Rules 82 to 97

Approved superannuation funds

The statutory background

82.1 Section 2(6) of the Act defines an ‘approved superannuation fund’ as ‘a superannuation fund or any part of a superannuation fund which has been and continues to be approved by the Chief Commissioner or Commissioner in accordance with the rules contained in Part B of the Fourth Schedule’. Section 36(1)(iv) of the Act provides for a deduction in the computation of business/professional income towards any sum paid by the assessee as an employer by way of contribution towards an approved superannuation fund, subject to such limits as may be prescribed for approving the superannuation fund and subject to such conditions as the Board may think fit to specify in special cases. This means that only if a superannuation fund gets itself approved by the Board, the contributions made by an employer to such a fund will get the benefit of deduction. The rules governing the approval of superannuation funds have been laid down in Part B of the Fourth Schedule to the Act in sufficient detail. However, even the rules contained therein have made some enabling provisions to specify certain aspects in the Income-tax Rules. Rules 82 to 97 lay down the additional requirements, and they must be read in conjunction with section 36(1)(iv) of the Act and Part B of the Fourth Schedule to the Act.

The contents of the rules vis-a-vis Fourth Schedule, Part B

82.2 The aspects in respect of which mention is made in Part B of the Fourth Schedule, but detailed requirements are laid down in the rules, are tabulated below :

Rule  No. in

Requirement laid down

Rule No. in

Part B of

 

IT Rules

IV Schedule

 

 

3

For receiving and retaining approval, the fund should, in addition to the conditions in rule 3, satisfy other conditions which the Board may, by rules, prescribe

84, 86, 91

8(2)

Appeal by employer shall be in such form and shall be verified in such manner and shall be subject to the payment of such fee as may be prescribed

97

11(1)(a)

Board may make rules, prescribing the statements and other information to be submitted along with an application for approval

95

11(1)(b)

Board may make rules, prescribing the returns, statements, particulars or information which the Assessing Officer may require

(covered in Rule 10 of Part B)

11(1)(c)

Board may make rules, limiting the ordinary contributions  and  any  other  contributions  to the fund

87, 88

11(1)(cc)

Board may make rules, regulating the investment or deposit of the moneys

85

11(1)(d)

Board may make rules, providing the assessment by way of penalty of any consideration received by an employee for an assignment of or creation of a charge upon his beneficial interest in the fund

92

11(1)(e)

Board may make rules, determining the extent to, and the manner in, which exemption from tax may be granted in respect of any payment from a fund for which approval is withdrawn

—-

11(1)(f)

Board may make rules, providing for the withdrawal of approval

—-

11(1)(g)

Board may make rules, generally to carry out the specified purposes, etc.

89, 90

 

Constitution of the fund

82.3 Rules 83 and 84 deal with this aspect. Rule 83 requires that the fund and the trust shall be established in India. Rule 84 requires that the trust must have at least two trustees, and that a company cannot be appointed as trustee without the prior approval of the Commissioner. The trustees must also be resident in India, and if they leave India permanently, they must vacate the office of trustee.

Investment of fund moneys

82.4 Under rule 85, the moneys should primarily be utilised as follows :

u As deposits in a Post Office Savings Bank Account or in a savings account in a scheduled bank

u As payments for schemes of insurance or annuity in accordance with rule 89

If any unutilised money remains after meeting the above investment/payment, such monies (called ‘investible moneys’) must be invested in the manner specified for recognised provident funds under rule 67 (Refer para 67.3 for details).

Restrictions for directors

82.5 Under rule 86, a company-employer can admit a director of that company to the benefits of the fund, only if he is a whole-time bona fide employee of that company, and in addition, does not beneficially own shares in that company carrying more than 5 per cent of the total voting power.

Limits on contributions

82.6 Rules 87 and 88 specify the limits upto which ordinary annual contributions and initial contributions respectively are permissible.

82.6-1 Ordinary annual contributions - The ordinary annual contributions in respect of any employee by the employer should not exceed :

(27% of annual salary) minus (Employer’s contribution to any provident fund, whether recognised or not, for that year).

Illustration : Suppose the employee’s annual salary is Rs. 30,000, and the employer is contributing Rs. 3,000 to the provident fund account of that employee, the contribution to the superannuation fund of that employee should not exceed Rs. 8,100 (27% of salary) minus Rs. 3,000, i.e., Rs. 5,100.

82.6-2 Initial contributions - Rule 88 stipulates that, subject to any conditions which the Board may specify under section 36(1)(iv) of the Act, the initial contribution by the employer in respect of the past services of an employee should not exceed (27% of the employee’s salary for each year of his past service with that employer) minus (Employer’s contribution to any provident fund account in respect of that employee for each such year).

82.6-3 Limits will apply even after the fund is recognised - A scrutiny of rules 87 and 88 would indicate that these provisions are applicable for allowance of contributions made by the employer from year to year, and the deduction on account of annual contribution as well as initial contribution is restricted to the limits specified in the two rules. In order to retain recognition, it is imperative that the limits prescribed at the time of recognition should be adhered to even subsequent to recognition or approval. The first limb of section 36(1)(iv) of the Act as well as rules 87 and 88 refer not only to the limits prescribed for the recognition and approval of the superannuation fund, but also relate to the contributions thereafter made, whether such contributions are annual contributions or initial contributions - CIT v. Hyderabad Asbestos Cement Products Ltd. [1988] 172 ITR 762 (AP).

82.6-4 Limit prescribed by the Board - Refer to Notification No. SO 3433, dated 21-10-1965 [Annex 82.4].

This Notification prescribes the following conditions:

 

(a)

The limit on contributions that should be taken into account is 25 per cent of the employee’s salary for each year of his past service with the employer, less the employer’s contribution.

 

(b)

Subject to condition (a), 80 per cent of the amount actually paid by the employer by way of contribution during any previous year shall be the deductible allowance.

 

(c)

One-fifth of such deductible allowance shall be allowed in each of the five successive assessments, starting with the assessment year relating to the previous year in which the amount was actually paid.

The Supreme Court held that conditions (a) and (b) are really not ‘conditions’, but ‘an impermissible attempt to rewrite the section’, and that hence these two conditions were not valid - CIT v. Sirpur Paper Mills [1999] 103 Taxman 352/237 ITR 41 (SC). The effect of this judgment is that full deduction of the amount actually paid is allowable in the assessment year relating to the previous year in which the amount is actually paid, subject to the limit specified in condition (a). Even condition (a) requires to be changed in order to increase the limit from 25 per cent to 27 per cent, consistent with the increase in limit in rule 87 for ordinary annual contributions. (See para 82.6-1).

Scheme of insurance or annuity

82.7 Rules 89 to 91 deal with this aspect. Rule 89 authorises the trustees to enter into a scheme of insurance with the LIC, or to accumulate the contributions in respect of each beneficiary and purchase an annuity from the LIC at the time of death or retirement/death/incapacitation of the employee. This provision does not however apply to funds established or constituted under the rules and regulations of certain Central Acts mentioned in the proviso to Rule 89. Rule 90 specifies the monetary limits for any payment in commutation of annuity. Rule 91 clarifies that no beneficiary shall have any interest in any insurance policy taken out by the trustees, and he shall be entitled only to an annuity from the fund. It also makes it clear that no money belonging to the fund shall be receivable by the employer under any circumstances nor shall the employer have any lien or charge on the fund.

82.7-1 Constitutional validity - The Supreme Court has, in the case of Sasadhar Chakravarthy v. Union of India [1997] 223 ITR 796, upheld the constitutional validity of rules 89 and 91. The Court observed :

“. . . from the point of view of safety and security of the moneys of the superannuation fund, an investment in an annuity through the Life Insurance Corporation of India provides valuable security to a beneficiary. By ensuring that the investment is made in a manner which ensures the safety of the fund and the payment of an annuity, the Board has ensured that the fund is not misutilised or the pensioner is not deprived of his annuity. Of course, it is possible to envisage other types of schemes and other types of investments, which may have varying safety and different returns. But that does not mean that rule 89 is arbitrary or unreasonable. The entire scheme is framed on the basis of relevant considerations and cannot be called unreasonable or arbitrary.

Rule 91 provides that the beneficiary shall not have any interest in any insurance policy taken out by the trustees under the rules of a fund and he shall be entitled only to the annuity. It is contended by the petitioners that the Life Insurance Corporation appropriates the capital purchase price on the death of the annuitant and this amounts to an unjust enrichment of the Life Insurance Corporation at the cost of the beneficiary. The submission is based on a misconception of the manner in which annuity is calculated. The annual instalment does not consist only of the interest which is earned on the capital used for the purchase of annuity. The annual instalment contains an element both of interest as also a part of the capital so that over a period of years as actuarially calculated, the entire capital and the interest earned thereon are utilised for the payment of annuities to the beneficiary. Secondly, the Life Insurance Corporation has introduced a new annuity scheme under which an option has been given to the existing members to switch over to the new scheme. As per the new option available to the pensioners the value of outstanding instalments is determined and this is used for the purchase of an annuity. This new annuity would be payable during the lifetime of the beneficiary and the value of the outstanding instalments is returned to the beneficiary’s nominee on his death. The petitioners have the option to switch over to this new scheme in respect of their outstanding instalments. Therefore, in any event there can be no question of the Life Insurance Corporation appropriating the capital purchase price of an annuity on the death of the annuitant. Rule 91, therefore, in any event, cannot be considered as giving any unjust gains to the Life Insurance Corporation of India.”

82.7-2 Departmental clarifications - The following clarifications issued by the CBDT are also relevant :

 

u

Where approved superannuation funds execute deeds of variation incorporating the provisions of the new annuity plan of the LIC, the Commissioners may accord approval to such variations after satisfying themselves that the conditions laid down in the rules are satisfied - Circular No. 500, dated 9-12-1987 [Annex 82.1].

 

u

Approval to superannuation funds which provide for payment of annuities to an employee or transfer of equitable interest to another approved superannuation fund when the employee leaves the service voluntarily before the specified date of superannuation, may not be refused merely on the ground that the employee left the service voluntarily before he reached the normal age of retirement - Letter F. No. 216/6/77-IT-(A-II), dated 7-6-1978 [Annex 82.2].

 

u

Where the rules of the superannuation fund provide for the pension benefits in the form of ‘annuity certain’, the fund is not entitled to approval - Circular No. 403, dated 5-12-1984 [Annex 82.3].

Penalty for assignment/creation of charge

82.8 Rule 92 provides that, if an employee assigns or creates a charge on his beneficial interest in a fund, the Assessing Officer must give a notice to him to the effect that if the employee fails to cancel the assignment or charge within two months of the date of receipt of the notice, the consideration received by him for the assignment/charge shall be deemed to be the income received by him in the previous year in which the fact became known to the Assessing Officer, and shall be assessed to tax.

When business/fund is wound up

82.9 Rules 93 and 94 deal with this aspect. When the business of the employer to be wound up or discontinued, the trustees must make satisfactory arrangements for the payment of annuities to the existing employees or their dependents, with the prior approval of, and subject to such conditions as may be imposed by, the Commissioner. Any arrangement for the winding up of the fund or for its amalgamation with another fund must be made with the prior approval of and such conditions as may be imposed by, the Commissioner. The winding up of the fund should be necessitated by the winding up of the business - Circular No. 595, dated 5-3-1991 [Annex 82.6].

Procedural aspects

82.10 Rule 95 specifies the contents for the application for approval and the form of verification to be signed by the trustees. Rule 96 places an embargo on altering the rules, constitution, objects or conditions of an approved fund except with the prior approval of the Commissioner. Rule 97 stipulates that any appeal against the order of the Commissioner shall be made in Form No. 43. It shall be verified in the manner indicated in the Form, and shall be accompanied by a fee of Rs. 100.

Procedure for deduction

82.11 The procedure for grant of deduction to the employer in respect of contributions made to an approved superannuation fund is explained with illustrations in Board’s Circulars, dated 12-2-1949 and 25-11-1965. See Annex 82.5.

Annexure to rules 82 to 97

Annex 82.1

Circular No. 500 [F.No. 216/10/87-IT(A-II)], dated 9-12-1987

Life Insurance Corporation’s new annuity plan with return of corpus with group pension terminal bonus - Approval by Commissioner to deed of variation executed by approved superannuation funds incorporating new annuity plan - Part B of Fourth Schedule read with rule 89 of Income-tax Rules

1. As per rule 89 of the Income-tax Rules, 1962, the trustees of an approved superannuation fund may either enter into a scheme of insurance with Life Insurance Corporation of India (LIC) or accumulate the contributions in respect of each beneficiary and purchase on annuity from the LIC at the time of retirement or death of each employee or on his becoming incapacitated prior to retirement.

2. Under the existing provisions, the LIC have been offering the option of purchasing any of the following three annuities:

 

(a)

annuity payable for life only;

 

(b)

annuity payable for life with guaranteed payment for 5, 10, 15 or 20 years;

 

(c)

annuity payable jointly with the beneficiary till one of them is alive.

3. The LIC has recently come out with a new life annuity plan with benefits available under whole life assurance plan with group pension terminal bonus, which provides that on death of the member, the sum assured equal to the corpus is returned with the group pension terminal bonus to the beneficiary. Existing annuitants may also avail of the benefit of this plan which has been introduced by the LIC in order to give higher returns to beneficiaries of approved superannuation funds and to meet the criticism that annuity payment represented only periodical payment marginally higher than the interest on capital and on death the capital was lost.

The Board are of the view that in cases where approved superannuation funds execute deeds of variation incorporating the provisions of the new annuity plan, the Commissioners of Income-tax may accord approval to the said deed of variation after satisfying themselves that the conditions laid down in Part ‘B’ of the Fourth Schedule and the relevant Income-tax Rules are satisfied.

Annex 82.2

Letter F. No. 216/6/77-IT(A-II), dated 7-6-1978

Contribution to approved superannuation fund - Approval to superannuation fund not to be refused merely on the ground that employee is entitled to leave service voluntarily before he reached the age for normal retirement

1. Attention is invited to Board’s Instruction No. 657 [F. No. 216/6/73-IT(A-II)], dated 28-1-1974 wherein it was clarified that if the rules of a superannuation fund provide for the payment of pension according to certain formula to persons leaving service voluntarily after pension rights are vested in them in accordance with the agreed terms but before their retirement at or on a specific age, the approval under the Act to such fund may not be granted. It was, however, stated that where such funds have already been approved under the 1922 Act, no action need be taken to withdraw the approval.

2. The Board have re-examined the matter in consultation with the Ministry of Law. The Board have been advised that approval to superannuation funds, which provide for payment of annuities to an employee or transfer of equitable interest to another approved superannuation fund, when the employee leaves the service voluntarily before he attains the specified age for retirement, may not be refused merely on the ground that he left the service voluntarily before he reached the age for normal retirement. If such a superannuation fund complies with the rules and conditions set out in Part B of the Fourth Schedule and relevant rules of the 1962 Rules, approval under the Act should be granted.

3. In view of the above, Instruction No. 657, dated 28-1-1974, may be treated to have been withdrawn with immediate effect.

4. The Board desire that the clarification given above may be kept in mind while according approval to superannuation funds.

5. The cases of those superannuation funds where approval was refused on this ground may be reviewed in the light of the present instructions.

Annex 82.3

Circular No. 403 [F. No. 216/7/84-IT(A-II)], dated 5-12-1984

Contribution to approved superannuation fund - Whether pension benefits can be provided to employees under rule 89 of Income-tax Rules in the form of “annuity certain” also

1. An assessee is entitled  under section 36(1)(iv) of a deduction of any sum paid as an employer by way of contribution towards an approved superannuation fund subject to such limits as may be prescribed by the Board or such conditions as the Board may think fit to specify.

2. As per rule 89 of the Income-tax Rules, 1962, the trustees may either enter into a scheme of insurance with Life Insurance Corporation (LIC) or accumulate the contribution in respect of each beneficiary and purchase annuity from the LIC at the time of retirement or death of each employee or on his becoming incapacitated prior to retirement.

3. These annuities can be either “annuity certain”, i.e., an annuity payable for a fixed term of years and independent of any contingency, or it may be an annuity which depends upon a contingency for example dependent on human life.

4. A question has arisen as to whether pension benefits can be provided to the employees under rule 89 of the said Rules in the form of an “annuity certain” also. The question has been examined in consultation with the Ministry of Law. It is pointed out that rule 89 refers to the purchase of an annuity from the LIC at the time of retirement or death of each employee or on his becoming incapacitated prior to retirement and rule 90 lays down the condition that only one-third of such annuity can be commuted having regard to the age of the recipient, the state of his health, the rate of interest and officially recognised tables of mortality - Rule 3(b) of Part B of the Fourth Schedule also clarifies that the sole purpose of such fund would be the provision of annuities for employees on their retirement or on their becoming incapacitated prior to such retirement, or for the widows, children or defendants of persons who are or have been such employees on the death of those persons. Rule 6 also provides for taxing the contributions paid to an employee during the lifetime in circumstances other than those referred to in section 10(13).

5. In view of all these provisions, the Board are advised that a superannuation fund, where rules provide for pension benefits in the form of “annuity certain”, is not entitled for approval as the same is not covered under rule 89 of the Income-tax Rules, 1962. It is desired that the cases of the funds already approved should also be reviewed and in case of funds where rules provide for pension benefits in the form of “annuity certain”, the trustees should be advised to make suitable amendments in the rules within a reasonable time, say, three months. The Commissioners of Income-tax may also consider the withdrawal of approval in cases where such necessary amendments are not effected in the rules.

Annex 82.4

Notification No. SO 3433, dated 21-10-1965

Contribution to approved superannuation fund - Conditions specified under clause (iv) of sub-section (1) for the purposes of deduction of certain contributions

In exercise of the powers conferred by clause (iv) of sub-section (1) of section 36, the Central Board of Direct Taxes hereby specifies the following conditions for the deduction of contributions, not being annual contributions of fixed amounts or annual contributions fixed on some definite basis by reference to the income chargeable under the head “Salaries” or to the contributions or to the number of members of the fund, namely:

1. The total amount of contribution that shall be taken into account for the purposes of this notification shall not exceed twenty-five per cent of the employee’s salary for each year of his past service with the employer as reduced by the employer’s contribution, if any, to any provident fund (whether recognised or not) in respect of that employee for each such year.

2. Subject to condition 1, eighty per cent of the amount actually paid by the employer by way of contribution during any previous year shall be the deductible allowance.

3. One-fifth of such deductible allowance shall be allowed in the assessment year relating to the previous year in which the amount was actually paid and the balance of the deductible allowance shall be allowed in equal instalments for each of the four immediately succeeding assessment years.

Annex 82.5

Circular No. 4P (LVIII-30), dated 25-11-1965

Contribution to approved superannuation fund - Procedure for grant of deduction under clause (iv) of sub-section (1) explained

Clarification 1

1. Relief on initial contributions to superannuation fund was, under the Indian Income-tax Act, 1922, regulated under instructions contained in Board’s Circular No. 44(3)-IT/49, dated 12-2-1949 [Clarification 2]. Under section 36(1)(iv), read with rule 88 of the Rules, the Board are empowered to specify the conditions under which relief on special lump sum contributions and/or initial contributions would be regulated. The conditions have now been specified in Board’s Notification No. 100 [F. 44A/8/64-ITJ], dated 21-10-1965 [SO 3433, dated 21-10-1965]. (Annex 82.4) The relief for and from assessment year 1962-63 will be regulated according to the notification.

The procedure for grant of relief has been considerably simplified. The first step is to see that the contribution on which relief is to be allowed does not exceed the maximum laid down under rule 88 of the Income-tax Rules. This is ensured by condition No. 1 of the notification.

It should be noted that the limit mentioned in rule 88 is in respect of the salary of each employee taken separately and also in respect of each year of his service taken separately. The following examples illustrate the manner in which the question whether condition No. 1 of the notification is fulfilled and the amount permissible as initial contributions.

Example 1

 

 

Salary of the employee

25 per cent of the salary

Contribution to the Provident Fund Whether Recognised or not

Actual initial contribution to the superannuation fund proposed or made

Permissible maximum contribution to superannuation fund according to rule 88

To be taken into consideration under condition 1

 

 

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

1st year

12,000

3,000

3,000

2,000

Nil

Nil

2nd year

12,000

3,000

3,000

2,000

Nil

Nil

3rd year

80,000

20,000

6,000

12,000

14,000

12,000

4th year

80,000

20,000

6,000

12,000

14,000

12,000

 

1,84,000

46,000

18,000

28,000

28,000

24,000

 

Although the actual amount contributed (Rs. 28,000) is the same as is permissible if all the years are taken together, the amount to be taken into account under condition 1 is only Rs. 24,000 as each year of service is to be taken into account separately.

Example 2

Initial contribution of Rs. 1,20,000 made for the employees A, B and C is as follows:

 

Rs.

Employee A

60,000

Employee B

40,000

Employee C

     20,000

Total

  1,20,000

 

Particulars regarding salary and superannuation fund contributions are as follows :

 

 

25% of salary of each year of service

Provident fund contribution

Maximum permissible  contribution to superannuation fund under rule 88

Actual contribution made or proposed to be made by the employer

Excess

 

Rs.

Rs.

Rs.

Rs.

Rs.

Employee A

72,000

24,000

48,000

60,000

12,000

Employee B

48,000

16,000

32,000

40,000

8,000

Employee C

36,000

12,000

24,000

20,000

Nil

 

1,56,000

52,000

1,04,000

1,20,000

20,000

 

2. The amount to be taken into consideration under condition 1 in the above case will be Rs. 1,00,000 which is arrived at after deducting the excess contribution from the actual contribution made. It is to be noted that although the maximum permissible allowance in respect of employee C is Rs. 24,000, the actual contribution is only Rs. 20,000. The benefit of short contribution in his case cannot be given to others. Again, although the maximum permissible allowance for all employees together is Rs. 1,04,000 the amount to be taken into consideration under condition 1 will only be Rs. 1,00,000 because it is only this amount which is within the permissible limit prescribed by rule 88 considering each employee separately.

3. The second step will be to determine the deductible allowance. The deductible allowance will be 80 per cent of the actual contribution made by the employer or the maximum allowable contribution on which relief is admissible as determined under condition 1, whichever is less.

Example 3

 

Actual contribution

Maximum contribution permissible to be taken into account under condition No. 1

 

Rs.

Rs.

Case A

1,12,000

1,00,000

Case B

1,00,000

1,00,000

Case C

80,000

1,00,000

 

In cases of A and B, Rs. 1,00,000 will be taken into consideration for determining deductible allowance. In case of C, it will be Rs. 80,000. Thus the deductible allowance under condition 2 will be Rs. 80,000 in the cases of A and B and Rs, 64,000 in the case of C.

4. The third step is to regulate the actual relief. After having determined the deductible allowance, this will be allowed in five years spread over five assessments. One-fifth of such deductible allowance [Rs. 16,000 in the cases of A and B, and Rs. 14,800 in the case of C referred to in para 3 above] shall be allowed in the assessment year relevant to the previous year in which the contribution is made and in each of the subsequent four assessment years.

5. The fact that initial contribution is spread over more than one year does not affect the calculation of relief. On each occasion when any contribution is made the above procedure should be followed. It is obvious, however, that if on an earlier occasion initial contribution is made at a percentage of salary, this should also be taken into account in considering the maximum limit laid down in condition No. 1 [rule 88].

Example 4

In 1964-65 assessment year, the employer has already made initial contribution as follows:

Employer

Salary for past 10 years

25% of salary

Provident fund contribution

Initial contribution to superannuation fund made

Further initial contribution admissible in subsequent years

 

Rs.

Rs.

Rs.

Rs.

Rs.

A

1,20,000

30,000

10,000

10,000

10,000

B

84,000

20,000

7,000

7,000

7,000

 

In 1965-66  assessment year, a further contribution of Rs. 20,000 is made in respect of the same 10 years of service as follows:

Initial contribution made to superannuation fund in 1965-66 :

 

   Rs.

Employee A

  8,000

Employee B

12,000

 

But the sum to be taken on the second occasion, i.e., in 1965-66, will only be Rs. 8,000 in the case of employee A and Rs. 7,000 in the case of employee B, i.e., Rs. 15,000 in all. The employer could, however, have made contribution of Rs. 17,000, i.e., Rs. 10,000 in the case of employee A and Rs. 7,000 in the case of employee B, but, since in the case of employee B, the actual contribution is Rs. 12,000, this is in excess of the permissible contribution by Rs. 5,000. Hence, out of the total contribution of Rs. 20,000, Rs. 5,000 will have to be deducted.

In the assessment for 1964-65, the employer in the above case will get a deduction of 1/5 (80/100 × 17,000) = Rs. 2,720. This deduction will also be given in the next four assessments. In addition, in 1965-66 assessment, the employer will get a deduction of 1/5(80/100 ×15,000) = Rs. 2,400. Whereas the allowance of Rs. 2,720 will continue upto the assessment for 1968-69, the allowance of Rs. 2,400 will continue upto the assessment for 1969-70 and so on.

6. Even if an employer suffers a loss in any year, the deductible allowance will be allowed as a deduction in computing the business income of that year and will form part of the business loss of that year to be carried forward and set off according to the provisions of the Act.

Circular No. 44(3)-IT/49, dated 12-2-1949

Clarification 2

1. The main reason for the delay in granting approval to superannuation funds is that the rules governing the funds are found to be not in accordance with the provisions of the Act and consequently protracted correspondence between the Central Board of Revenue and the trustees of the funds has to be made. To avoid such delays in future, all applicants for the recognition of superannuation funds are requested to see that the rules of the fund fulfil the requirements of Chapter IXB of the 1922 Act and particularly satisfy each one of the three conditions laid down in section 58P of that Act [corresponding to the Fourth Schedule, Part B, rule 3 of the 1961 Act].

2. The following are some of the other important conditions which should also be satisfied by every superannuation fund before it may secure the Board’s approval:

1. The trustees and the fund should be located within the jurisdiction of the Board, i.e., within the States of India.

2. All pensions should invariably be made payable in the States of India.

3. The funds of the trust should be invested only in such trustee securities as are payable both as respects capital and interest in the States of India.

4. There should be no provision for commutation of pensions under any circumstances.

5. Under no circumstances should the employer’s annual contribution exceed 25 per cent of the salary of an employee during any year.

6. Initial contributions made by an employer, which is not an ordinary annual contribution will, subject to the condition prescribed by (5) above, be spread backwards over the past year of service of the members who would benefit from such contribution so as to arrive at the tax relief that the employer could get if, during those past years the fund were in existence as an approved fund. The resultant tax effect by way of refund will be allowed wholly in the assessment in respect of the year in which the initial contribution is made. An illustration of a hypothetical case is given.

3. If the particulars regarding such initial contribution according to these proposals are furnished, along with the application for approval, it may be possible for the Board to indicate the relief to be granted along with the order according approval or soon thereafter without delay.

Illustration of the method suggested in the note

1. The employees in respect of whom the extraordinary contribution is made are say, A, B and C.

2. The earliest year when any of them was in the employer’s service is say, 1938.

3. The extraordinary contribution in question is, say, Rs. 9,000 made in 1943.

4. Aggregate salaries:

 

Years

 

1938

1939

1940

1941

1942

Total

 

Rs.

Rs.

Rs.

Rs.

Rs.

Rs.

A

1,000

1,000

1,000

1,000

1,000

....

B

Nil

1,000

1,000

1,000

1,000

....

C

Nil

Nil

1,000

1,000

1,000

....

 

1,000

2,000

3,000

3,000

3,000

12,000

 

5. Allocation according to assessment years :

 

Years

1939-40

1940-41

1941-42

1942-43

1943-44

TOTAL

1/12 of 9,000

2/12 of 9,000

3/12 of 9,000

3/12 of 9,000

3/12 of 9,000

 

750

1,500

2,250

2,250

2,250

9,000

 

6. IT and ST rates:

42 pies 45.5 pies

56 pies

53 pies

74 pies

7. Tax to be relieved:

Rs.

As.

Rs.

As.

Rs.

As.

Rs.

As.

Rs.

As.

Rs.

As.

164

1

355

7

656

4

738

4

867

3

2,781

3

 

8. Amount to be deducted from the assessment demand for each of the five years 1944-45 to 1948-49: Rs. 556-4-0.

Annex 82.6

Circular No. 595, dated 5-3-1991

Winding up of superannuation fund - Rule 3(a) of Part B of the Fourth Schedule to the Income-tax Act, 1961 and rules 93 and 94 of the Income-tax Rules, 1962

The Board had clarified earlier that a gratuity fund, approved under the Income-tax Act, cannot be wound up unless it is necessitated by the winding up or discontinuance of the employer’s trade or undertaking, and that the revocation of a gratuity fund cannot be permitted on the basis of a resolution of the trustees and/or beneficiaries.

2. The Board has been requested to consider whether an approved superannuation fund can be allowed to be wound up only when the undertaking of the assessee is wound up or discontinued.

3. Rules 93 and 94 of the Income-tax Rules, relating to the superannuation fund, are analogous to rules 107 and 108 of the Income-tax Rules relating to gratuity funds. Further, rule 3(a) of Part B of the Fourth Schedule to the Income-tax Act prescribes that superannuation funds should be established under an irrevocable trust in connection with a trade or undertaking.

4. The Board has, therefore, been advised that an approved superannuation fund also cannot be wound up unless necessitated by the winding up or discontinuance of the employer’s trade or undertaking.