Ahmedabad ITAT Quashes Section 263 Revision; Contribution to Approved LIC Gratuity Fund Not Restricted to 8.33% of Salary

Sarvodaya Nagrik Sahakari Bank Ltd. Vs PCIT (ITAT Ahmedabad)

Ahmedabad ITAT Quashes Section 263 Revision; Contribution to Approved LIC Gratuity Fund Not Restricted to 8.33% of Salary

Summary: The Ahmedabad ITAT allowed the assessee’s appeal and quashed the Principal Commissioner of Income Tax’s revision order passed under Section 263 of the Income-tax Act for AY 2022-23. The PCIT had held that deduction for contribution to an approved LIC Group Gratuity Scheme should be restricted to 8.33% of employees’ salary under Rule 103 of the Income-tax Rules and directed fresh assessment. The Tribunal noted that the assessee had contributed ₹33,53,965 to an approved LIC Group Gratuity Scheme pursuant to LIC’s demand based on actuarial valuation and that the Assessing Officer had examined and accepted the claim during assessment. Relying on judicial precedents cited before it, the Tribunal held that payment to an approved gratuity fund was allowable even if it exceeded 8.33% of employees’ salaries, and found that the assessee had rightly claimed the deduction. It concluded that the assessment order was neither erroneous nor prejudicial to the interests of the revenue and accordingly quashed the revision order passed under Section 263.

The Ahmedabad ITAT quashed the revision order passed u/s 263, holding that the Assessing Officer had rightly allowed deduction for contribution made to an approved LIC Group Gratuity Scheme. The PCIT had invoked section 263 on the ground that the assessee-bank had contributed ₹33.54 lakh to the gratuity scheme and claimed excess deduction of ₹17.49 lakh, allegedly in violation of Rule 103, which limits annual contributions to 8.33% of employees’ salary.

The Tribunal observed that the gratuity scheme was duly approved by the Commissioner of Income-tax and that the contribution had been made strictly in accordance with the actuarial valuation and demand raised by LIC. Relying on the Supreme Court’s decision in CIT v. Textool Co. Ltd. and the judgments of the Calcutta and Madras High Courts, it held that once the payment is made to an approved gratuity fund over which the employer has no control, deduction cannot be denied merely because the contribution exceeds 8.33% of employees’ salary. The Tribunal further held that Rule 103 had no application in such circumstances.

The Tribunal also noted that the issue had been specifically examined by the AO during the original assessment and the claim was found to be in order. Since the assessment order was in consonance with settled judicial precedents, it could not be regarded as erroneous and prejudicial to the interests of the Revenue. Accordingly, the assumption of jurisdiction by the PCIT u/s 263 was held to be unsustainable, the revision order was quashed, and the assessee’s appeal was allowed.

Cases Discussed:

• CIT Vs. Standard Chartered Grindlays Ltd. (ITA 388/2019)
• CIT Vs. Textool Co. Ltd. (2013) 263 CTR 257 (SC)
• CIT Vs. Premier Cotton Spg. Mills Ltd. (2002) 258 ITR 253 (Mad)
• CIT Vs. Rayalaseema Passenger & Goods Transports Pvt. Ltd. (1997) 230 ITR 332 (Mad)
• CIT Vs. Eastern Equipment & Sales Ltd. (1993) 201 ITR 858 (Cal)
• Triplicane Permanent Fund Ltd. Vs. CIT (1989) 179 ITR 492 (Mad)

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

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:

1. The PCIT has erred in law and on facts of the case, in exercising revisionary power u/s 263 for disallowance of Rs. 17,48,656/- u/s. 36(1)(v) on account of excess contribution of LIC Group Gratuity Scheme.

2. The appellant craves leave to add, amend or delete any ground of appeal at the time of hearing, if need arise.

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.

1. CIT Vs. Textool Co. Ltd. 1(2013) 263 CTR 257(5C)]

2. CIT Vs. Standard Chartered Grindlays Ltd. (ITA 388/2019]

3. CIT Vs. Eastern Equipment & Sales Ltd. 1(1993) 201 ITR 858(Cal)]

4. Triplicate Permanent Fund Ltd. Vs. C111(1989) 179 ITR 492(Mad)]

5. CIT Vs. Rayalaseema Passenger & Goods Transports Pvt. Ltd. 1(1997) 230 ITR 332 (Mad)]

6. CIT Vs. Premier Cotton Spg. Mills Ltd. [(2002) 258 ITR 253 (Mad)]

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 CIT Vs. 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 CIT Vs. 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. Vs. CIT (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 CIT vs. 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.

Order pronounced in the Court on 09/07/2026 at Ahmedabad.