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Veljan Hydrair (P). Ltd. Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Hyderabad
Decided On
Judge
Reported in(1985)14ITD409(Hyd.)
AppellantVeljan Hydrair (P). Ltd.
Respondentincome-tax Officer
Excerpt:
.....recognised. the learned departmental representative brought to our notice the employees' provident fund rules. chapter iii in those rules deal with membership to the fund. in paragraph no. 11(1), inter alia, it is provided that the board on the recommendation of the company may at its discretion admit an employee whose monthly salary exceeds rs. 1,600 as a member of the fund and thereupon such admission of such member is governed by these rules. rule 14 prescribes the rate of contribution to be made by the employee. the rate of contribution made by the employee is equal to the contribution of the employer. rule 15 speaks of voluntary contribution. each month a further sum not exceeding one-fifth of his salary and this contribution shall be deducted in the same manner as laid down in rule.....
Judgment:
1. This is an assessee's appeal. The point involved, though short, is interesting. The assessee is Veljan Hydrair (P.) Ltd., Hyderabad.

Admittedly, one Shri Janardhana Rao is the managing director of the said company. He had contributed Rs. 3,680 whereas his employer, the assessee, contributed Rs. 3,632 to the provident fund. Admittedly, the contribution is to a scheme formulated under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952. The total of the employer and employee's contributions came to Rs. 7,312. The ITO held firstly, that Shri Janardhana Rao, managing director of the assessee-company, owns shares in the company with a voting power exceeding 10 per cent of the total shareholding. He also held that it is a case where the contribution should be limited to the permissible sums mentioned in Rule 75 of the Income-tax Rules, 1962 ('the Rules'). Therefore, the ITO held that the permissible limit was only Rs. 3,000 and he had disallowed a sum of Rs. 3,632 which is found to be in excess under Rule 75. On appeal, it is contended that Rule 75 does not apply to this case as the contributions are made to the scheme formulated under Employees' Provident Funds and Miscellaneous Provisions Act and not to any provident fund mentioned in Part A of the Fourth Schedule to the Income-tax Act, 1961 ('the Act'). It is further contended that Shri Janardhana Rao contributed to the provident fund in his individual capacity, whereas he held shares in the capacity of the karta of his HUF. In such circumstances, as there is difference among 'person' who contributed to the provident fund and the 'person' holding the shares, even the requirements of Rule 75 are not fulfilled to justify any disallowance, out of the total of the contributions made by the employer as well as the employee to the provident fund. Therefore, the addition of Rs. 3,632 to the returned income of the assessee is unjustifiable and cannot be sustained. The assessee sought to rely upon the decision of a Bench of the Tribunal in v. & J. De Chane Laboratories (P.) Ltd. v. ITO [IT Appeal Nos. 1466 to 1468 (Hyd.) of 1982, dated 17-8-1983]. It is contended for the assessee-company that Rule 75 will apply only to recognise the provident fund coming under the Fourth Schedule and not to the statutory provident fund like Employees' Provident Funds and Miscellaneous Provisions Act. The learned Commissioner (Appeals) did not agree with the arguments advanced on behalf of the assessee. Firstly, he held that no distinction can be recognised regarding the shareholding in one's individual capacity and one s holding in a representative capacity on behalf of the joint family. He also held that it is incorrect to hold that Rule 75 will not apply to the contributions made to a statutory provident fund like the Employees' Provident Funds and Miscellaneous Provisions Act. The learned Commissioner (Appeals) concedes that no doubt as per Rule 1 of Part A of the Fourth Schedule will not apply to a provident fund governed by the Provident Funds Act, 1925. As a consequence Rule 15(1)(ii) of Part A of the Fourth Schedule does not govern the cases coming under the Provident Funds Act. He held that Rule 75 was framed not only in the context of Rule 15(1)(i) of Part A of the Fourth Schedule but was framed mainly in the context of Section 36(1)(iv) of the Act, whereby any contribution made by an employer to a recognised provident fund is admissible 'subject to such limits as may be prescribed'. According to him, the limits are prescribed under rules 75, 87 and 88 of the Rules read with Section 2(38) of the Act. He further held that the term 'recognised provident fund' employed in Section 36(1)iv) would include a provident fund established under a scheme framed under the Employees' Provident Funds and Miscellaneous Provisions Act. He ultimately held that Rule 75 would apply to the employer's contribution in view of Section 36(1)(iv), read with Section 2(38). The learned Commissioner (Appeals) was further of the view that the Rule 75 puts ceiling limit of Rs. 250 per month in respect of contributions made by the employer as well as the employees. Therefore, it can reasonably be presumed that the ceiling limit for contribution by each of employer will be Rs. 125 per month or Rs. 1,500 per annum.

In fact, this was the view taken by this Tribunal Bench 'A' as per its order in Indocean Engineers (P.) Ltd. [IT Appeal No. 1133 (Hyd.) of 1981-82, dated 22-12-1982]. He ultimately held that the ITO erred in considering the contributions made by the employer as well as employee together for the purpose of applying the ceiling limit. Since only the contribution made by the employer would be relevant for purposes of application of Section 36(1)(iv), only the employee's contribution of Rs. 3,652 will have to be taken into account. He held that out of it only Rs. 1,500 is admissible and Rs. 2,132 is to be disallowed. The disallowance was reduced from Rs. 3,632 to Rs. 2,132 by the learned Commissioner (Appeals). Thus, he allowed the appeal filed before him in part.

2. Further, aggrieved by the order of the learned Commissioner (Appeals) dated 27-4-1984, the assessee came up in second appeal to this Tribunal and, thus, the matter stands for our consideration. We have heard Shri G. Rajagopala Rao, the learned counsel for the assessee, and Shri P. Radhakrishnamurthy, the learned departmental representative. Firstly, it is argued by Shri G. Rajagopala Rao that assuming without admitting Rule 75 governs the case. Rule 75(1) which is the concerned rule for our purposes reads as follows : (1) Where an employee of a company owns shares in the company with a voting power exceeding ten per cent of the whole of such power, the sum of the contributions of the employee and employer to the recognised provident fund maintained by the company shall not exceed Rs. 250 in any month.

So before applying the said rule, the employee should have shares in the employer company with a voting power exceeding 10 per cent of whole of such power. A fair reading of the rule would disclose that the ceiling under that rule would apply if only the employee whose contributions to the 'recognised provident fund' would be the same 'person' holding shares of more than 10 per cent of the total shareholdings. Now in this case, the total shares are 9,100. The managing director in his individual capacity held 293 shares, whereas, as a karta of his HUF he held 1,052 shares. In order to buttress his contention that Shri Janardhana Rao was holding only 293 shares in his individual capacity, the learned counsel for the assessee filed the assessment order in the individual case of Shri Janardhana Rao which is dated 27-3-1982. In the statement of the total income accompanying his return, he had shown his dividend income derived from 293 shares at Rs. 2,917.50 which was accepted in the assessment. Further, when the same contention was put forward before the learned Commissioner (Appeals) he did not express any doubt about the truth of the contention but he held that no distinction need be drawn regarding the individual holding and the shareholding held by the joint family for the purposes of applying Rule 75. The decision of the learned Commissioner (Appeals) in this regard is bereft of any authority. Neither any section nor rule was discussed nor any authority was considered before coming to such a conclusion. In our opinion, this conclusion of the learned Commissioner (Appeals) cannot be justified under law. Under Section 2(31), there are seven categories of persons coming under the definition of 'person'. In the said definition, 'individual' and a 'HUF' were mentioned separately as two out of the seven categories coming under the definition of 'person'. The charging section, namely, Section 4 of the Act expects income-tax to be levied in respect of the total income of the previous year or previous years of every person. In view of the above, it is very difficult to appreciate the decision of the learned Commissioner (Appeals) that no distinction need be drawn between the shareholding of the HUF and the individual shareholding for purposes of Rule 75.

Therefore, we are of the opinion that Rule 75 applies in such case where the employee of the employer company holds more than 10 per cent of total shareholding. If the individual shareholding of the employee falls short of 10 per cent holding, then the said rule does not apply.

For purpose of calculating the individual shareholding the fact that the employee holds some of the shareholdings in a representative capacity either as a karta of his HUF or a partner of a firm, etc., should be ignored and such a shareholding in a representative capacity should not be clubbed or aggregated with the individual shareholding.

Therefore, on this point, we reverse the finding of the learned Commissioner (Appeals).

3. Now let us come to the question whether Rule 75 applies to the scheme provided under Employees' Provident Funds and Miscellaneous Provisions Act and the contributions made under that scheme both by the employer and the employee. Section 2(38) defines 'recognised provident fund'. Two kinds of provident funds come under the definition. The first is the one governed by rules contained in Part A of the Fourth Schedule, i.e., 'Recognised Provident Fund', which is hereinafter called as the 'Scheduled Provident Fund'. The second is a provident fund maintained under a scheme framed under the Employees' Provident Funds and Miscellaneous Provision Act. Certain rules are framed and are to be satisfied before the 'Scheduled Provident Funds' are recognised and continued to be recognised by the Commissioner (Appeals). The question is whether the set of rules meant to govern the 'Scheduled Provident Funds' apply to the provident funds maintained under the Employees' Provident Funds and Miscellaneous Provisions Act both of which come under the definition of 'Recognised Provident Fund'. On a common sense point even a layman can say that the rules meant to govern 'Schedule Provident Funds' do not govern the provident funds under the Employees' Provident Funds and Miscellaneous Provisions Act for the simple reason that if both kinds are governed by the same set of rules why the provident funds maintained under the Employees' Provident Funds and Miscellaneous Provisions Act should be made to govern by the provisions of that Act and for what earthly purpose the Employees' Provident Funds and Miscellaneous Provisions was enacted at all. So, it is apparent that the two kinds of provident funds referred to above are governed by two different set of rules and provisions. For instance, recognition and continuation of recognition by the Commissioner for 'Schedule Provident Fund' is essential to fulfil the definition of a 'recognised provident fund'. So in the case of 'Schedule Provident Fund' it should not only be recognised at the inception but it should continue to be recognised during the relevant accounting year. However, in the case of a scheme under the Employees' Provident Funds and Miscellaneous Provisions Act, no recognition by the Commissioner is necessary. Further, neither in the definition given in Section 2(38) nor in Part A of the Fourth Schedule, it is stated that rules and conditions contained in Part A of the Fourth Schedule apply to the schemes framed under the Employees' Provident Funds and Miscellaneous Provisions Act Also Section 10(1) of the Employees' Provident Funds and Miscellaneous Provisions Act states that the amount standing to the credit of any member in the fund shall not in anyway be capable of being assigned or charged and shall not be liable to attachment under any decree or order of any Court in respect of any debt or liability incurred by the member and neither official assignee appointed under the Presidency Towns Insolvency Act, 1909, nor any receiver, appointed under the Provincial Insolvency Act, 1920, shall be entitled to, or have any claim on, any such amount. Sub-section (2) of the same section is as follows : (2) Any amount standing to the credit of a member in the Fund or of an exempted employee in a provident fund at the time of his death and payable to his nominee under the scheme or the rules of the provident fund shall, subject to any deduction authorised by the said scheme or rule, vest in the nominee and shall be free from any debt or other liability incurred by the deceased or the nominee before the death of the member or of the exempted employee.

However, this privilege or protection afforded to the employee under the above provisions do not appear to have been provided to an employee contributing to the 'Scheduled Provident Fund'. The learned departmental representative brought to our notice that Section 9 of the Employees' Provident Funds and Miscellaneous Provisions Act is as follows : For the purpose of the Indian Income-tax Act, 1922, the Fund shall be deemed to be a recognised Provident Fund within the meaning of Chapter IX-A of this Act: The provident fund under Employees' Provident Funds and Miscellaneous Provisions Act shall vest in the Central Board constituted under Section 5A of the Employees' Provident Funds and Miscellaneous Provisions Act and the scheme framed under the said Act should provide all or any of the matters provided in the Second Schedule to the said Act. The scheme under the Employees' Provident Funds and Miscellaneous Provisions Act contemplates contributions from the employees employed by regular employers as well as contractors also. So the provisions under the Second Schedule should be observed or fulfilled in the case of the Employees' Provident Funds and Miscellaneous Provisions Act whereas the provisions of Part A of the Fourth Schedule would govern 'the Scheduled Provident Fund'. There are clear indications under the provisions of the 1961 Act themselves that the two kinds should be treated differently even for tax purposes. For instance, Section 17(1)(vi) and (vii) of the Act deal with 'Scheduled Provident Funds' but they do not concern themselves to the provident funds falling under the Employees' Provident Funds and Miscellaneous Provisions Act which are as follows: (vi) the annual accretion to the balance at the credit of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax under Rule 6 of Part A of the Fourth Schedule ; and (vii) the aggregate of all sums that are comprised in the transferred balance as referred to in Sub-rule (2) of Rule 11 of Part A of the Fourth Schedule of an employee participating in a recognised provident fund, to the extent to which it is chargeable to tax under Sub-rule (4) thereof; Therefore, we are of the opinion that the rules governing 'Scheduled Provident Funds' in Part A of the Fourth Schedule do not govern the Provident Funds maintained under the Employees' Provident Funds and Miscellaneous Provisions Act. The learned Commissioner (Appeals) gave another finding that Rule 75 was not only framed in pursuance of Rule 15(1)(vi) of Part A of the Fourth Schedule but also intended to cover the provisions of Section 36(1)(iv). We feel that this finding is of doubtful veracity. Section 36(1 )(iv) is as follows : (1) The deductions provided in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28 : (iv) 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; and subject to such conditions as the Board may think fit to specify in cases where the contributions are not in the nature of annual contributions of fixed amounts or annual contributions fixed on some definite basis by reference to the income chargeable under the head 'Salaries' or to the contributions or to the number of members of the fund; So the above provisions disclose that limits are expected to be prescribed for the purpose of recognising the provident fund. The question of recognition does not arise as already discussed above to the provident funds maintained under the Employees' Provident Funds and Miscellaneous Provisions Act but such recognition is essential only for 'Scheduled Provident Funds'. Therefore, in our opinion, assuming that Rule 75 is meant to govern the prescribed limits under Section 36(1)(iv) does not conclude the matter either way or does not help determine the real controversy in the matter. We have to determine for which category of the provident funds, the limits mentioned in Section 36(1)(iv) are intended. In our considered opinion, the prescribed limits under Section 36(1)(iv) are limited for the purpose of recognising the provident fund. When once the provident fund was recognised, the purpose of the limits contemplated under Section 36(1)(iv) was over. In this view the limits set out in Rule 75 cannot be said to be the limits under Section 36(1)(iv) after provident fund was already recognised. The learned departmental representative brought to our notice the Employees' Provident Fund Rules. Chapter III in those rules deal with membership to the fund. In paragraph No. 11(1), inter alia, it is provided that the Board on the recommendation of the company may at its discretion admit an employee whose monthly salary exceeds Rs. 1,600 as a member of the fund and thereupon such admission of such member is governed by these rules. Rule 14 prescribes the rate of contribution to be made by the employee. The rate of contribution made by the employee is equal to the contribution of the employer. Rule 15 speaks of voluntary contribution. Each month a further sum not exceeding one-fifth of his salary and this contribution shall be deducted in the same manner as laid down in Rule 14(3) for deduction of the member's contribution and the amount deducted and retained as aforesaid will be dealt with as prescribed in the said rule. Shri Radhakrishnamurthy, the learned departmental representative, submitted that the Employees' Provident Funds and Miscellaneous Provisions Act would govern only the case of employees drawing less than Rs. 1,600 per month as salary and it is only at the discretion of the employer, the provisions of that Act and Employees' Provident Fund Rules would be made applicable to officers drawing more than Rs. 1,600 per month as emolument, it is only by concession that the provisions of the Employees' Provident Funds and Miscellaneous Provisions Act are made applicable to him arid, therefore, in his case the scheme of contribution under the Employees' Provident Funds and Miscellaneous Provisions Act is made applicable by way of understanding and so the provisions of the Employees' Provident Funds and Miscellaneous Provisions Act do not apply to him strictly. It is also stated that the accounts of the employers who are contributing to the provident fund under the Employees' Provident Funds and Miscellaneous Provisions Act, while drawing Rs. 1,600 per month would be maintained separately. We are not impressed with this argument nor does it lead us anywhere. Rule 11(1) of Provident Fund Rules is self explanatory and runs counter to the argument of the learned departmental representative.

4. Now let us consider the famous case of Supreme Court in Gestetner Duplicators (P.) Ltd. v. CIT [1979] 117 ITR I. The first question that was considered was, whether the commission paid comes under the expression 'salary' within the meaning of Rule 2(h) in Part A of the Fourth Schedule. The revenue cited the earlier decision of the Supreme Court in Bridges & Roofs Co. Ltd. v. Union of India AIR 1963 SC 1474 in which it was held that 'production bonus' does not form part of 'basic wages' as defined under Section 2(6) of the Employees' Provident Funds and Miscellaneous Provisions Act. So by applying the parity of reasoning, the revenue wanted to contend that when 'bonus' does not form part of 'wages', the commission paid in the case before the Hon'ble Supreme Court cannot also form part of 'salary' within the meaning of Rule 2(h) of Part A of the Fourth Schedule. The Hon'ble Supreme Court distinguished the decision in Bridges & Roofs Co. Ltd.'s case (supra) as follows : In the first place, it was a case under the Employees' Provident Funds Act, 1952, where this Court was required to construe the expression 'basic wages' as defined in Section 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 Section 2(b)(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 dcarness allowance for the purposes of contribution and, therefore, this Court was concerned with trying to discover some basis 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 Clause (ii) of 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 contexts in that case would be inapplicable to the facts of the present case.

From the above, it can be seen that their Lordships of the Supreme Court always maintained distinction between the 'Scheduled Provident Fund' on the one hand and the provident fund under the Employees' Provident Funds and Miscellaneous Provisions Act on the other. The basis on which the contribution by the employee as well as employer under the Employees' Provident Funds and Miscellaneous Provisions Act has to be made is the term 'basic wages' which does not include production bonus, DA, house rent allowance, over-time allowance, whereas, the contribution, both by the employee as well as employer, should be made under the 'Scheduled Provident Funds' scheme on the basis of 'salary' as defined under Rule 2(h) of Part A of the Fourth Schedule which includes 'commission' also as decided in Gestetner Duplicators (P.) Ltd.'s case (supra) by the Hon'ble Supreme Court. It is also decided by the Hon'ble Supreme Court in Gestetner Duplicators (P.) Ltd.'s case (supra) that there is no difference between the 'wages' and 'salary'. From all the above, we have to conclude that rule I5(1)(b) governing the 'Scheduled Provident Funds' does not apply to the provident fund under the Employees' Provident Funds and Miscellaneous Provisions Act. A fortiori Rule 75 does not apply to the provident fund under the Employees' Provident Funds and Miscellaneous Provisions Act. Assuming without admitting that our above finding is not correct under law, even then Rule 75 does not apply to the facts of the case, as the conditions set out therein were all not fulfilled in the present case. The employee as an 'individual' did not hold more than 10 per cent in the total shareholding in the assessee-company.

5. Section 36(1)(iv) concerns itself only in the contribution of the employer towards provident fund of its employees and it does not concern itself with the employee's contribution. So, in any view of the matter, even in a case where Rule 75 has to be applied, it should be held that Rs. 3,000 is an admissible sum under Section 36(1)(iv) in the hands of the employer and the excess only should be disallowed in its hands. That means in this case, Rs. 680 should have been held as excess in any view of the matter. The Commissioner (Appeals) held that the amount of Rs. 2,132 should be disallowed which according to us is wrong.

6. Though our above conclusions or discussions were not all found in any single order but yet some of our conclusions are found supported by the previous orders rendered either by this Tribunal or the Tribunals elsewhere, which are listed below : 1. The Tribunal, the Madras Bench 'A', Hyderabad in IT Appeal Nos.

1473 to 1475 (Hyd.) of 1977-78 for the assessment years 1973-74 to 1975-76.

2. The order passed by the Hyderabad Bench 'B' in the case of ITO v. J. &J. Dechane Lab. (P.) Ltd. [IT Appeal Nos. 1563, 1564 and 1575 (Hyd.) of 1982, dated 17-8-1983] for the assessment years 1978-79 to 1980-81.

3. Our own order as the Hyderabad Bench 'B' passed in the case of Nath Laboratories (P.) Ltd. v. ITO [IT Appeal Nos. 145 and 146 (Hyd.) of 1982, dated 29-3-1983] for the assessment years 1977-78 and 1978-79.

4. The order of the Madras Bench 'B' in ITO v. Raab Pipe Works (P.) Ltd. [1982] 1 SOT 198.

Ultimately, we hold that no part of the contribution made by the assessee-company towards the scheme framed under the Employees' Provident Funds and Miscellaneous Provisions Act should be disallowed.

Therefore, we hold that the amount of Rs. 3,632 paid as contribution of the assessee-company towards provident fund of its managing director, Shri Janardhana Rao, should be allowed in full under Section 36(1)(iv).


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