GESTETNER DUPLICATORS (PVT.) LTD v. COMMISSIONER OF INCOME-TAX, WEST BENGAL

other allowances and perquisites, (b) Circular No. 6 dated January 16r 1941 issued by the Central Board of Revenue under the Indian Income Tax A,ct, 1922 but which has been continued under 11.297 (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 Mis 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 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· ?Ssessee 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 the· than as a benefit or perquisite" could not be availed of because same was not in ·existence during the relevant years and further 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 Court's view on both the questions is challenged by the asscssee in the instant appeals pre ferred on the strength of the certificates granted by that Court under s.261 of the Act. Counsel for the assessee raised a two-fold contention in support of In the first place he contended that once recognition was: the appeals. granted by the Commissioner of Income-Tax to the Provident Fund maintained by the assessee under the relevant rules and such recogni tion was in force during the relevant assessment years, the Taxing Authorities could not disallow the deductions claimed by interpreting the expression "salary" in Rule 2(h) of Part A of the Fourth Schedule to the Act so as to exclude the "commission" thaJ: was paid by 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 G H (1) AIR 1963 S.C. 1474 at p. 1477. ' • • • • • • GESTETNER DUPLICATORS v. C,.!.T. (Tulzapurkar, l.) 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 cl. ( c) 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 recogni In particular, tion to the Provident Fund maintained by the assessee. counsel placed reliance upon the correspondence which took place bet ween 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, 193 7 stated that the commission was the· monthly amount payable the salesmen in accordance with their written contract and was based 011 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 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 Ruic 4 ( c) 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 ,.36 (1 )(iv) of the Act by interpreting the expression "salary" in Rule 2(h) in Part A of the Fourth Schedule to the Act as being exclusive of the commission of the nature and kind paid by salesmen. Secondly, counsel contended that on a true and proper construction of the expression "salary occurring in the said Ruic 2(h) the commission of the nature and type paid by the assessee to its sales men under the terms of their contract of employment would be includ ed or covered by that expression. Aq:ording 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 wa11 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·bim for his services. the percentage basis being tho measure of the salary; in other words, according to him, there was no difl'erenee 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 ~lary in Rule 2 (h) would include .such commi~ion. In this behalf ho rolled upon a decision of the A!laha- the asse8see A B c D F G H A B c D E F G H 796 SUPREME COURT REl'ORTS [1979] 2 s.c.R. bad High Court in the case of Raja Ram Kumar Bhargava v. Commis sioner of lncome Tax, U.P.(') He urged that the decision of this Court in M/s Bridge & Roofs Co. Ltd. v. Union of lndian & Ors. (supra) on which the, High Court has relied was inapplicable since 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 iii 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 s.36(l)(iv) of the Act. On the other hand, counsel for the Revenue contended that notwith standing 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 4(c) 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 con dition in Rule 4(c) of Part A of the Fourth Schedule to the Act the assessee could not claim deduction under s.36(l)(iv) 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 rely ing 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 2(h) of Part A of the Fourth Schedule to the Act included or excluded com mission paid by the assessee to its salesmen and he urged that definition of th~ expression 'salary' as given in the said Rule 2 (h) clearly showed that the 'salary' did not include commission, for, accor ding to him, the definition merely included dearness allowance and excluded all other allowances and perquisites and commission payabl<; 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 No.6 dated January 16, 1941 issued by the Central Board of Revenue under the 1922 Act and continued under s.297(k) of the 1961 Act wherein on the question whether the term 'salary' as .used in Chapter IXA (of the. old Aet) (I) (1963) 47 I.T.R. 689. • ... > • , • • • • • GESTETNER DUPLICATORS v. c.I.T. (Tulzapurkar, !.) -included commissions and bonuses paid to the employees, the Board ·expressed its view that "unless commissions and bonuses are periodical payments not dependent on a contingency they are not -cove; red by the term 'salary' as w;ed 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 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,J~e employer from the employee's 'salary' in proportion at each periodical payment of such salary in that year, and credited to the employee's individual account in the Fund and under s.80C 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 Conrt was right in ans, wering both the questions against the a§sessee and in favour D -of the Revenue. B c As stated at the outset, in our view, the main question raised these ap!'!'als is whether the expression 'salary' as defined in Rule 2(h) of Part A of the- FogrJh Schedule the Act includes commission payable by an assessee to his or its employees in terms of their con tracts 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 s. 17 of the Act as well as in Rule 2(h) of Part A of the Fourth Schedule to the Act but each of the said definitions serves a different purpose. Secti.on 17 defines the expression 'salary' for purposes of ss. 15 and 16 which deal with "Salaries" as a head of income, and under cl.(iv) of sub-s.(1) 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 'salary' has been relating to Recognised Prmlident Fu_nds the word .defined in Rule 2(h) thus : "Salary" includes dearness allowance, if terms of employment so provide, but excludes all other allowances and perquisites." E F G H ' ' -;. J A B c D B F G H 798 SUPREME COURT REPORTS [1979] 2 s.c.R. Since wo are concerned in this case with contributions made to a. recognised Provident Fund and deductions thereof under s. 36(1) (iv) it will be the definition of 'salary' as given in Rule 2 (h) of Part A of the Fourth Schedule to the Act and not the one given in s. 1 7 that will be applicable and will have to be considered. Under s. 36(1) (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 2(c) of Part A of the Fourth Schedule defines contribu tion" 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 Jays down the conditions-. which aro required to be satisfied by a Provident Fund in order that it may receive and retain recognition and the conditions in els. (b), and (c) are material and these conditions are: "4(b) the contributions of an employee in any year shaU 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 in any year shall not exceed aocount of an employee 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 rontributions credited by him to the employee's ipdividual account in the funds are deductible under s. 36( I) (iv) whereas the contributions. of an employee are deductible in the computation of his total income· under s.80C read with Rule 7 of Part A of the Fourth Schedule to the Act and the scheme of els. (b) and ( c) of Rule 4 of Part A of the Fourth Schedule does suggoi;t that in the matter of deductions claim-- GESTETNER DUPLICATORS v. C.J.T. (Tulzapurkar, !.) 7 99 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 the question definite proportion of his salary for a particular year, whether such proportion would be inclusive of commission received by him from. his employer must depend upon the true meaning or cons· trnction of the expression 'salary' as occurring in Rule 2(h) of Part A of the Fourth Schedule; iu 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 2(h). Now, Rule 2(h) 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 >Omething 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 bi's service in another person's business; also wages, stipend or annual allowance." Jn Stroud's 'salary' is explained at item (2) thus : Judicial Dictionary (4th Edn.) expression "Where the ell!lllgement 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 Fedual Commissioner of Taxation v. Thompson (J. Walter) (Aui.) Ply. Ltd. 69 C.L.R. 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 con· nection with servi<:ei of a higher or non-manual type while the latter is used in connection with manual services. In Gordon v.·Jennings(') Grover' if. observed as follows : 0) 51 LJ.B. 417. B c D E G R > • • • A 8 c D E F G 800 SUPREME COURT REP OR TS [1979] 2 S.C.R. "Though this word (wages) might be said to include pay ment 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 v. Union oif India(') this Court, while contention that the Employees' Provident Fund Act 1952 was inten ded by Parliament to apply to employees who were mere wage earners indicating and not salaried servants, has made observations clearly 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 : repelling ' .. ' relatively unskilled "It is a little difficult to appreciate the distinction sought Both 'salary' and 'wages' are emoluments to be made•. 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" 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 re- muneration paid to an employee whose period of engage ment is more or less permanent in character, for other than manual or labour. The distinction between skilled and unskilled labour itself is not very definite and it cannot be argued, nor has it been argued, remuneration for skilled labour '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 prindple, there is no difference between the two." is not ) • • • • H It will thus appear clear that CQnceptually there is no difference bet ween salary and wages both being a recompense for work done or (l) AIR 1964 SC 980 , I \ • • GESTETNER DUPLICATORS v. C.l.T. (Tulzapurkar, !.) 801 ~ It 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. is further common know ledge 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 In other words, the ex latter category being a piece-rated worker. pression 'wages' does not imply that the compensation is to be deter mined solely upon the basis of time spent in service; it may be deter mined 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 In fact, in the case of salary the recompense or by the job done. 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 In other words, whatever be the basis on partly by the work done. which such recompense is determined it would all be salary. Having reached the above conclusion, we have to consider nature of recompense that is being made by the assessee to its sales men, whether the whole of it partakes of the character of salary or not? The definition of 'salary' in Rule 2(h) includes dearness allow ance 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 v. Commissioner of Income-Tax, U.P. (supra) the Allahabad High Court has pointed out how in certain circumstances commission payable to an employee may, in fact, repre sent the salary receivable by him for the services rendered to the em ployer. At page 694 of the report the relevant observation run thus "The word "commis-sion", in business practice, covers various kinds of payments made under different circums tances. There are cases where a servant is employed by a businessman and, as a condi"tion of his employment, agreed prior to the services having been rendered that he would be paid for his services at a fixed rate of percentage In such a case, it is clear that of the turnover or profits. the commissi~n payable to the employee will, in fact, repre sent the salary to be drawn by him for his services. The pay ment on the percentage basis will only determine the measure of the salary." A B c D E F G H A B c D E F G ; H 802 SUPREME COURT REP OR TS [1979] 2 S.C.R. 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 th~ 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 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 or recompense payable for the services ren dered 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 asscssee 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. 95,4211-, Rs. 1,00,564/- and Rs. 1,17,969/- representing pro portionate 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 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 In any case we are of position arising on such proper constrnction. 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 Mis. Bridge & Roof Co.'s case (supra) on which the High Court In the first place it was a case has relied cannot avail the Revenue. 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 , • • ' . " GESTETNER DUPLICATORS v. C.I.T. (Tulzapurkar, l.) 803 B to the effect that the said expression as defined therein di\i,.n9! include A .any bonus, commission or other similar allowances. ~µdly, as against the definition of 'basic wages' in s. 2(b) (ii) whi~h, eJ[cluded carry dearness allowance, house rent allowance, over-time ,a,l)owance, bonus, commission or any other similar allowance, s. 6, qf the Act provided for inclusion of dearness allowance for the purposes of con ·tribution and, therefore, this Court was concerned with tryil\g to dis- ·cover some basis for the exclusion in cl. (ii) of s. 2 (b) as also for ~he inclusion of dearness allowance and retaining allowance (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 .vas 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 e:<cluded from the. defini tion of 'basic wages', for commission and allowances were not neces sarily to be found in all concerns nor were they necessarily earned by call 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 cas~. c D Having regard to the above discussion it is clear that the High ·Court's view on the first question is clearly unsustainable and •question must be answered in favour of the assessee and against the ·Revenue. \ E • • Dealing next with the second question it seems to us clear '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 Reve ·nue 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 193 7 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 F G H 804 SUPREME COURT REPORTS [1979] 2 s.c.R .. A B c D E F assessee to its salesmen nuder 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 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 Sche dule to the. Act and not sit in judgment over it. There is ample pawer conferred upon the Commissioner under Rule 3 of Part A of Fourth Schedule to withdraw at any time the recognition already gran ted if, in his opinion, the Provident Fund contravenes any of if during conditions required to be satisfied for its recognition and asses.ment 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 sat)ified all the requisite conditions 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_ favour of the assessee and the appeals are accordingly answered in allowed with costs . • P.B.R. Appeal allowed .. • .. , j •