1978 (12) TMI 1 - SC - Income Tax

Commission paid to salesmen deemed salary for tax deduction; provident fund complies with regulations

The Supreme Court held that the commission paid by the assessee to its salesmen was part of the salary, making contributions related to commission ... Definition of 'salary' in r. 2(h) of Part A of the Fourth Schedule to the I.T. Act - commission as part of salary under contract of employment - deduction for employer's contribution to a recognised provident fund under s. 36(1)(iv) of the I.T. Act - conditions for recognition of a provident fund in r. 4(c) of Part A of the Fourth Schedule - effect of recognition granted by the Commissioner on subsequent assessment proceedingsDefinition of 'salary' in r. 2(h) of Part A of the Fourth Schedule to the I.T. Act - commission as part of salary under contract of employment - deduction for employer's contribution to a recognised provident fund under s. 36(1)(iv) of the I.T. Act - Whether the expression 'salary' in r. 2(h) of Part A of the Fourth Schedule includes commission payable to salesmen under their contracts of employment, so as to permit deduction under s. 36(1)(iv). - HELD THAT: - The Court held that the r. 2(h) definition (which includes dearness allowance if terms so provide and excludes other allowances and perquisites) must be understood with reference to the ordinary meaning of 'salary'. Conceptually 'salary' and 'wages' denote recompense for services and need not be tied solely to a time element; remuneration may be measured by time, by work done, or by a combination. Where, as in this case, the contract of employment fixes commission at a percentage of turnover as an agreed mode of measuring the employee's remuneration, that commission is the measure of the salary and partakes of the character of salary. The Court therefore rejected reliance on the Board's 1941 circular and on Bridge & Roofs (which concerned 'basic wages' under a different statute and context) as inapplicable here, and concluded that the commission paid to the assessee's salesmen fell within 'salary' for the purposes of r. 2(h) and hence the employer's contributions attributable to such commission were deductible under s. 36(1)(iv).Commission paid under the salesmen's contracts at a fixed percentage of turnover is part of 'salary' under r. 2(h) and contributions attributable thereto are deductible under s. 36(1)(iv).Conditions for recognition of a provident fund in r. 4(c) of Part A of the Fourth Schedule - recognition of provident fund by the Commissioner - effect of recognition granted by the Commissioner on subsequent assessment proceedings - Whether the provident fund maintained by the assessee satisfied the conditions in r. 4(c) of Part A of the Fourth Schedule for the assessment years in question. - HELD THAT: - The Court held that, on the construction of 'salary' adopted above, the Tribunal was correct in finding that the fund met r. 4(c). Moreover, where the Commissioner granted recognition after being informed of the basis of commission payable under the contracts (recognition having been in force since 1937 and continuing through the relevant years), the taxing authorities in assessment proceedings may not, without the Commissioner having withdrawn recognition under the appropriate power, sit in judgment to deny that the fund satisfied the conditions. If the taxing authority believes contravention has occurred it may refer withdrawal to the Commissioner, but until recognition is withdrawn the authority should proceed on the basis that the fund satisfies r. 4.The provident fund satisfied r. 4(c) for the relevant years; the Tribunal's finding is upheld and recognition stands, precluding denial of deductions in assessment proceedings absent formal withdrawal.Final Conclusion: Both questions answered in favour of the assessee: commissions paid under the salesmen's contracts constitute 'salary' within r. 2(h) and employer contributions attributable thereto are deductible under s. 36(1)(iv); the provident fund satisfied r. 4(c) and the recognition granted by the Commissioner precluded taxing authorities from denying the fund's compliance for the relevant years. Appeals allowed with costs. 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.