Case: Gestetner Duplicators Private Limited Vs. Commissioner of Income Tax, West Bengal

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 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 companys 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. 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 assessees 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 Strouds Judicial Dictionary and upon the manner in which the term was defined in Rule 2 of the assessees 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 t hat the definition of the expression "salary" as given in Rule 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 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 s.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 Rule 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 assessees 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. 95, 421/-, Rs. 1, 00, 564/- and Rs. 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 section 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 Rule 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 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. I n doing so the High Court principally relied upon (3) 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 January 16, 1941 issued by the Central Board of Revenue under the Indian Income Tax Act, 1922 but which has been continued under s.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 M/s Bridge &Roofs Co. Ltd. v. 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 a s 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 s.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 Courts 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 s.261 of the Act

Court's reasoning:
It will thus appear clear that conceptually there is no difference between salary and wages both being a recompense for work done or 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 i.e. 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 mea n 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 2(h) 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.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 2(h) 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 partake s 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 2(h) of Part A of the Fourth Schedule to the Act and as such the three sums of Rs. 95, 421/-, Rs. 1, 00, 564/- and Rs. 1, 17, 969/- representing proportionate contributions appertaining to the commission paid by the assessee to its salesmen would be deductible under s. 36(1) (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 Boards 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 M/s. 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 s. 2(b) 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 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 s. 2(b) (ii) which excluded any dearness allowance, house rent allowance, over-time allowance, bonus, commission or any other similar allowance, s. 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 s. 2(b) as also for the inclusion of dearness allowance and retaining allow ance (if any) in s. 6 of that Act and the Court found that the basis for inclusion in s. 6 and exclusion in cl. (ii) of s. 2(b) was that whatever was payable in all concerns and was earned by all permanent employees was included for the purpose of contribution under s. 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 th e 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 Courts view on the first question is clearly unsustainable and that question must be answered in favour of the assessee and against the RevenueDealing 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 2(h) 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 4(c) 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 assessee to its salesmen under their contracts of employment had been brought to t he 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 t he ground that the assessees 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 condition s 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 Fun d 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.