Full Judgment Text
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PETITIONER:
GESTETNER DUPLICATORS (PVT.) LTD.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, WEST BENGAL
DATE OF JUDGMENT14/12/1978
BENCH:
TULZAPURKAR, V.D.
BENCH:
TULZAPURKAR, V.D.
BHAGWATI, P.N.
PATHAK, R.S.
CITATION:
1979 AIR 607 1979 SCR (2) 788
1979 SCC (2) 354
CITATOR INFO :
RF 1992 SC 803 (22)
ACT:
Income-tax Act, 1961-s.17(1) (iv) and r. 2(h) of Part A
of Fourth Schedule- Scope of.
Salesmen entitled to commission in addition to salary-
Assessee credited into the provident fund accounts of
salesmen its share of PF contribution calculated on both
salary and commission-Assessee’s contribution of PF on
commission, if could be claimed as an allowable deduction
under s. 36(1)(iv).
Words and phrases : Salary-Meaning of-Salary, if
includes commission.
HEADNOTE:
The expression "salary," under s. 17(1)(iv) of the
Income Tax Act, 1961, includes "any fees, commissions,
perquisites or profits in lieu of or in addition to any
salary or wages"; under r. 2(h) in Part-A of the Fourth
Schedule to the Act, which contains Rules relating to
recognised Provident Funds, the term ‘salary’ includes
dearness allowance, if the terms of employment so provide,
but excludes all other allowances and perquisites, where an
assessee, as an employer, has paid any sum by way of
contribution towards a recognised provident fund, s.
36(1)(iv) allows such sum as a deduction in computing the
income subject to such limits as may be prescribed for the
purpose of recognising the provident fund. The term
"contribution’ is defined in r. 2(c), of part A of the
Fourth Schedule as any sum credited by or on behalf of any
employee out of his salary or by an employer out of his own
moneys to the individual account of an employee but does not
include any sum credited as interest.
The assessee maintained a provident fund which was
recognised by the Commissioner of Income-tax in 1937. Under
r. 2 of the Provident Fund Scheme Rules "salary" meant not
only fixed monthly salary but also commission and dearness
allowance as might be paid by the company to its employees.
As a term of the contract of employment, in addition to
monthly salary, the assessee paid to each of the salesmen
commission at a fixed percentage of turnover achieved by
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them. The assessee’s shares of the contribution to the
provident fund was calculated on the basis of both salary as
well as the commission paid to each of the salesmen.
In respect of assessment years 1962-63, 1963-64 and
1964-65 the assessee claimed the whole amount paid by it
towards provident fund contributions, as a deduction
allowable under s. 36(1)(iv) of the Income-tax Act and for
this purpose it relied on r. 2 of its Provident Fund Scheme
Rules.
Out of the total Provident Fund contributions claimed
as allowable deduction under s. 36(1)(iv) the Income-tax
Officer disallowed that part of the assessee’s contribution
which related to the amounts calculated on the basis of
commission paid to the salesmen on the ground that under r.
2(h) of Part A of the Fourth Schedule the expression
"salary" did not include commission paid to the employees.
789
The assessee’s appeal in respect of the assessment year
1962-63 was rejected by an Appellate Assistant Commissioner;
but in respect of the other two assessment years another
Appellate Assistant Commissioner allowed its appeals.
On further appeals both by the assessee and the
Department the Appellate Tribunal held that the commission
paid being a part of the contractual obligation, it was a
part of the salary paid to the employees and therefore
contributions made towards provident fund on the commission
were allowable as a deduction under s. 36(1)(iv) of the Act,
and secondly since the provident fund was a recognised fund
which fulfilled the conditions laid down in r. 4(c) of Part
A of the Fourth Schedule, the employer’s contributions were
entitled to be deducted.
The High Court answered the reference in favour of the
Department. It held that since commission, unlike salary,
was not a fixed monthly payment it could not be included
within the meaning of "salary" and that the meaning of the
term "salary" could not be extended by the assessee by
defining it in a particular manner in its provident fund
scheme rules for the purpose of recognition of its fund. The
High Court relied upon a circular dated January 16, 1941
issued by the Central Board of Revenue which provided that
unless commission and bonuses were fixed periodical payments
not dependent on a contingency, they were not covered by the
term "salary".
On further appeal to this Court it was contended on
behalf of the Revenue that the definition of "salary" in r.
2(h) clearly showed that it did not include commission and
since commission was nothing but an allowance paid without
reference to any time factor which is associated with salary
or wages, it is not deductible under s. 36(1) (iv).
Allowing the assessee appeals,
^
HELD : The commission paid by the assessee to its
salesmen would clearly fall within the expression "salary"
as defined in r. 2(h) of Part A of the Fourth Schedule to
the Act and the amounts representing proportionate provident
fund contributions made by the assessee to its salesmen
would be deductible under s. 36(1)(iv) of the Act. [802 E]
1(a) The expression "salary" has been defined in s. 17
as well as in r. 2(h) of Part-A of the Fourth Schedule. But
each of the definitions serves a different purpose. Since
this case is concerned with contributions made to a
recognised provident fund and deductions thereof under s.
36(1)(iv), it would be the definition of "salary" as given
in r. 2(h) of Part-A of the Fourth Schedule, and not the one
given in s. 17, that will be applicable. [797 F; 798 A-B]
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(b) Conceptually salary and wages connote one and the
samething viz., remuneration or. payment for work done or
services rendered. The former expression is generally used
in connection with services of higher or non-manual type
while the latter is used in connection with manual services.
If conceptually salary and wages mean one and the same thing
then salary could take the form of payment by reference to
the time factor or by the job done. In the case of salary
the recompense could be determined wholly on the basis of
time spent on service or wholly by the work done or partly
by the time spent on service and partly by the work done. In
other words, whatever be the basis on which such recompense
is determined it would all be salary. [799 G; 801C]
790
Gordon v. Jennings, 51 L.J. Q.B. 417; Mohmedalli v.
Union of India, AIR 1964 SC 980: referred to.
(c) The definition of "salary" in r. 2(h) includes
dearness allowance if the terms of employment so provide and
excludes all other allowances and perquisites. It does not,
in terms, exclude commission. But though the dictionary
meaning of the term "commission" is "a pro rata remuneration
for work done as agent", in business practice commission
covers various kinds of payments made under different
circumstances. [801 E]
(d) If under the terms of the contract of employment
remuneration or recompense for the services rendered by the
employee is determined at a fixed percentage of turnover
achieved by him, then such remuneration or recompense will
partake of the character of salary, the percentage basis
being the measure of the salary. Therefore, such
remuneration or recompense must fall within the expression
"salary" as defined in r. 2(h). [802 A]
In the instant case under the term of the contract of
employment the assessee had been paying to the salesmen, in
addition to the fixed monthly salary. commission at a fixed
percentage of the turnover. It is, therefore, a case where
remuneration or recompense payable for the services rendered
by the salesman is determined partly by reference to the
time spent in the service and partly by reference to the
volume of work done. The entire remuneration so determined
on both the bases clearly partakes of the character of
salary. [802 C-D]
(e) The Circular dated January 16, 1941 issued by the
Central Board of Revenue did not affect the question of
deductibility because if the commission paid by the assessee
to its salesmen was covered by the expression "salary" on
its true construction, the Board’s view or instructions
could not detract from the legal position arising on such
construction. What the Board, by the said circular, wanted
to keep out of the term "salary" were payments by way of
commissions which did not partake of the character of
salary. [802 F-G]
Bridge & Roofs Co. Ltd. v. Union of India & Ors. AIR
1963 SC 1474 at p. 1477: held inapplicable.
2(a) The Tribunal was right in its view that the
provident fund maintained by the assessee satisfied the
condition laid down in r. 4(c) of Part-A of the Fourth
Schedule. [803 G].
(b) After taking into account the true nature of the
commission payable by the assessee to its salesmen under the
terms of the employment, the Commissioner granted
recognition to the provident fund, as far back as 1937 and
that recognition continued to remain in operation during the
relevant assessment years. The provident fund clearly
satisfied all the conditions laid down in r. 4 of Part-A of
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the Fourth Schedule. It was, therefore, not open to the
Taxing Authorities to question the recognition on the ground
that the assessee’s provident fund did not satisfy any
particular condition mentioned in r. 4. For the sake of
certainty and uniformity in administering the law the Taxing
Authorities should proceed on the basis that the recognition
granted and available for any particular assessment year
implied that the provident fund satisfied all the conditions
in that rule. Under r. 3 the Commissioner had ample power to
withdraw at any time the recognition already granted if the
provident fund contravened any of the conditions required to
be satisfied for its recognition.
791
But until the Commissioner withdrew such recognition, the
Taxing Authorities must proceed on the basis that the
provident fund satisfied all the requisite conditions for
its recognition for that year. Any other course would result
in uncertainty. [803 H-804 F]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 565-570
of 1978.
Appeal from the Judgment and Order dated 8-2-1977 of
the Calcutta High Court in Income Tax Reference Nos 398, 399
and 400/69 and 456 of 1969.
Devi Pal and D. N. Gupta for the Appellant.
S. T. Desai, B. B. Ahuja and Miss A. Subhashini for the
Respondent.
The Judgment of the Court was delivered by
TULZAPURKAR, J. These appeals, by certificates are
directed against the common judgment and order rendered by
the Calcutta High Court on February 8, 1977 in Income Tax
Reference No.156 of 1969 and Income Tax References Nos. 398,
399 and 400 of 1969, whereby the assessee’s claim for
deduction under s.36(1)(iv) of the Indian Income Tax Act,
1961 (hereinafter referred to as ’the Act’) in respect of
three sums of Rs.95,421/-, Rs.1,00,564/- and Rs.1,17,969/-
out of the total contributions made by the assessee to a
recognised Provident Fund for the assessment years 1962-63,
1963-64 and 1964-65 respectively was disallowed and the
principal question raised in these appeals is whether the
expression "salary" as defined in Rule 2(h) in Part A of the
Fourth Schedule to the Act includes "Commission" paid by the
assessee to its salesmen in terms of their contracts of
employment ?
The assessee is a private limited company and carries
on the business of manufacture and sale of duplicating
machines and accessories. It has in its regular employment
three categories of salesmen-machine salesmen, mixed
salesmen and supply salesmen. As a term of the contract of
employment between the assessee and the salesmen of the
aforesaid categories, the assessee, besides paying a fixed
monthly salary also paid commission to them at fixed
percentage of turnover achieved by each salesman, the rate
of percentage varying according to the class of article sold
and the category to which the salesman belonged. The
assessee maintained a regular Provident Fund for its
employees which was recognised by the Commissioner of
Income-Tax some time in 1937 and the said recognition
continued and was in force during the relevant years in
question. In the previous years ending 31st December 1961.
31st December 1962 and 31st December 1963 rele-
792
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vant to the assessment years 1962-63, 1963-64 and 1964-65
the assessee made contributions, out of its own moneys, to
the individual accounts of these salesmen in the said
Provident Fund on the basis of salary and commission paid to
them and claimed such contributions as allowable deductions
under s. 36(1) (iv) of the Act and in that behalf reliance
was placed by the assessee upon Rule 2 of the assessee
company’s Recognised Provident Fund Scheme Rules under which
"salary" meant not only the fixed monthly salary but also
the commission and dearness allowance as might be paid by
the company to its employees. Out of such total
contributions the Income-Tax Officer disallowed the sums of
Rs. 95,421/-, Rs. 1,00,564/- and Rs. 1,17,969/- on the
ground that these amounts pertained to the commission paid
by the assessee to its salesmen for the three years
respectively and that under Rule 2(h) of Part A of the
Fourth Schedule to the Act, which was applicable, the
expression "salary" did not include such commission. Three
appeals, for the aforesaid three years, filed by the
assessee were heard by two different Appellate Assistant
Commissioners, one of whom rejected the appeal for the
assessment year 1962-63 in view of Rule 2 (h) of Part A of
the Fourth Schedule to the Act but the other Appellate
Assistant Commissioner allowed the appeals for the
assessment years 1963-64 and 1964-65 by accepting the
assessee’s contention. The assessee as also the Revenue
preferred appeals to the Appellate Tribunal. On the one
hand, relying upon the dictionary meaning of the expression
"salary" as given in the Shorter Oxford Dictionary and
Stroud’s Judicial Dictionary and upon the manner in which
the term was defined in Rule 2 of the assessee’s Recognised
Provident Fund Scheme Rules, it was contended on behalf of
the assessee that the commission of the nature paid by it to
its salesmen was nothing but a composite part of the salary
itself, the same being determinable as per the terms of the
contract and as such the contributions on the basis of such
commission made by the assessee to the Provident Fund were
deductible under s.36(1)(iv) of the Act; it was further
contended that since these payments were being admittedly
made to a Provident Fund recognised by the Commissioner of
Income-Tax, which recognition was in force during the
relevant years, the Taxing Authorities could not disallow
the deduction claimed by the assessee, and the view taken by
the Appellate Assistant Commissioner in respect of
assessment years 1963-64 and 1964-65 was canvassed for
acceptance. On the other hand, the Revenue contended before
the Tribunal that the definition of the expression "salary"
as given in Rule 2(h) of Part A of the Fourth Schedule to
the Act which applied to the recognised Provident Fund
governed the matter and since that definition excluded all
other allowances and perquisites the commission
793
paid by the assessee to its salesmen, which was nothing but
some sort of allowance, could not be regarded as salary and,
on that basis the Tribunal was pressed to accept the
contrary view taken by the Appellate Assistant Commissioner
for the assessment year 1962-63. The Tribunal on a
consideration of the rival submissions held that the
commission paid by the assessee to various classes of
salesmen was a part of the contractual obligation and as
such was a part of the salary of the employees and
contributions made on that basis were liable to be deducted
under s.36(1)(iv) of the Act. It also took the view that
since the Provident Fund maintained by the assessee was a
recognised Fund and since it fulfilled the condition laid
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down in Rule 4(C) of Part A of the Fourth Schedule to the
Act the contributions by the employer to the same would be
entitled to deduction under the said provision. In this view
of the matter the Tribunal by its order dated June 12, 1968
allowed the assessee’s appeal and dismissed the appeals of
the Department.
At the instance of the Revenue the following two
questions were referred to the High Court for its opinion:
"(1) Whether, on the facts and in the
circumstances of the case, the sums of Rs. 95,421/-,
Rs. 1,00,564/- and Rs. 1,17,969/- disallowed by the
Income Tax Officer out of the total contributions made
by the assessee towards the provident fund were
allowable under section 36(1)(iv) of the Income Tax
Act, 1961 for the assessment years 1962-63, 1963-64 and
1964-65 respectively ?
(2) Whether, on the facts and in the circumstances
of the case, the Tribunal was right in holding that the
provident fund maintained by the assessee satisfied the
condition laid down in Rule 4(c) of the Fourth
Schedule, Part ’A’ of the Income Tax Act, 1961 ?"
The former question was the subject-matter of Income
Tax Reference No.156 of 1969 made under s.256(1) of the Act
while the latter was the subject-matter of Income-tax
References Nos. 398, 399 and 400 of 1969 made under s.256(2)
of the Act. These References were heard together and
disposed of by the High Court by a common judgment and order
dated February 8, 1977. Rejecting the contentions urged on
behalf of the assessee the High Court answered both the
questions in the negative and in favour of the Revenue. In
doing so the High Court principally relied upon (3) Rule
2(h) of Part A of the Fourth Schedule to the Act where the
expression "salary" has been defined as inclusive of
dearness allowance but exclusive of all
794
other allowances and perquisites, (b) Circular No. 6 dated
January 16, 1941 issued by the Central Board of Revenue
under the Indian Income Tax Act, 1922 but which has been
continued under s.297(k) of the Act, which provided that
unless commission and bonuses are fixed periodical payments
not dependent on a contingency, they are not covered by the
term "salary" as used in Chapter IXA of the Act (1922 Act)
and (c) observations of this Court in M/s Bridge & Roofs Co.
Ltd. v. Union of India and Ors. to the effect that
"commission and other similar allowances are excluded from
the definition of "basic wages" under the Provident Fund Act
1952 because it was not a universal rule that each and every
establishment must pay commission to its employees". The
High Court further held that the Circular No. 80 dated March
4, 1972 on which reliance was placed by the assessee and
which stated that "if the terms and conditions of service
are such that commission is paid not as a bounty or benefit
but is paid as a part and parcel of the remuneration for
services rendered by the employees such payment may partake
of the nature of salary rather than as a benefit or
perquisite" could not be availed of because the same was not
in existence during the relevant years and further it had
been issued under s.40(c) (iii) of the Act and would not
apply to s.36(1)(iv). The High Court also held that the
ordinary meaning of "salary" was a fixed monthly payment
while "commission" was not such payment and, therefore, it
could not be included within the scope and ambit of the term
"salary", the meaning of which could not be extended by the
assessee company by defining it in a particular manner in
its Provident Fund Scheme Rules for the purposes of
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recognition of its Fund and deductibility as well. The High
Court’s view on both the questions is challenged by the
assessee in the instant appeals preferred on the strength of
the certificates granted by that Court under s.261 of the
Act.
Counsel for the assessee raised a two-fold contention
in support of the appeals. In the first place he contended
that once recognition was granted by the Commissioner of
Income-Tax to the Provident Fund maintained by the assessee
under the relevant rules and such recognition was in force
during the relevant assessment years, the Taxing Authorities
could not disallow the deductions claimed by interpreting
the expression "salary" in Rule 2(h) of Part A of the Fourth
Schedule to the Act so as to exclude the "commission" that
was paid by the assessee to its salesmen, for, by doing so
the Taxing Authorities would be sitting in judgment over the
recognition granted and allowed to be retained by the
Commissioner of Income-Tax to the assessee. It was
795
pointed out that Rule 4 of Part A of the Fourth Schedule to
the Act set out the conditions, particularly, the one
contained in cl.(c) of the said rule that were required to
be satisfied before recognition could be granted and in the
instant case the Commissioner after having been satisfied
that the said conditions had been fulfilled had granted
recognition to the Provident Fund maintained by the
assessee. In particular, counsel placed reliance upon the
correspondence which took place between the assessee and the
Commissioner of Income Tax, West Bengal, during the course
of which, the Commissioner had by his letter dated September
9, 1937 required the assessee to inform him of the basis on
which the commission payable to the salesmen participating
in the fund was computed with a view to seeing whether the
commission would be includible in the definition of "salary"
for purposes of Chapter IXA of the 1922 Act and the assessee
had by its reply dated September 11, 1937 stated that the
commission was the monthly amount payable to the salesmen in
accordance with their written contract and was based on a
fixed term of rate and that it was after such correspondence
that recognition was granted to the Provident Fund of the
assessee and that the said recognition had continued and was
in operation during the relevant assessment years. He,
therefore, urged that it was not open to the Taxing
Authorities to reach a conclusion that the Provident Fund of
the assessee did not satisfy the condition laid down in Rule
4(c) of Part A of the Fourth Schedule to the Act during the
relevant years nor was it open to them to disallow the
deductions claimed under s.36 (1)(iv) of the Act by
interpreting the expression "salary" in Rule 2(h) in Part A
of the Fourth Schedule to the Act as being exclusive of the
commission of the nature and kind paid by the assessee to
its salesmen. Secondly, counsel contended that on a true and
proper construction of the expression "salary occurring in
the said Rule 2(h) the commission of the nature and type
paid by the assessee to its salesmen under the terms of
their contract of employment would be included or covered by
that expression. According to him, commission in business
practice covered various kinds of payments made under
different circumstances and in the cases where a servant was
employed by a businessman and as a condition of his
employment it was agreed that he would be paid for his
services at a fixed rate of percentage over the turnover it
was clear that such commission payable to the employee will
par take of the character of "salary" received by him for
his services. the percentage basis being the measure of the
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salary; in other words, according to him, there was no
difference between the concept of salary and the concept of
commission if the latter was of the aforesaid nature or kind
and as such the expression salary in Rule 2 (h) would
include such commission. In this behalf he relied upon a
decision of the Allaha-
796
bad High Court in the case of Raja Ram Kumar Bhargava v.
Commissioner of Income Tax, U.P. He urged that the decision
of this Court in M/s Bridge & Roofs Co. Ltd. v. Union of
Indian & Ors. (supra) on which the High Court has relied was
inapplicable since it was a case under the Provident Fund
Act, 1952 and this Court was required to construe the term
’basic wages’ appearing in that Act and in that context it
observed that that term did not include any bonus,
commission or other similar allowances. He, therefore, urged
that the Tribunal was right in allowing the deductions
claimed by the assessee under s.36(1)(iv) of the Act.
On the other hand, counsel for the Revenue contended
that notwithstanding the recognition accorded to the
assessee’s Provident Fund by the Commissioner of Income-Tax
the assessee had to satisfy the taxing authorities every
year that the Provident Fund maintained by it satisfied the
conditions of Rule 4, particularly, the one contained in
Rule 4(c) of Part A of the Fourth Schedule to the Act and
if for any particular assessment year the assessee’s
Provident Fund failed to satisfy the condition in Rule 4(c)
of Part A of the Fourth Schedule to the Act the assessee
could not claim deduction under s.36(1)(iv) of the Act in
respect of such portion of the contribution made by it to
the Fund as was in breach of the said condition. Secondly,
he urged that by relying upon the fact of recognition
obtained by it and the further fact that such recognition
had remained in force during the relevant assessment years
the assessee could not by-pass the real question that arose
for determination before the taxing authorities for the
relevant assessment years, namely, whether the expression
’salary’ as defined in Rule 2(h) of Part A of the Fourth
Schedule to the Act included or excluded commission paid by
the assessee to its salesmen and he urged that the
definition of the expression ’salary’ as given in the said
Rule 2(h) clearly showed that the ’salary’ did not include
commission, for, according to him, the definition merely
included dearness allowance and excluded all other
allowances and perquisites and commission payable by the
assessee to its salesmen was nothing but an allowance paid
without reference to any time factor which is associated
with salary or wages as an important concomitant thereof. In
this behalf reliance was also placed by him upon the
Circular No.6 dated January 16, 1941 issued by the Central
Board of Revenue under the 1922 Act and continued under
s.297(k) of the 1961 Act wherein on the question whether the
term ’salary’ as used in Chapter IXA (of the old Act)
797
included commissions and bonuses paid to the employees, the
Board expressed its view that "unless commissions and
bonuses are fixed periodical payments not dependent on a
contingency they are not covered by the term ’salary’ as
used in Chapter IXA of the Act." Counsel further contended
that in the matter of deductions claimable in respect of
contributions to the Provident Fund the position of the
employer could not be different from that of the employee
and in regard to employee’s contribution the condition
required to be satisfied in Rule 4 (b) was to the effect
that the contribution of an employee in any year shall be a
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definite proportion of his ’salary’ for that year and shall
be deducted by the employer from the employee’s ’salary’ in
that proportion at each periodical payment of such salary in
that year, and credited to the employee’s individual account
in the Fund and under s.80C read with Rule 7 of Part A of
the Fourth Schedule to the Act the employee is entitled to a
deduction in respect of his contribution which pertains to a
definite proportion of the ’salary’ which would not include
commission. He therefore, urged that the High Court was
right in answering both the questions against the assessee
and in favour of the Revenue.
As stated at the outset, in our view, the main question
raised in these appeals is whether the expression ’salary’
as defined in Rule 2(h) of Part A of the Fourth Schedule to
the Act includes commission payable by an assessee to his or
its employees in terms of their contracts of employment ? We
shall, therefore, address ourselves to that question first
and then deal with the aspect regarding the true impact of
the recognition granted by the Commissioner of Income Tax
under the relevant Rules to a Provident Fund maintained by
an assessee.
The expression ’salary’ has been defined in s. 17 of
the Act as well as in Rule 2(h) of Part A of the Fourth
Schedule to the Act but each of the said definitions serves
a different purpose. Section 17 defines the expression
’salary’ for purposes of ss. 15 and 16 which deal with
"Salaries" as a head of income, and under cl.(iv) of sub-
s.(1) that expression includes:
"any fees, commissions, perquisites or profits in
lieu of or in addition to any salary or wages."
In Part A of the Fourth Schedule to the Act, which
contains rules relating to Recognised Provident Funds the
word ’salary’ has been defined in Rule 2(h) thus :
"Salary" includes dearness allowance, if the terms
of employment so provide, but excludes all other
allowances and perquisites."
798
Since we are concerned in this case with contributions
made to a recognised Provident Fund and deductions thereof
under s. 36(1) (iv) it will be the definition of ’salary’ as
given in Rule 2(h) of Part A of the Fourth Schedule to the
Act and not the one given in s. 17 that will be applicable
and will have to be considered. Under s. 36(1) (iv) the
deduction allowable is in respect of
"any sum paid by the assessee as an employer by way of
contribution towards a Recognised Provident Fund or an
approved superannuation fund, subject to such limits as
may be prescribed for the purpose of recognising the
Provident Fund or approving the superannuation fund, as
the case may be."
Rule 2(c) of Part A of the Fourth Schedule defines
contribution" as meaning
"any sum credited by or on behalf of any employee
out of his salary, or by an employer out of his own
monies, to the individual account of an employee, but
does not include any sum credited as interest."
Rule 4 of Part A of the Fourth Schedule lays down the
conditions which are required to be satisfied by a Provident
Fund in order that it may receive and retain recognition and
the conditions in cls.(b) and (c) are material and these
conditions are:
"4(b) the contributions of an employee in any year
shall be a definite proportion of his salary for that
year, and shall be deducted by the employer from the
employee’s salary in that proportion, at each
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periodical payment of such salary in that year, and
credited to the employee’s individual account in the
fund;
(c) the contributions of an employer to the
individual account of an employee in any year shall not
exceed the amount of the contributions of the employee
in that year, and shall be credited to the employee’s
individual account at intervals not exceeding one
year."
It may be stated that so far as the employer is
concerned the contributions credited by him to the
employee’s individual account in the funds are deductible
under s. 36(1) (iv) whereas the contributions of an employee
are deductible in the computation of his total income under
s.80C read with Rule 7 of Part A of the Fourth Schedule to
the Act and the scheme of cls.(b) and (c) of Rule 4 of Part
A of the Fourth Schedule does suggest that in the matter of
deductions claim-
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able in respect of contributions to the recognised Provident
Fund the position of both the employer and the employee
would be the same; but since in the case of an employee his
contributions are to be a definite proportion of his salary
for a particular year, the question whether such proportion
would be inclusive of commission received by him from his
employer must depend upon the true meaning or construction
of the expression ’salary’ as occurring in Rule 2(h) of Part
A of the Fourth Schedule; in other words, in the matter of
deductions claimable in respect of contributions to the
Recognised Provident Fund qua both the employer and the
employee the question has to be answered by reference to the
true meaning of the expression ’salary’ occurring in Rule
2(h). Now, Rule 2(h) of Part A of the Fourth Schedule does
not define the expression ’salary’ conceptually but merely
proceeds to state what is included therein and what is
excluded therefrom and, therefore, one is required to turn
to the dictionary meaning of that expression as also to
ascertain how judicial decisions have understood that
expression. According to the Shorter Oxford English
Dictionary (3rd Edn.) ’salary’ means:
"To recompense, reward; to pay for something
done;"
In Jowitt’s Dictionary of English Law (1959 Edn.) the
term is explained thus:
"a recompense or consideration generally
periodically made to a person for his service in
another person’s business; also wages, stipend or
annual allowance."
In Stroud’s Judicial Dictionary (4th Edn.) the expression
’salary’ is explained at item (2) thus:
"Where the engagement is for a period, is
permanent or substantially permanent in character, and
is for other than manual or relatively unskilled
labour, the remuneration is generally called a salary".
[Per Latham C. J., in Federal Commissioner of Taxation
v. Thompson (J. Walter) (Aus.) Pty. Ltd. 69 C.L.R.
227].
It appears that conceptually ’salary’ and ’wages’ connote
one and the same thing, namely, remuneration or payment for
work done or services rendered but the former expression is
generally used in connection with services of a higher or
non-manual type while the latter is used in connection with
manual services. In Gordon v. Jennings Grover J. observed as
follows:
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"Though this word (wages) might be said to include
payment for any services, yet, in general, the word
’salary’ is used for payment or services of a higher
class, and ’wages’ is confined to the earnings of
labourers and artisans."
In Mohmedalli v. Union of India this Court, while repelling
the contention that the Employees’ Provident Fund Act 1952
was intended by Parliament to apply to employees who were
mere wage earners and not salaried servants, has made
observations clearly indicating that there is no difference
between the two concepts of salary and wages. Chief Justice
Sinha speaking for the Court observed in para 10 of the
judgment as follows:
"It is a little difficult to appreciate the
distinction sought to be made. Both ’salary’ and
’wages’ are emoluments paid to an employee by way of
recompense for his labour. Neither of the two terms is
a ’term of art’. The Act has not defined wages; it has
only defined "basic wages" as all emoluments which are
earned by an employee while on duty or on leave with
wages in accordance with the terms of the contract of
employment and which are paid or payable in cash to
him,....... ’Salary’, on the other hand, is
remuneration paid to an employee whose period of
engagement is more or less permanent in character, for
other than manual or relatively unskilled labour. The
distinction between skilled and unskilled labour itself
is not very definite and it cannot be argued, nor has
it been argued, that the remuneration for skilled
labour is not ’wages’. The Act itself has not made any
distinction between ’wages’ and ’salary’. Both may be
paid weekly, fortnightly or monthly, though
remuneration for the day’s work is not ordinarily
termed ’salary’. Simply because wages for the month run
into hundreds, as they very often do now, would not
mean that the employees is not earning wages, properly
so called. A clerk in an office may earn much less than
the monthly wages of a skilled labourer. Ordinarily he
is said to earn his salary. But, in principle, there is
no difference between the two."
It will thus appear clear that conceptually there is no
difference between salary and wages both being a recompense
for work done or
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services rendered, though ordinarily the former expression
is used in connection with services of non-manual type while
the latter is used in connection with manual services. It is
further common knowledge that this compensation to the
labourer or artisan could be a specified sum for a given
time of service or a fixed sum for a specified work i.e.
payment made by the job, the commonest example of the latter
category being a piece-rated worker. In other words, the
expression ’wages’ does not imply that the compensation is
to be determined solely upon the basis of time spent in
service; it may be determined by the work done; it could be
estimated in either way. If conceptually salary and wages
mean one and the same thing then salary could take the form
of payment by reference to the time factor or by the job
done. In fact, in the case of salary the recompense could be
determined wholly on the basis of time spent on service or
wholly by the work done or partly by the time spent in
service and partly by the work done. In other words,
whatever be the basis on which such recompense is determined
it would all be salary.
Having reached the above conclusion, we have to
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consider the nature of recompense that is being made by the
assessee to its salesmen, whether the whole of it partakes
of the character of salary or not? The definition of
’salary’ in Rule 2(h) includes dearness allowance if the
terms of employment so provide and excludes all other
allowances and perquisites. It does not in terms exclude
’commission’ as such and, in our view rightly, for, though
ordinarily according to the Shorter Oxford English
Dictionary ’commission’ means ’a pro rata remuneration for
work done as agent’, in business practice commission covers
various kinds of payments made under different
circumstances. In Raja Ram Kumar Bhargava v. Commissioner of
Income-Tax, U.P. (supra) the Allahabad High Court has
pointed out how in certain circumstances commission payable
to an employee may, in fact, represent the salary receivable
by him for the services rendered to the employer. At page
694 of the report the relevant observation run thus:
"The word "commission", in business practice,
covers various kinds of payments made under different
circumstances. There are cases where a servant is
employed by a businessman and, as a condition of his
employment, it is agreed prior to the services having
been rendered that he would be paid for his services at
a fixed rate of percentage of the turnover or profits.
In such a case, it is clear that the commission payable
to the employee will, in fact, represent the salary to
be drawn by him for his services. The payment on the
percentage basis will only determine the measure of the
salary."
802
It is thus clear that if under the terms of the contract of
employment remuneration or recompense for the services
rendered by the employee is determined at a fixed percentage
of turnover achieved by him then such remuneration or
recompense will partake of the character of salary, the
percentage basis being the measure of the salary and
therefore such remuneration or recompense must fall within
the expression ’salary’ as defined in Rule 2(h) of Part A of
the Fourth Schedule to the Act. In the instant case before
us, admittedly, under their contracts of employment the
assessee has been paying and did pay during the previous
years relevant to the three assessment years to its
salesmen, in addition to the fixed monthly salary,
commission at a fixed percentage of the turnover achieved by
each salesman, the rate of percentage varying according to
the class of article sold and the category to which each
salesman belonged. The instant case is therefore, an
instance where the remuneration so recompense payable for
the services rendered by the salesmen is determined partly
by reference to the time spent in the service and partly by
reference to the volume of work done. But it is clear that
the entire remuneration so determined on both the basis
clearly partakes of the character of salary. In our view,
therefore, the commission paid by the assessee to its
salesmen would clearly fall within the expression ’salary’
as defined in Rule 2(h) of Part A of the Fourth Schedule to
the Act and as such the three sums of Rs. 95,421/-, Rs.
1,00,564/- and Rs. 1,17,969/- representing proportionate
contributions appertaining to the commission paid by the
assessee to its salesmen would be deductible under s. 36(1)
(iv) of the Act.
Turning to the Circular dated January 16, 1941 issued
by the Central Board of Revenue on which counsel for the
Revenue has relied, it cannot, in our view, affect the
question of deductibility, for, if the commission paid by
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the assessee to its salesmen is covered by the expression
’salary’ on its true construction, which, according to us,
it does, the Board’s view or instructions cannot detract
from the legal position arising on such proper construction.
In any case we are of the view that by the said Circular
what the Board wants to keep out of the term ’salary’ are
payments by way of commission which do not partake of the
character of salary. Similarly the decision of this Court in
M/s. Bridge & Roof Co.’s case (supra) on which the High
Court has relied cannot avail the Revenue. In the first
place it was a case under the Provident Fund Act, 1952 where
this Court was required to construe the expression ’basic
wages’ as defined in s. 2(b) of that Act and to decide
whether ’production bonus’ was included in that expression
and it was in that context that this Court made observations
803
to the effect that the said expression as defined therein
did not include any bonus, commission or other similar
allowances. Secondly, as against the definition of ’basic
wages’ in s. 2(b) (ii) which excluded any dearness
allowance, house rent allowance, over-time allowance, bonus,
commission or any other similar allowance, s. 6, of the Act
provided for inclusion of dearness allowance for the
purposes of contribution and, therefore, this Court was
concerned with trying to discover some basis for the
exclusion in cl. (ii) of s. 2(b) as also for the inclusion
of dearness allowance and retaining allowance (if any) in s.
6 of that Act and the Court found that the basis for
inclusion in s. 6 and exclusion in cl. (ii) of s. 2(b) was
that whatever was payable in all concerns and was earned by
all permanent employees was included for the purpose of
contribution under s. 6 but whatever was not payable by all
concerns and was not earned by all employees of a concern
was excluded for the purposes of contribution and that is
why commission or similar allowances were excluded from the
definition of ’basic wages’, for commission and allowances
were not necessarily to be found in all concerns nor were
they necessarily earned by all the employees of the same
concern. It is, therefore, clear that the ratio of the
decision and the observations made by this Court in a
different context in that case would be inapplicable to the
facts of the present case.
Having regard to the above discussion it is clear that
the High Court’s view on the first question is clearly
unsustainable and that question must be answered in favour
of the assessee and against the Revenue.
Dealing next with the second question it seems to us
clear that having regard to our view on the proper
construction of the expression ’salary’ occurring in Rule
2(h) of Part A of the Fourth Schedule to the Act it must be
held that the Tribunal was right in holding that the
Provident Fund maintained by the assessee satisfied the
condition laid down in Rule 4(c) of Part A of the Fourth
Schedule and that question also must be answered in favour
of the assessee and against the Revenue However, we would
like to make some observations with regard to the true
impact of the recognition granted by the Commissioner of
Income-Tax to a Provident Fund maintained by an assessee.
The facts in the present case that need be stressed in this
behalf are that it was as far back as 1937 that the
Commissioner of Income-tax had granted recognition to the
Provident Fund maintained by the assessee under the relevant
rules under 1922 Act, that such recognition had been granted
after the true nature of the commission payable by the
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assessee to its salesmen under their contracts of employment
had been brought to the notice of the Commissioner and that
said recognition had continued to remain in operation during
the relevant assessment years in question; the last fact in
particular clearly implied that the Provident Fund of the
assessee did satisfy all the conditions laid down in Rule 4
of Part A of the Fourth Schedule to the Act even during the
relevant assessment years. In that situation we do not think
that it was open to the taxing authorities to question the
recognition in any of the relevant years on the ground that
the assessee’s Provident Fund did not satisfy any particular
condition mentioned in Rule 4. It would be conducive to
judicial discipline and the maintaining of certainty and
uniformity in administering the law that the taxing
authorities should proceed on the basis that the recognition
granted and available for any particular assessment year
implies that the Provident Fund satisfies all the conditions
under Rule 4 of Part A of the Fourth Schedule to the Act and
not sit in judgment over it. There is ample power conferred
upon the Commissioner under Rule 3 of Part A of the Fourth
Schedule to withdraw at any time the recognition already
granted if, in his opinion, the Provident Fund contravenes
any of the conditions required to be satisfied for its
recognition and if during assessment proceedings for any
particular assessment year the taxing authority finds that
the Provident Fund maintained by an assessee has contravened
any of the conditions of recognition he may refer the
question of withdrawal of recognition to the Commissioner
but until the Commissioner acting under the powers reserved
to him withdraws such recognition the taxing authority must
proceed on the basis that the Provident Fund has satisfied
all the requisite conditions for its recognition for that
year; any other course is bound to result in chaos and
uncertainty which has to be avoided.
Having regard to the above discussion, both the
questions are accordingly answered in favour of the assessee
and the appeals are allowed with costs.
P.B.R. Appeal allowed.
805