1978 (12) TMI 1 - SC - Income Tax

Whether the expression salary as defined in r. 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 - Whether Employer s contribution on the basis of monthly salary as well as commission to the individual account of these employees in the recognised provident fund is allowable as a deduction in the assessee employers - both the questions are answered in favour of the assessee

Summary

Issues Involved:
1. Whether the sums disallowed by the ITO out of the total contributions made by the assessee towards the provident fund were allowable under s. 36(1)(iv) of the I.T. Act, 1961, for the assessment years 1962-63, 1963-64, and 1964-65.
2. Whether the Tribunal was right in holding that the provident fund maintained by the assessee satisfied the conditions laid down in r. 4(c) of the Fourth Schedule, Part 'A' of the I.T. Act, 1961.

Detailed Analysis:

Issue 1: Allowability of Contributions under s. 36(1)(iv)
The principal question was whether the expression "salary" as defined in r. 2(h) in Part A of the Fourth Schedule to the I.T. Act includes "commission" paid by the assessee to its salesmen. The assessee, a private limited company, paid both fixed monthly salaries and commissions to its salesmen based on turnover. The assessee claimed deductions for contributions to a recognized provident fund, including amounts related to commission, under s. 36(1)(iv) of the Act. The ITO disallowed portions of these contributions, arguing that "salary" under r. 2(h) did not include commissions.

The Tribunal held that the commission paid was part of the contractual obligation and thus part of the salary, making the contributions deductible under s. 36(1)(iv). The High Court, however, disagreed, relying on r. 2(h) which excludes all other allowances and perquisites from "salary," and a circular from the Central Board of Revenue which stated that commissions dependent on contingencies are not covered by "salary."

The Supreme Court analyzed the definition of "salary" and concluded that conceptually, salary and wages are recompenses for work done or services rendered, and can be determined by time spent or work done. The Court held that the commission paid by the assessee to its salesmen, being a part of the contractual remuneration, partakes of the character of salary. Therefore, the sums representing contributions related to commission are deductible under s. 36(1)(iv).

Issue 2: Satisfaction of Conditions under r. 4(c)
The second issue was whether the provident fund maintained by the assessee satisfied the conditions laid down in r. 4(c) of Part A of the Fourth Schedule. The Tribunal had held that the provident fund met these conditions, but the High Court disagreed.

The Supreme Court, agreeing with the Tribunal, held that the provident fund satisfied the conditions under r. 4(c). The Court emphasized that once the CIT had granted recognition to the provident fund and such recognition continued during the relevant assessment years, it implied that the fund satisfied all necessary conditions. The taxing authorities should not question the recognition unless the CIT withdraws it.

Conclusion:
The Supreme Court answered both questions in favor of the assessee. The commission paid by the assessee to its salesmen was included in the definition of "salary" under r. 2(h) of Part A of the Fourth Schedule, making the contributions deductible under s. 36(1)(iv). Additionally, the provident fund maintained by the assessee satisfied the conditions laid down in r. 4(c) of Part A of the Fourth Schedule. The appeals were allowed with costs.