ivil Appeal Nos
565 570 of 1978
Appeal from the Judgment and Order dated 8 2 1977 of the Calcutta High Court in Income Tax Reference Nos 398 399 and 40069 and 456 of 1969
Devi Pal and D N Gupta for the Appellant
section T Desai B B Ahuja and Miss A Subhashini for the Respondent
The Judgment of the Court was delivered by TULZAPURKAR J
These appeals by certificates are directed against the common judgment and order rendered by the Calcutta High Court on February 8 1977 in Income Tax Reference No156 of 1969 and Income Tax References Nos 398 399 and 400 of 1969 whereby the assessee s claim for deduction under s361iv of the Indian Income Tax Act 1961 hereinafter referred to as the Act  in respect of three sums of Rs95421  Rs100564 and Rs117969 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 2h 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  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 Commissioner 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 rele 792 vant 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 section 361 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 Rs 95421  Rs 100564 and Rs 117969 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 2h 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 Rule 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 s361iv 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 Rule 2h 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 793 paid by the 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 a part of the salary of the employees and contributions made on that basis were liable to be deducted under s361iv 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 Rule 4C 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
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 95421  Rs 100564 and Rs 117969 disallowed by the Income Tax Officer out of the total contributions made by the assessee towards the provident fund were allowable under section 361iv 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 Rule 4c of the Fourth Schedule Part A  of the Income Tax Act 1961  The former question was the subject matter of Income Tax Reference No156 of 1969 made under s2561 of the Act while the latter was the subject matter of Income tax References Nos 398 399 and 400 of 1969 made under s2562 of the Act
These References were heard together and disposed of by the High Court by a common judgment and order dated February 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 3 Rule 2h 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 794 other allowances and perquisites b Circular No 6 dated January 16 1941 issued by the Central Board of Revenue under the Indian Income Tax Act 1922 but which has been continued under s297k 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 Ms Bridge  Roofs Co Ltd vs Union of India and Ors
to the effect that commission and other similar allowances are excluded from the definition of basic wages under the Provident Fund 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 employees 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 s40c iii of the Act and would not apply to s361iv
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 certificates granted by that Court under s261 of the Act
Counsel for the assessee raised a two fold contention in support of the appeals
In the first place he contended that once recognition was granted by the Commissioner of Income Tax to the Provident Fund maintained by the assessee under the relevant rules and such recognition was in force during the relevant assessment years the Taxing Authorities could not disallow the deductions claimed by interpreting the expression salary in Rule 2h of Part A of the Fourth Schedule to the Act so as to exclude the commission that was paid by the assessee to its salesmen for by doing so the Taxing Authorities would be sitting in judgment over the recognition granted and allowed to be retained by the Commissioner of Income Tax to the assessee
It was 795 pointed out that Rule 4 of Part A of the Fourth Schedule to the Act set out the conditions particularly the one contained in clc of the said rule that were required to be satisfied before recognition could be granted and in the instant case the Commissioner after having been satisfied that the said conditions had been fulfilled had granted recognition to the Provident Fund maintained by the assessee
In particular counsel placed reliance upon the correspondence which took place between the assessee and the Commissioner of Income Tax West Bengal during the course of which the Commissioner had by his letter dated September 9 1937 required the assessee to inform him of the basis on which the commission payable to the salesmen participating in the fund was computed with a view to seeing whether the commission would be includible in the definition of salary for purposes of Chapter IXA of the 1922 Act and the assessee had by its reply dated September 11 1937 stated that the commission was the monthly amount payable to the salesmen in accordance with their written contract and was based on a fixed term of rate and that it was after such correspondence that recognition was granted to the Provident Fund of the assessee and that the said recognition had continued and was in operation during the relevant assessment years
He therefore urged that it was not open to the Taxing Authorities to reach a conclusion that the Provident Fund of the assessee did not satisfy the condition laid down in Rule 4c of Part A of the Fourth Schedule to the Act during the relevant years nor was it open to them to disallow the deductions claimed under s36 1iv of the Act by interpreting the expression salary in Rule 2h in Part A of the Fourth Schedule to the Act as being exclusive of the commission of the nature and kind paid by the assessee to its salesmen
Secondly counsel contended that on a true and proper construction of the expression salary occurring in the said Rule 2h the commission of the nature and type paid by the assessee to its salesmen under the terms of their contract of employment would be included or covered by that expression
According to him commission in business practice covered various kinds of payments made under different circumstances and in the cases where a servant was employed by a businessman and as a condition of his employment it was agreed that he would be paid for his services at a fixed rate of percentage over the turnover it was clear that such commission payable to the employee will par take of the character of salary received by him for his services
the percentage basis being the measure of the salary in other words according to him there was no difference between the concept of salary and the concept of commission if the latter was of the aforesaid nature or kind and as such the expression salary in Rule 2 h would include such commission
In this behalf he relied upon a decision of the Allaha 796 bad High Court in the case of Raja Ram Kumar Bhargava vs Commissioner of Income Tax UP He urged that the decision of this Court in Ms Bridge  Roofs Co Ltd vs Union of Indian  Ors
supra on which the High Court has relied was inapplicable since it was a case under the Provident Fund Act 1952 and this Court was required to construe the term basic wages  appearing in that Act and in that context it observed that that term did not include any bonus commission or other similar allowances
He therefore urged that the Tribunal was right in allowing the deductions claimed by the assessee under s361iv of the Act
On the other hand counsel for the Revenue contended that notwithstanding the recognition accorded to the assessee s Provident Fund by the Commissioner of Income Tax the assessee had to satisfy the taxing authorities every year that the Provident Fund maintained by it satisfied the conditions of Rule 4 particularly the one contained in Rule 4c of Part A of the Fourth Schedule to the Act and if for any particular assessment year the assessee s Provident Fund failed to satisfy the condition in Rule 4c of Part A of the Fourth Schedule to the Act the assessee could not claim deduction under s361iv of the Act in respect of such portion of the contribution made by it to the Fund as was in breach of the said condition
Secondly he urged that by relying upon the fact of recognition obtained by it and the further fact that such recognition had remained in force during the relevant assessment years the assessee could not by pass the real question that arose for determination before the taxing authorities for the relevant assessment years namely whether the expression salary  as defined in Rule 2h of Part A of the Fourth Schedule to the Act included or excluded commission paid by the assessee to its salesmen and he urged that the definition of the expression salary  as given in the said Rule 2h clearly showed that the salary  did not include commission for according to him the definition merely included dearness allowance and excluded all other allowances and perquisites and commission payable by the assessee to its salesmen was nothing but an allowance paid without reference to any time factor which is associated with salary or wages as an important concomitant thereof
In this behalf reliance was also placed by him upon the Circular No6 dated January 16 1941 issued by the Central Board of Revenue under the 1922 Act and continued under s297k of the 1961 Act wherein on the question whether the term salary  as used in Chapter IXA of the old Act 797 included commissions and bonuses paid to the employees the Board expressed its view that unless commissions 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 Counsel further contended that in the matter of deductions claimable in respect of contributions to the Provident Fund the position of the employer could not be different from that of the employee and in regard to employee s contribution the condition required to be satisfied in Rule 4 b was to the effect that the contribution of an employee in any year shall be a definite proportion of his salary  for that year and shall be deducted by the employer from the employee s salary  in that proportion at each periodical payment of such salary in that year and credited to the employee s individual account in the Fund and under s80C read with Rule 7 of Part A of the Fourth Schedule to the Act the employee is entitled to a deduction in respect of his contribution which pertains to a definite proportion of the salary  which would not include commission
He therefore urged that the High Court was right in answering both the questions against the assessee and in favour of the Revenue
As stated at the outset in our view the main question raised in these appeals is whether the expression salary  as defined in Rule 2h of Part A of the Fourth Schedule to the Act includes commission payable by an assessee to his or its employees in terms of their contracts of employment  We shall therefore address ourselves to that question first and then deal with the aspect regarding the true impact of the recognition granted by the Commissioner of Income Tax under the relevant Rules to a Provident Fund maintained by an assessee
The expression salary  has been defined in section 17 of the Act as well as in Rule 2h of Part A of the Fourth Schedule to the Act but each of the said definitions serves a different purpose
Section 17 defines the expression salary  for purposes of sections 15 and 16 which deal with Salaries as a head of income and under cliv of sub s1 that expression includes any fees commissions perquisites or profits in lieu of or in addition to any salary or wages
 In Part A of the Fourth Schedule to the Act which contains rules relating to Recognised Provident Funds the word salary  has been defined in Rule 2h thus  Salary includes dearness allowance if the terms of employment so provide but excludes all other allowances and perquisites
 798 Since we are concerned in this case with contributions made to a recognised Provident Fund and deductions thereof under section 361 iv it will be the definition of salary  as given in Rule 2h of Part A of the Fourth Schedule to the Act and not the one given in section 17 that will be applicable and will have to be considered
Under section 361 iv the deduction allowable is in respect of any sum paid by the assessee as an employer by way of contribution towards a Recognised Provident Fund or an approved superannuation fund subject to such limits as may be prescribed for the purpose of recognising the Provident Fund or approving the superannuation fund as the case may be Rule 2c of Part A of the Fourth Schedule defines contribution as meaning any sum credited by or on behalf of any employee out of his salary or by an employer out of his own monies to the individual account of an employee but does not include any sum credited as interest Rule 4 of Part A of the Fourth Schedule lays down the conditions which are required to be satisfied by a Provident Fund in order that it may receive and retain recognition and the conditions in clsb and c are material and these conditions are 4b the contributions of an employee in any year shall be a definite proportion of his salary for that year and shall be deducted by the employer from the employee s salary in that proportion at each periodical payment of such salary in that year and credited to the employee s individual account in the fund c 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 and shall be credited to the employee s individual account at intervals not exceeding one year
 It may be stated that so far as the employer is concerned the contributions credited by him to the employee s individual account in the funds are deductible under section 361 iv whereas the contributions of an employee are deductible in the computation of his total income under s80C read with Rule 7 of Part A of the Fourth Schedule to the Act and the scheme of clsb and c of Rule 4 of Part A of the Fourth Schedule does suggest that in the matter of deductions claim 799 able in respect of contributions to the recognised Provident Fund the position of both the employer and the employee would be the same but since in the case of an employee his contributions are to be a definite proportion of his salary for a particular year the question whether such proportion would be inclusive of commission received by him from his employer must depend upon the true meaning or construction of the expression salary  as occurring in Rule 2h of Part A of the Fourth Schedule in other words in the matter of deductions claimable in respect of contributions to the Recognised Provident Fund qua both the employer and the employee the question has to be answered by reference to the true meaning of the expression salary  occurring in Rule 2h
Now Rule 2h of Part A of the Fourth Schedule does not define the expression salary  conceptually but merely proceeds to state what is included therein and what is excluded therefrom and therefore one is required to turn to the dictionary meaning of that expression as also to ascertain how judicial decisions have understood that expression
According to the Shorter Oxford English Dictionary 3rd Edn salary  means To recompense reward to pay for something done In Jowitt s Dictionary of English Law 1959 Edn the term is explained thus a recompense or consideration generally periodically made to a person for his service in another person s business also wages stipend or annual allowance In Stroud s Judicial Dictionary 4th Edn the expression salary  is explained at item 2 thus Where the engagement is for a period is permanent or substantially permanent in character and is for other than manual or relatively unskilled labour the remuneration is generally called a salary
Per Latham C J in Federal Commissioner of Taxation vs Thompson J Walter Aus Pty Ltd 69 CLR 227
It appears that conceptually salary  and wages  connote one and the same thing namely remuneration or payment for work done or services rendered but the former expression is generally used in connection with services of a higher or non manual type while the latter is used in connection with manual services
In Gordon vs Jennings Grover J observed as follows 800 Though this word wages might be said to include payment for any services yet in general the word salary  is used for payment or services of a higher class and wages  is confined to the earnings of labourers and artisans In Mohmedalli vs Union of India this Court while repelling the contention that the Employees  Provident Fund Act 1952 was intended by Parliament to apply to employees who were mere wage earners and not salaried servants has made observations clearly indicating that there is no difference between the two concepts of salary and wages
Chief Justice Sinha speaking for the Court observed in para 10 of the judgment as follows It is a little difficult to appreciate the distinction sought to be made
Both salary  and wages  are emoluments paid to an employee by way of recompense for his labour
Neither of the two terms is a term of art 
The Act has not defined wages it has only defined basic wages as all emoluments which are earned by an employee while on duty or on leave with wages in accordance with the terms of the contract of employment and which are paid or payable in cash to him  Salary  on the other hand is remuneration paid to an employee whose period of engagement is more or less permanent in character for other than manual or relatively unskilled labour
The distinction between skilled and unskilled labour itself is not very definite and it cannot be argued nor has it been argued that the remuneration for skilled labour is not wages 
The Act itself has not made any distinction between wages  and salary 
Both may be paid weekly fortnightly or monthly though remuneration for the day s work is not ordinarily termed salary 
Simply because wages for the month run into hundreds as they very often do now would not mean that the employees is not earning wages properly so called
A clerk in an office may earn much less than the monthly wages of a skilled labourer
Ordinarily he is said to earn his salary
But in principle there is no difference between the two
 It will thus appear clear that conceptually there is no difference between salary and wages both being a recompense for work done or 801 services rendered though ordinarily the former expression is used in connection with services of non manual type while the latter is used in connection with manual services
It is further common knowledge that this compensation to the labourer or artisan could be a specified sum for a given time of service or a fixed sum for a specified work ie payment made by the job the commonest example of the latter category being a piece rated worker
In other words the expression wages  does not imply that the compensation is to be determined solely upon the basis of time spent in service it may be determined by the work done it could be estimated in either way
If conceptually salary and wages mean one and the same thing then salary could take the form of payment by reference to the time factor or by the job done
In fact in the case of salary the recompense could be determined wholly on the basis of time spent on service or wholly by the work done or partly by the time spent in service and partly by the work done
In other words whatever be the basis on which such recompense is determined it would all be salary
Having reached the above conclusion we have to consider the nature of recompense that is being made by the assessee to its salesmen whether the whole of it partakes of the character of salary or not The definition of salary  in Rule 2h includes dearness allowance if the terms of employment so provide and excludes all other allowances and perquisites
It does not in terms exclude commission  as such and in our view rightly for though ordinarily according to the Shorter Oxford English Dictionary commission  means a pro rata remuneration for work done as agent  in business practice commission covers various kinds of payments made under different circumstances
In Raja Ram Kumar Bhargava vs Commissioner of Income Tax UP supra the Allahabad High Court has pointed out how in certain circumstances commission payable to an employee may in fact represent the salary receivable by him for the services rendered to the employer
At page 694 of the report the relevant observation run thus The word commission in business practice covers various kinds of payments made under different circumstances
There are cases where a servant is employed by a businessman and as a condition of his employment it is agreed prior to the services having been rendered that he would be paid for his services at a fixed rate of percentage of the turnover or profits
In such a case it is clear that the commission payable to the employee will in fact represent the salary to be drawn by him for his services
The payment on the percentage basis will only determine the measure of the salary
 802 It is thus clear that if under the terms of the contract of employment remuneration or recompense for the services rendered by the employee is determined at a fixed percentage of turnover achieved by him then such remuneration or recompense will partake of the character of salary the percentage basis being the measure of the salary and therefore such remuneration or recompense must fall within the expression salary  as defined in Rule 2h of Part A of the Fourth Schedule to the Act
In the instant case before us admittedly under their contracts of employment the assessee has been paying and did pay during the previous years relevant to the three assessment years to its salesmen in addition to the fixed monthly salary commission at a fixed percentage of the turnover achieved by each salesman the rate of percentage varying according to the class of article sold and the category to which each salesman belonged
The instant case is therefore an instance where the remuneration so recompense payable for the services rendered by the salesmen is determined partly by reference to the time spent in the service and partly by reference to the volume of work done
But it is clear that the entire remuneration so determined on both the basis clearly partakes of the character of salary
In our view therefore the commission paid by the assessee to its salesmen would clearly fall within the expression salary  as defined in Rule 2h of Part A of the Fourth Schedule to the Act and as such the three sums of Rs 95421  Rs 100564 and Rs 117969 representing proportionate contributions appertaining to the commission paid by the assessee to its salesmen would be deductible under section 361 iv of the Act
Turning to the Circular dated January 16 1941 issued by the Central Board of Revenue on which counsel for the Revenue has relied it cannot in our view affect the question of deductibility for if the commission paid by the assessee to its salesmen is covered by the expression salary  on its true construction which according to us it does the Board s view or instructions cannot detract from the legal position arising on such proper construction
In any case we are of the view that by the said Circular what the Board wants to keep out of the term salary  are payments by way of commission which do not partake of the character of salary
Similarly the decision of this Court in Ms Bridge  Roof Co s case supra on which the High Court has relied cannot avail the Revenue
In the first place it was a case under the Provident Fund Act 1952 where this Court was required to construe the expression basic wages  as defined in section 2b of that Act and to decide whether production bonus  was included in that expression and it was in that context that this Court made observations 803 to the effect that the said expression as defined therein did not include any bonus commission or other similar allowances
Secondly as against the definition of basic wages  in section 2b ii which excluded any dearness allowance house rent allowance over time allowance bonus commission or any other similar allowance section 6 of the Act provided for inclusion of dearness allowance for the purposes of contribution and therefore this Court was concerned with trying to discover some basis for the exclusion in cl
ii of section 2b as also for the inclusion of dearness allowance and retaining allowance if any in section 6 of that Act and the Court found that the basis for inclusion in section 6 and exclusion in cl
ii of section 2b was that whatever was payable in all concerns and was earned by all permanent employees was included for the purpose of contribution under section 6 but whatever was not payable by all concerns and was not earned by all employees of a concern was excluded for the purposes of contribution and that is why commission or similar allowances were excluded from the definition of basic wages  for commission and allowances were not necessarily to be found in all concerns nor were they necessarily earned by all the employees of the same concern
It is therefore clear that the ratio of the decision and the observations made by this Court in a different context in that case would be inapplicable to the facts of the present case
Having regard to the above discussion it is clear that the High Court s view on the first question is clearly unsustainable and that question must be answered in favour of the assessee and against the Revenue
Dealing next with the second question it seems to us clear that having regard to our view on the proper construction of the expression salary  occurring in Rule 2h of Part A of the Fourth Schedule to the Act it must be held that the Tribunal was right in holding that the Provident Fund maintained by the assessee satisfied the condition laid down in Rule 4c of Part A of the Fourth Schedule and that question also must be answered in favour of the assessee and against the Revenue However we would like to make some observations with regard to the true impact of the recognition granted by the Commissioner of Income Tax to a Provident Fund maintained by an assessee
The facts in the present case that need be stressed in this behalf are that it was as far back as 1937 that the Commissioner of Income tax had granted recognition to the Provident Fund maintained by the assessee under the relevant rules under 1922 Act that such recognition had been granted after the true nature of the commission payable by the 804 assessee to its salesmen under their contracts of employment had been brought to the notice of the Commissioner and that said recognition had continued to remain in operation during the relevant assessment years in question the last fact in particular clearly implied that the Provident Fund of the assessee did satisfy all the conditions laid down in Rule 4 of Part A of the Fourth Schedule to the Act even during the relevant assessment years
In that situation we do not think that it was open to the taxing authorities to question the recognition in any of the relevant years on the ground that the assessee s Provident Fund did not satisfy any particular condition mentioned in Rule 4
It would be conducive to judicial discipline and the maintaining of certainty and uniformity in administering the law that the taxing authorities should proceed on the basis that the recognition granted and available for any particular assessment year implies that the Provident Fund satisfies all the conditions under Rule 4 of Part A of the Fourth Schedule to the Act and not sit in judgment over it
There is ample power conferred upon the Commissioner under Rule 3 of Part A of the Fourth Schedule to withdraw at any time the recognition already granted if in his opinion the Provident Fund contravenes any of the conditions required to be satisfied for its recognition and if during assessment proceedings for any particular assessment year the taxing authority finds that the Provident Fund maintained by an assessee has contravened any of the conditions of recognition he may refer the question of withdrawal of recognition to the Commissioner but until the Commissioner acting under the powers reserved to him withdraws such recognition the taxing authority must proceed on the basis that the Provident Fund has satisfied all the requisite conditions for its recognition for that year any other course is bound to result in chaos and uncertainty which has to be avoided
Having regard to the above discussion both the questions are accordingly answered in favour of the assessee and the appeals are allowed with costs
PBR Appeal allowed


Summary:
The expression salary under section 171iv of the Income Tax Act 1961 includes any fees commissions perquisites or profits in lieu of or in addition to any salary or wages under r 2h in Part A of the Fourth Schedule to the Act which contains Rules relating to recognised Provident Funds the term salary  includes dearness allowance if the terms of employment so provide but excludes all other allowances and perquisites where an assessee as an employer has paid any sum by way of contribution towards a recognised provident fund section 361iv allows such sum as a deduction in computing the income subject to such limits as may be prescribed for the purpose of recognising the provident fund
The term contribution  is defined in r 2c of part A of the Fourth Schedule as any sum credited by or on behalf of any employee out of his salary or by an employer out of his own moneys to the individual account of an employee but does not include any sum credited as interest
The assessee maintained a provident fund which was recognised by the Commissioner of Income tax in 1937
Under r 2 of the Provident Fund Scheme Rules salary meant not only fixed monthly salary but also commission and dearness allowance as might be paid by the company to its employees
As a term of the contract of employment in addition to monthly salary the assessee paid to each of the salesmen commission at a fixed percentage of turnover achieved by them
The assessee s shares of the contribution to the provident fund was calculated on the basis of both salary as well as the commission paid to each of the salesmen
In respect of assessment years 1962 63 1963 64 and 1964 65 the assessee claimed the whole amount paid by it towards provident fund contributions as a deduction allowable under section 361iv of the Income tax Act and for this purpose it relied on r 2 of its Provident Fund Scheme Rules
Out of the total Provident Fund contributions claimed as allowable deduction under section 361iv the Income tax Officer disallowed that part of the assessee s contribution which related to the amounts calculated on the basis of commission paid to the salesmen on the ground that under r 2h of Part A of the Fourth Schedule the expression salary did not include commission paid to the employees
789 The assessee s appeal in respect of the assessment year 1962 63 was rejected by an Appellate Assistant Commissioner but in respect of the other two assessment years another Appellate Assistant Commissioner allowed its appeals
On further appeals both by the assessee and the Department the Appellate Tribunal held that the commission paid being a part of the contractual obligation it was a part of the salary paid to the employees and therefore contributions made towards provident fund on the commission were allowable as a deduction under section 361iv of the Act and secondly since the provident fund was a recognised fund which fulfilled the conditions laid down in r 4c of Part A of the Fourth Schedule the employer s contributions were entitled to be deducted
The High Court answered the reference in favour of the Department
It held that since commission unlike salary was not a fixed monthly payment it could not be included within the meaning of salary and that the meaning of the term salary could not be extended by the assessee by defining it in a particular manner in its provident fund scheme rules for the purpose of recognition of its fund
The High Court relied upon a circular dated January 16 1941 issued by the Central Board of Revenue which provided that unless commission and bonuses were fixed periodical payments not dependent on a contingency they were not covered by the term salary
On further appeal to this Court it was contended on behalf of the Revenue that the definition of salary in r 2h clearly showed that it did not include commission and since commission was nothing but an allowance paid without reference to any time factor which is associated with salary or wages it is not deductible under section 361 iv
Allowing the assessee appeals  HELD  The commission paid by the assessee to its salesmen would clearly fall within the expression salary as defined in r 2h of Part A of the Fourth Schedule to the Act and the amounts representing proportionate provident fund contributions made by the assessee to its salesmen would be deductible under section 361iv of the Act
802 E 1a The expression salary has been defined in section 17 as well as in r 2h of Part A of the Fourth Schedule
But each of the definitions serves a different purpose
Since this case is concerned with contributions made to a recognised provident fund and deductions thereof under section 361iv it would be the definition of salary as given in r 2h of Part A of the Fourth Schedule and not the one given in section 17 that will be applicable
A B b Conceptually salary and wages connote one and the samething viz remuneration or
payment for work done or services rendered
The former expression is generally used in connection with services of higher or non manual type while the latter is used in connection with manual services
If conceptually salary and wages mean one and the same thing then salary could take the form of payment by reference to the time factor or by the job done
In the case of salary the recompense could be determined wholly on the basis of time spent on service or wholly by the work done or partly by the time spent on service and partly by the work done
In other words whatever be the basis on which such recompense is determined it would all be salary
799 G 801C 790 Gordon vs Jennings  Mohmedalli vs Union of India AIR 1964 SC 980 referred to
c The definition of salary in r 2h includes dearness allowance if the terms of employment so provide and excludes all other allowances and perquisites
It does not in terms exclude commission
But though the dictionary meaning of the term commission is a pro rata remuneration for work done as agent in business practice commission covers various kinds of payments made under different circumstances
801 E d If under the terms of the contract of employment remuneration or recompense for the services rendered by the employee is determined at a fixed percentage of turnover achieved by him then such remuneration or recompense will partake of the character of salary the percentage basis being the measure of the salary
Therefore such remuneration or recompense must fall within the expression salary as defined in r 2h
802 A In the instant case under the term of the contract of employment the assessee had been paying to the salesmen in addition to the fixed monthly salary
commission at a fixed percentage of the turnover
It is therefore a case where remuneration or recompense payable for the services rendered by the salesman is determined partly by reference to the time spent in the service and partly by reference to the volume of work done
The entire remuneration so determined on both the bases clearly partakes of the character of salary
802 C D e The Circular dated January 16 1941 issued by the Central Board of Revenue did not affect the question of deductibility because if the commission paid by the assessee to its salesmen was covered by the expression salary on its true construction the Board s view or instructions could not detract from the legal position arising on such construction
What the Board by the said circular wanted to keep out of the term salary were payments by way of commissions which did not partake of the character of salary
802 F G Bridge  Roofs Co Ltd vs Union of India  Ors  at p 1477 held inapplicable
2a The Tribunal was right in its view that the provident fund maintained by the assessee satisfied the condition laid down in r 4c of Part A of the Fourth Schedule
803 G
b After taking into account the true nature of the commission payable by the assessee to its salesmen under the terms of the employment the Commissioner granted recognition to the provident fund as far back as 1937 and that recognition continued to remain in operation during the relevant assessment years
The provident fund clearly satisfied all the conditions laid down in r 4 of Part A of the Fourth Schedule
It was therefore not open to the Taxing Authorities to question the recognition on the ground that the assessee s provident fund did not satisfy any particular condition mentioned in r 4
For the sake of certainty and uniformity in administering the law the Taxing Authorities should proceed on the basis that the recognition granted and available for any particular assessment year implied that the provident fund satisfied all the conditions in that rule
Under r 3 the Commissioner had ample power to withdraw at any time the recognition already granted if the provident fund contravened any of the conditions required to be satisfied for its recognition
791 But until the Commissioner withdrew such recognition the Taxing Authorities must proceed on the basis that the provident fund satisfied all the requisite conditions for its recognition for that year
Any other course would result in uncertainty
803 H 804 F