- (1.) These appeals, by certificates are directed against the common judgment and order rendered by the Calcutta High Court on Feb. 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 Rupees 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
(2.) 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 Commr. 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 relevant 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 Rupees 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 R. 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 R. 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 paid by th 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 part of the salary of the employees and contributions made on that basis were liable to be deducted under Section 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 down in R. 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.
(3.) 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 Rupees 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 Sec. 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 R. 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 Feb 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 (a) 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 other allowances and perquisites, (b) Circular No. 6 dated Jan. 16, 1941 issued by the Central Board of Revenue under the Indian Income-tax Act, 1922 but which has been continued under Sec. 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 Bridge and Roofs Co. Ltd. v. Union of India, AIR 1963 SC 1474 at page 1477 to the effect that "commission and other similar allowances are excluded from the definition of "basic wages" under the Provident Funds 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 employee 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 Section 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 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 certificate granted by that Court under S. 261 of the Act.;