1982 (2) TMI 57 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Tribunal was correct in holding that the tax authorities were justified in disallowing the assessee's contribution to the provident fund for the benefit of the joint managing directors.
2. Whether the managing directors qualify as employees under the provident fund rules.
3. Whether the contributions towards the provident fund were allowable as legitimate business expenditure under Section 37 of the I.T. Act.

Issue-wise Detailed Analysis:

1. Justification of Disallowance by Tax Authorities:
The Tribunal held that the tax authorities were justified in disallowing the assessee's contribution to the provident fund for the benefit of the joint managing directors for the assessment years 1964-65, 1965-66, 1966-67, and 1967-68. The disallowance was based on the ground that the managing directors were not considered "members" as per the provident fund rules, as they were not permanently in the service of the company. The Tribunal concluded that the relationship between the assessee-company and the managing directors was of principal and agent, not of employer and employee, and thus, the contributions did not qualify for deduction under Section 36(1)(iv) of the I.T. Act.

2. Qualification of Managing Directors as Employees:
The Tribunal found that the managing directors were not permanently in the service of the company, which is a requirement under the provident fund rules for membership. The rules define a member as "any person permanently in the service of the company or likely to be made permanent in the service of the company and who contributes to the fund." The Tribunal noted that the managing directors were appointed by the board of directors and their appointment was subject to the control and supervision of the board, indicating a principal-agent relationship rather than an employer-employee relationship. Additionally, the managing directors had discretionary powers under the provident fund rules, further indicating that they were not intended to be members of the provident fund.

3. Allowability of Contributions as Business Expenditure:
The assessee contended that the contributions towards the provident fund should be allowable as legitimate business expenditure under Section 37 of the I.T. Act. However, the Tribunal found no evidence or finding by the AAC or the Tribunal that the amount was laid out wholly and exclusively for the purposes of the business of the company. The ITO had noted that the necessity for such contributions in relation to the legitimate business needs of the company was not explained, and no such contributions were made in prior years. The Tribunal emphasized that the question of whether an amount has been laid out wholly and exclusively for the purposes of the business is a mixed question of law and fact, requiring specific findings which were absent in this case. Consequently, the Tribunal rejected the claim under Section 37.

Conclusion:
The High Court upheld the Tribunal's decision, answering the referred question in the affirmative and against the assessee. The court concluded that the managing directors did not qualify as members under the provident fund rules and that the contributions were not allowable as business expenditure under Section 37. The assessee was ordered to pay the costs of the reference, and the motion for relief was rejected.