1977 (2) TMI 14 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sums 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.
2. Whether 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.

Issue-wise Detailed Analysis:

1. Allowability of Sums Disallowed by the Income-tax Officer:
The primary question was whether 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. The assessee, a private limited company, paid commissions to its salesmen in addition to their fixed monthly salary and included these commissions in the provident fund contributions. The Income-tax Officer disallowed the amounts pertaining to commissions, arguing that commissions do not fall under the definition of "salary" as per rule 2(h) of Part A of the Fourth Schedule to the Income-tax Act, 1961.

The court analyzed the definition of "salary" and concluded that the term "salary" includes dearness allowance but excludes all other allowances and perquisites. The commission paid by the company to its salesmen was neither a fixed amount nor necessarily payable monthly, thus failing to meet the criteria for being considered "salary." Additionally, Circular No. 6 of 1941 clarified that commissions and bonuses are not included in "salary" unless they are fixed periodical payments not dependent on a contingency. Since the commissions varied and were dependent on sales, they could not be considered "salary."

2. Satisfaction of Conditions Laid Down in Rule 4(c) of the Fourth Schedule:
The second question was whether 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. Rule 4(c) stipulates that 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. The court noted that the company's provident fund scheme defined "salary" to include commissions, but this definition could not override the statutory definition provided in the Income-tax Act.

The court held that the company's provident fund did not meet the conditions of rule 4(c) because the contributions pertaining to commissions were not allowable deductions. The court also rejected the argument that the recognition of the provident fund by the Commissioner of Income-tax during the relevant years implied that the contributions were allowable. The court emphasized that the statutory definitions and conditions must be met, and the company's internal definitions could not alter the statutory requirements.

Conclusion:
The court concluded that the sums disallowed by the Income-tax Officer were not allowable under section 36(1)(iv) of the Income-tax Act, 1961, and that the provident fund maintained by the assessee did not satisfy the condition laid down in rule 4(c) of the Fourth Schedule. The questions were answered in the negative and in favor of the revenue, with no order as to costs.