“approved gratuity fund”

The provision for leave encashment is allowable as a deduction only on an actual payment basis under Section 43B(f) of the Income Tax Act, 1961. The Supreme Court upheld the constitutional validity of Section 43B(f).

If an assessee has applied for approval of a fund or exemption within a reasonable time, the exemption should not be denied due to delays in processing by the tax authorities. The taxing authorities erred in holding that gross receipts are taxable without allowing expenditure when exemption is denied.

An amount paid by an assessee to its employees' approved gratuity fund is not deductible if it is not paid wholly and exclusively for the purposes of the business. A payment made by way of contribution to a gratuity fund, while it may be for the benefit of the employees, must also be demonstrably for the purpose of the business itself to qualify for deduction.

Disallowance under Section 40A(7) of the Income Tax Act cannot be made solely on the ground that the gratuity fund is not approved, especially when the payment is made to an LIC group gratuity fund and approval is pending.

For a provision for gratuity to be allowed as a deduction, the assessee must create an approved gratuity fund for the exclusive benefit of its employees under an irrevocable trust, and the application for approval must be made to the Commissioner.