Benefits of approved superannuation funds. - Income Tax - 1143/CBDT

INSTRUCTION NO. 1143/CBDT Dated : January 25, 1978 Section(s) Referred: 36(1)(iv) ,80C , Rule 86 of IT Act Statute: Income - Tax Act, 1961 Instances have come to the notice of the Board where directors of companies admitted to the benefits of approved superannuation funds in contravention of rule 86 of the Income-tax Rules, 1962 were allowed deductions under section 80C on their contributions. This matter has been examined in consultation with the Ministry of Law. 2. According to rule 86 of the Income-tax Rules, 1962, a director of a company can be admitted to the benefits of an approved superannuation fund only if (i) he is a 'whole time bona-fide employee' of the company and (ii) he does not 'beneficially own shares in the company carrying more than 5 percent of the total voting power'. Both these conditions must be satisfied simultaneously. Thus the contributions made by a director who does not fulfil both the conditions of rule 86, would not be entitled to deductions under section 80C of the Income-tax Act, 1961. 3. The Board has been advised that a director is a wholetime bonafide employee if, whether or not there is time to spare, no other employment in fact is taken up by him. This would be irrespective of the fact whether the terms of employment permit him to take up any other employment. Further he must in reality be an employee and discharge the duties and functions as such and should not be merely described as an employee on paper. Thus a person who is an employee-director of more than one company cannot be held to be a whole-time bonafide employee of any one of the companies within the meaning of rule 86 and as such is not entitled to participate in the superannuation funds of any of these companies. However, a director who is a whole-time bonafide employee of a company, can be a director of another company in a capacity other than that of an employee and can be admitted to the benefits of the superannuation fund of the first mentioned company. Further in order to determine the percentage of share holdings of a director within the meaning of rule 86, shares actually belonging to him, even though registered in another person's name, have to be taken into account. The question whether a director beneficially owns more than five percent of the total voting power is a finding of fact which requires to be considered with reference to the facts of each case. 4. In this context another question that may arise for consideration is the treatment to be meted out to the contributions made by a company in respect of a director who does not satisfy the conditions of rule 86 to the superannuation fund, (a) in the hands of the director, and (b) in the hands of the company. As regards (a), such contributions cannot be considered as income of the year in the hands of the director because he does not acquire any vested right in the amount. However, the amounts as and when they fall due shall be treated as income liable to tax and no exemption u/s. 10(13) will be available. Regarding (b), such contributions will not qualify for deduction under section 36(1) (iv) in the hands of the company as they are not in respect of an employee entitled to participate in the approved superannuation fund. 5. In case where it is found that a director who is not entitled to be admitted to the benefits of an approved superannuation fund in view of rule 86, is a member of the fund, the Commissioner should issue a notice to the company to show cause as to why the approval granted should not be withdrawn. If the company makes a request that approval should be granted to the fund excluding such persons, this should be done provided the amount representing the contributions in respect of such persons is segregated. The exemption u/s 10(25) (iii) would not be available to the fund in respect of the income earned from such segregated amount. Commissioners should invariably examine this aspect while according approval to the funds for the first time. 6. Remedial measures may be taken in cases of directors and companies where deductions have been allowed wrongly under section 80C and 36(1)(iv) respectively.