the following previous year. It is not authority for deducting payments to an unapproved scheme that stays unapproved.
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For assessment year 1983-84, the previous year ending 30 April 1982, the assessee claimed Rs 92,06,978 towards gratuity. That was made up of Rs 5,84,754 paid to the Life Insurance Corporation as annual premium, Rs 50,00,000 paid to LIC as an initial contribution under its group scheme, and Rs 36,22,224 by way of provision. The Assessing Officer allowed the provision of Rs 36,22,224 under s.40A(7) but disallowed the balance, on the ground that the payments had gone directly to LIC rather than to an approved gratuity fund and so did not answer s.36(1)(v). The Textool Company Ltd. Employees Group Gratuity Fund was approved by the Commissioner of Income Tax, Coimbatore with effect from 25 February 1983. The Commissioner (Appeals), the Tribunal and the High Court all decided for the assessee.
The department's appeal was dismissed. Payments made to LIC under a group gratuity scheme qualify for deduction under s.36(1)(v) where the employer has no control over the fund and the contributions ultimately reach the approved gratuity fund.
The Court accepted that a fiscal statute is construed strictly, but held that strict construction does not exclude reasonable construction to give effect to the purpose and intention of the provision, relying on Shri Sajjan Mills Ltd. v. CIT. It identified the real intention behind s.36(1)(v) as being that the employer should not have any control over the funds of the irrevocable trust created exclusively for the benefit of the employees. On the findings recorded by the Commissioner and affirmed by the Tribunal, the assessee had absolutely no control over the fund created by LIC for the benefit of its employees, and all the contributions made by the assessee into that fund ultimately came back to the Textool Employees Gratuity Fund, approved by the Commissioner with effect from the following previous year. The condition being satisfied in substance, the deduction was allowable.
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 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.
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Handle my notice → Ask a CA on WhatsAppNo, on these facts. Section 36(1)(v) allows a contribution towards an approved gratuity fund, and the department read that as requiring payment into the fund itself. The Court held that the object of the condition is that the employer should have no control over the money, and where the assessee had no control over the fund LIC created and every rupee ultimately reached the gratuity fund the Commissioner later approved, the deduction stood. This was decided by the Supreme Court (Supreme Court of India — D.K. Jain J and R.M. Lodha J) and bears on section 36(1)(v), section 40A(7) of the Income Tax Act 1961. It is reported as Civil Appeal No. 447 of 2003 (SC); [2013] 35 taxmann.com 639 (SC). Group gratuity schemes are almost always run by paying the insurer directly, and the trust deed and the approval frequently lag behind the first cheque. This is the authority for reading the clause by its object rather than by its form. It is narrow, though: the assessee here did have an irrevocable trust, the money did end up in a fund that was approved, and approval was granted with effect from a date in the following previous year. It is not authority for deducting payments to an unapproved scheme that stays unapproved. If it applies to you, the first step is this: Apply for approval of the gratuity fund and keep the application, the trust deed and the approval order together, because the deduction turned on approval actually being granted.
For assessment year 1983-84, the previous year ending 30 April 1982, the assessee claimed Rs 92,06,978 towards gratuity. That was made up of Rs 5,84,754 paid to the Life Insurance Corporation as annual premium, Rs 50,00,000 paid to LIC as an initial contribution under its group scheme, and Rs 36,22,224 by way of provision. The Assessing Officer allowed the provision of Rs 36,22,224 under s.40A(7) but disallowed the balance, on the ground that the payments had gone directly to LIC rather than to an approved gratuity fund and so did not answer s.36(1)(v). The Textool Company Ltd. Employees Group Gratuity Fund was approved by the Commissioner of Income Tax, Coimbatore with effect from 25 February 1983. The Commissioner (Appeals), the Tribunal and the High Court all decided for the assessee. The matter was decided on 2009-09-09 by the Supreme Court (Supreme Court of India — D.K. Jain J and R.M. Lodha J). On those facts the Supreme Court held as follows. The department's appeal was dismissed. Payments made to LIC under a group gratuity scheme qualify for deduction under s.36(1)(v) where the employer has no control over the fund and the contributions ultimately reach the approved gratuity fund.
The Court accepted that a fiscal statute is construed strictly, but held that strict construction does not exclude reasonable construction to give effect to the purpose and intention of the provision, relying on Shri Sajjan Mills Ltd. v. CIT. It identified the real intention behind s.36(1)(v) as being that the employer should not have any control over the funds of the irrevocable trust created exclusively for the benefit of the employees. On the findings recorded by the Commissioner and affirmed by the Tribunal, the assessee had absolutely no control over the fund created by LIC for the benefit of its employees, and all the contributions made by the assessee into that fund ultimately came back to the Textool Employees Gratuity Fund, approved by the Commissioner with effect from the following previous year. The condition being satisfied in substance, the deduction was allowable. In the words reproduced by the source cited on this page: "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 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."
It was decided by the Supreme Court on 2009-09-09 and is reported as Civil Appeal No. 447 of 2003 (SC); [2013] 35 taxmann.com 639 (SC). Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 36(1)(v), section 40A(7), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The department's appeal was dismissed. Payments made to LIC under a group gratuity scheme qualify for deduction under s.36(1)(v) where the employer has no control over the fund and the contributions ultimately reach the approved gratuity fund. It arises in Deductions & Disallowances matters, on section 36(1)(v), section 40A(7) of the Income Tax Act 1961, and was decided by Supreme Court of India — D.K. Jain J and R.M. Lodha J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Show that the employer has no control over the fund — the irrevocability of the trust and the insurer's terms are the evidence that matters. Trace the money: demonstrate that the initial contribution and the annual premiums paid to the insurer went into the fund that was approved. Keep s.36(1)(v) and s.40A(7) apart in the computation. What is claimed here is a contribution actually paid, not a provision; a bare provision is governed by s.40A(7). Do not stretch this to a scheme with no approved fund behind it at all.
Still good law. Checked against current commentary. A 2020 explainer on thetaxtalk.com carries it as the governing authority for direct payment to LIC under a group gratuity scheme and pairs it with the point that payment made after creation of the trust but before the date of approval can still be allowed under s.36(1)(v). Nothing fetched indicated any legislative displacement of s.36(1)(v). Note that s.43B(b) separately requires actual payment by the return due date. That finding was checked against a published source, which is linked on this page, on 2026-08-22. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
This entry is taken from the judgment itself, hosted as a PDF on taxguru.in. The judgment PDF and the itatonline and cainindia write-ups print no reporter citation for the Supreme Court decision — itatonline gives only 257 ITR 39 (Mad), the High Court citation. The taxmann citation [2013] 35 taxmann.com 639 is printed on the thetaxtalk explainer cited under validity. The judgment allowed the claim on findings of fact recorded by the Commissioner and affirmed by the Tribunal — that the assessee had no control over the LIC fund and that the contributions came back to the approved fund. Where those findings are absent the case will not carry an assessee. It does not say what happens if approval is refused after the payment, and it does not address the timing rule in s.43B(b) or the treatment of the surplus in an insurer-managed fund. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The department's appeal was dismissed. Payments made to LIC under a group gratuity scheme qualify for deduction under s.36(1)(v) where the employer has no control over the fund and the contributions ultimately reach the approved gratuity fund.
TaxSphere, “CIT v Textool Co Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-textool-lic-group-gratuity-36-1-v/ (validity last checked 2026-08-22)
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